Arborbridge wrote:
Well, in fact I did identify it in advance, and the chart confirms the choice was right. Of course, I agree with what you say about hindsight generally, and I just had a lucky moment.
I chose FGT on its previous history at that time - backward looking, as you say - which cannot be relied on.
However, at any given time with a choice between two funds A) with low fees and modest TR history,
B) with higher fees but a much better TR history, for what reason would I choose A)?
Fees are only one factor and do not tell us which is the better buy.
I've similarly done very nicely by looking at historic performance and accepting a higher management fee than an index find.
My concern however is this (and apologies if what follows is egg sucking):
Active funds tend to have themes. There are vanishingly few of them that metaphorically sit down on a Saturday morning and spend the day assessing every company on every exchange, assess likely TR for their investment horizon, and then build a portfolio for the next time period out of the highest anticipated. Instead they tend to fish in a smaller pool of companies/characteristics that they are familiar with and have historically done well with.
The latter approach is all very well as long