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Archimedes
Guest
I have a lump sum to invest and am weighing up the relative merits of an index tracking fund versus an active managed fund. Anyone have any thoughts/experience to share?
[FONT=Verdana, Arial, Helvetica, sans-serif]Investing in the stockmarket through a unit linked fund[/FONT]
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Index trackers tend to have lower costs.
Evidence suggests index trackers also outperform actively managed funds. Fund managers are human too and fall victim to chasing prices, resulting in overtrading (increased costs) and the fatal error of buying last years winner.
Evidence suggests index trackers also outperform actively managed funds. Fund managers are human too and fall victim to chasing prices, resulting in overtrading (increased costs) and the fatal error of buying last years winner.
From all the reports and studies I've read the index funds have outperform managed especially in the longer term. ie index beat 45% of managed funds after year 1, 60% after year 5. 80% after year 10 etc... (those figures are off the top of my head. I will source and post a more accurate figure later)Archimedes said:
Edited, future -> past.
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Archimedes
Guest
Thanks for the comments. Very helpful. Any thoughts on who to use as a vehicle for index linked. Quinn seems good? Is that an illusion and is there a better outfit available?
What do you mean by "good"? If you mean performance wise then that will largely depend on the index being tracked and the accuracy with which the provider tracks it. If you mean charges then QL are quite competitive but still not as cheap as index trackers available in the likes of the US and other larger markets. Obviously you should not concern yourself unduly with past performance since it is no guide to future returns.
personally, I think the concept of tracking is actually quite dangerous and it disturbs me how much it has become ingrained into the psyche as a low-risk route to equity. Cheap Beta maybe but low risk no way. I favour combining both high cost strategies which do things very differently to indices with index trackers (averaged in monthly to dull the volatility) and try to find smarter indices to track (value, sentiment, fundamentals). Don't have a problem with high costs as long as you're obtaining something in return. Always act firmly against managers who trade around indices and don't add value. Choice of index is crucial. I try and think that although it's passive, someone is taking real-world decisions that affects the price. Take the top 5 companies in most large cap indices; these sway the indices a lot so you ask the question; am I happy with these lot running Vodafone, AIB, Total, whatever, as it will impact the movement of that index...
Who said that index tracking was necessarily low risk? Depending on the index tracked a particular fund could be anywhere on the risk/reward scale. For example if it is a bond index then it will be relatively low risk/reward. If it is a pure/mainly equity index then it will probably be relatively high risk/reward.kellyiom said:
Very often there is nothing tangible on offer for higher charges. How would you judge a priori if/how high charges are justified?
This sounds like the "good managers can time and [consistently] beat the market/index" argument which is as old as it is fallacious.
Of course - choice of index is crucial. As is the composition of the index. And the accuracy with which the provider can match the index.
Nobody has said that index tracking is some sort of panacea. People still have to match investments to their own specific circumstances and needs. On the other hand, all things being equal, low charges are a better bet than higher charges.
ClubMan said:
yeah, all things being equal- but how often do you get an opportunity to make a truly equal comparison. Like err, I could either buy this Largecap tracker for 0.35% a year, or I could buy the same version run by Anthony Bolton for 0.35% a year on an identical mandate- obvious choice but when are all things equal like that?
I don't understand your point. I haven't a clue who Anthony Bolton is. My point is that once an individual (with independent, professional advice if necessary) has done a thorough review of their finances, plans etc. they should identify a range of savings/investments that are suitable to their short, medium and long term needs/plans/goals. One part of a well diversified portfolio should generally be equities. For those that decide that indirect equity investments are appropriate then an index tracker or managed fund with a suitable asset mix is one possible option. When choosing such products one should generally aim to minimise charges. Higher charges should only be paid if there is something tangible to be gained - e.g. a wider mix of funds than available elsewhere, better customer service etc. Nobody should pay higher charges in the expectation that the stock picking skills of the manager will be better. There is simply no way to know this a priori and over time all managers will gravitate towards the mean anyway.kellyiom said:
my point is clubman, that the scenario you illustrate 'all things being equal' almost never happens. Anthony Bolton I used as an example of how rare your argument is seen in the real world; not this Markowitz heaven you seem to have been inhabiting today when you wrote this. (He's the manager of Fidelity's Special Sits fund btw). That's why you don't get someone with a really good long track record running money for the same fee (all things being equal) as a tracker. Otherwise it would always be a no-brainer.
And that's the tangible benefit. Don't get me wrong, I'm not saying most active managers aren't worth tuppence, never mind €100k a a year cos I'm no big fan of the industry and I do definitely agree with you 100% about sitting down, setting up your asset allocation and getting comfortable with risk and doing some serious planning. The active passive debate comes much further down the line.
I would disagree so much more than 100% tho about your comment that there's no way of deciding which managers are 'worth it'. If that's the case then perhaps you should tell the fund of funds industry that they're wasting my time. As I said, it's not easy but it is achievable, it just needs a lot of qualitative legwork.
As for the tosh about gravitating towards the mean, well...what mean?! Mean of all manager returns, index returns? Rubbish. As I mentioned above, you can find managers who outperform in discrete time periods as well as over extended, prolonged periods, they time markets and they don't gravitate towards the mean. As I said, I'll post a list of them if you want!
Should probably expand on the comment about managers in indexes- what I was saying there was that if you hold trackers, then it doesn't stop you doing some qualitative analysis on what you're holding as ETF investing tends to be very quantitative and driven by the fundamentals or technicals. If you use that you can get a feel for what the head honchos are like- which would have been useful if you held S&P500 in 2000; you'd know there would acquistions, complex financials, etc potential red flags even tho the numbers looked good.
And that's the tangible benefit. Don't get me wrong, I'm not saying most active managers aren't worth tuppence, never mind €100k a a year cos I'm no big fan of the industry and I do definitely agree with you 100% about sitting down, setting up your asset allocation and getting comfortable with risk and doing some serious planning. The active passive debate comes much further down the line.
I would disagree so much more than 100% tho about your comment that there's no way of deciding which managers are 'worth it'. If that's the case then perhaps you should tell the fund of funds industry that they're wasting my time. As I said, it's not easy but it is achievable, it just needs a lot of qualitative legwork.
As for the tosh about gravitating towards the mean, well...what mean?! Mean of all manager returns, index returns? Rubbish. As I mentioned above, you can find managers who outperform in discrete time periods as well as over extended, prolonged periods, they time markets and they don't gravitate towards the mean. As I said, I'll post a list of them if you want!
Should probably expand on the comment about managers in indexes- what I was saying there was that if you hold trackers, then it doesn't stop you doing some qualitative analysis on what you're holding as ETF investing tends to be very quantitative and driven by the fundamentals or technicals. If you use that you can get a feel for what the head honchos are like- which would have been useful if you held S&P500 in 2000; you'd know there would acquistions, complex financials, etc potential red flags even tho the numbers looked good.
kellyiom said:
Great, you can post a list for fund manager that have in the past beaten the market average. (anyone with access to Morningstar can also do this)
However for your theory to be of any use, please post a list of fund managers here that will outperform the market over the next 10 years. We can review the list in 2016 and see how you (and your money) has done.
However more and more people these days are doing their homework and are able to see what fund managers really are -an added expense of no, possibly even negative, value.
Research has consistently demonstrated that past performance of active managers is useless in predicting future performance, so a list of active managers who've outperformed in the past is worthless information. Do you have a list of active managers who will outperform their benchmark indices in the future? (any time period will do ...)kellyiom said:
Do yourself and your arguments a favour and ditch the intemperate language.kellyiom said:
As others have said above "past performance yadda yadda yadda"...
They are not wasting their time. They may be wasting some people's money/charges though.
An efficient market should by definition be driven by quantitative factors/decisions. You seem to be suggesting that somehow qualitative factors/decisions made by the privileged few in the know can make a difference? Short of illegal insider trading I don't see how this can be the case in the normal course of events.
dunkamania
Registered User
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The rise in popularity of trackers could lead to whole indexes being overvalued as the amount of funds that have to be invested,increases.
That could lead to actice managers beating,tracking managers.
Thoughts?
That could lead to actice managers beating,tracking managers.
Thoughts?
nahhh, all markets are efficient, all of the time...^^^^ that's my point exactly dunkamania, tracking is a dangerous self-fulfilling game, all in the flawed name of 'efficiency'
hey, no offence intended ClubMan, definitely very sorry if anyone was a bit put off my my language and hope it didn't undo the very stimulating topic you kicked off here, I am admonished and it won't happen again (at least not today )
I was definitely not advocating insider trading- just that qualitative work is often a good counterbalance to the numbers game. It doesn't need any greater resource than time and effort. Just this would have revealed interesting aspects about Enron, Bernie Ebbers, Kozlowski & Co which some people successfully used as red flags to get out, even though the numbers told them something different. Don't know how doing a different type of research can even be misconstrued as even like insider trading and certainly not restricted to those in privileged positions. I'm not suggesting it, I'm stating it, qualitative analysis can blow apart the cosy worldview of efficient markets. Not got scope to do this here but these markets give the appearance of being efficient...
Zephyro- think you need some wider reading on that topic; past performance is of limited value, not 100% worthless and you'll find a huge number of studies on that topic all with differing conclusions. My view is you'd be an idiot to base a decision on that but that info isn't useless and in my experience, anyone who says that isn't being entirely true. So whenever you've made any sort of investment, you've struck the past performance of it from your consciousness? hmmm...perhaps if that is the case you might explain why regulators the world over still insist on past performance being extrapolated out in client projections? I'm not saying it's right, just asking for your take...
Diarmuidc- no, can't even be bothered redirecting people to morningstar as you rightly point out. I reckon you've got a right good idea tho; money where the mouth is and all that. I'll gladly donate €500 to a forum-nominated charity in 2016 if I'm wrong as well. Forget the past, here's the future and I'll also exclude a really short period from the study like the next 12 months so here goes for starters off the top of my head:
- henry maxey
- james ridgewell
- jorma korhonen
- jim simons
- philippe jabre
- daniel loeb
- crispin odey
- paul tudor jones
- larry robbins
- john horseman
- paul bate
-louis bacon
- william von mueffling
- peter thiel
- dinashkar singh
- thomas sandell
-jacob gottlieb
scott pagel
-zafah ahmadullah
-steven heinz
-bernie madoff
- harlan kervaes
-alan howard
- bill browder
I could put hundreds more but that would do for starters.
Notice Clubman, you haven't exactly answered my point about when the last time you saw a passive and active option priced identically so when was the last time all things were equal?
people, as you probably have guessed, I'm not a particular 'fan' of active management, just that I think a lot of people have a blinkered view about passive vs active and don't really look any further than tracker and that's as bad a dogma as 'always go active'.
Also, anyone feel like sharing their info with Harvard, CaliforniaPERS and so on as they all still use active management to beat the market. Think they ought to know they're wasting their own and client's monies! On a less facetious note, if you are all so certain, then someone please explain why active management still exists? Surely if you believe in efficient markets, then this anomaly would have been arbitraged out by now. Is it because the edifice of active management is so tough, it has effectively brainwashed millions and controls world capital? Or is it because it actually does work consistently well in some cases? I'm quite happy for you guys to keep tracking as it lets other people exploit the situation and make money for me. Over to you....Clubman, Diarmuid, Zeph...why do these smart investors keep 'wasting' their fees on active?
hey, no offence intended ClubMan, definitely very sorry if anyone was a bit put off my my language and hope it didn't undo the very stimulating topic you kicked off here, I am admonished and it won't happen again (at least not today )
I was definitely not advocating insider trading- just that qualitative work is often a good counterbalance to the numbers game. It doesn't need any greater resource than time and effort. Just this would have revealed interesting aspects about Enron, Bernie Ebbers, Kozlowski & Co which some people successfully used as red flags to get out, even though the numbers told them something different. Don't know how doing a different type of research can even be misconstrued as even like insider trading and certainly not restricted to those in privileged positions. I'm not suggesting it, I'm stating it, qualitative analysis can blow apart the cosy worldview of efficient markets. Not got scope to do this here but these markets give the appearance of being efficient...
Zephyro- think you need some wider reading on that topic; past performance is of limited value, not 100% worthless and you'll find a huge number of studies on that topic all with differing conclusions. My view is you'd be an idiot to base a decision on that but that info isn't useless and in my experience, anyone who says that isn't being entirely true. So whenever you've made any sort of investment, you've struck the past performance of it from your consciousness? hmmm...perhaps if that is the case you might explain why regulators the world over still insist on past performance being extrapolated out in client projections? I'm not saying it's right, just asking for your take...
Diarmuidc- no, can't even be bothered redirecting people to morningstar as you rightly point out. I reckon you've got a right good idea tho; money where the mouth is and all that. I'll gladly donate €500 to a forum-nominated charity in 2016 if I'm wrong as well. Forget the past, here's the future and I'll also exclude a really short period from the study like the next 12 months so here goes for starters off the top of my head:
- henry maxey
- james ridgewell
- jorma korhonen
- jim simons
- philippe jabre
- daniel loeb
- crispin odey
- paul tudor jones
- larry robbins
- john horseman
- paul bate
-louis bacon
- william von mueffling
- peter thiel
- dinashkar singh
- thomas sandell
-jacob gottlieb
scott pagel
-zafah ahmadullah
-steven heinz
-bernie madoff
- harlan kervaes
-alan howard
- bill browder
I could put hundreds more but that would do for starters.
Notice Clubman, you haven't exactly answered my point about when the last time you saw a passive and active option priced identically so when was the last time all things were equal?
people, as you probably have guessed, I'm not a particular 'fan' of active management, just that I think a lot of people have a blinkered view about passive vs active and don't really look any further than tracker and that's as bad a dogma as 'always go active'.
Also, anyone feel like sharing their info with Harvard, CaliforniaPERS and so on as they all still use active management to beat the market. Think they ought to know they're wasting their own and client's monies! On a less facetious note, if you are all so certain, then someone please explain why active management still exists? Surely if you believe in efficient markets, then this anomaly would have been arbitraged out by now. Is it because the edifice of active management is so tough, it has effectively brainwashed millions and controls world capital? Or is it because it actually does work consistently well in some cases? I'm quite happy for you guys to keep tracking as it lets other people exploit the situation and make money for me. Over to you....Clubman, Diarmuid, Zeph...why do these smart investors keep 'wasting' their fees on active?
diarmuidc said:
Bit of a sweeping statement. You can't possible say that all fund managers bring no value to the funds that they manage. You may want to explain that to poor BIAM who lost billions of AUM when they lost a few fund managers. Their clients obviously believed they added value!
I would have thought that it was not a case of saying trackers are good, but managed are bad. It all depends on the investors risk appetite and requirements. There are some very poor so called trackers out there. Also, managers past performance might not be any guarantee to future performance but it is certainly useful and I would certainly place a great deal of importance on it if I was picking a manager.
Sunny said:
quite, Sunny- a sensible comment I think. All I've been saying is that you take each individual investment on its own merits and look under the bonnet and don't take anything for granted. Following on from your BIAM comment which is spot on I think, I think a sceptic would just say that those clients were mugs for following them! If that's the case then, then they should inform their pension managers to have no holdings in fund management groups as their business is purely illusory!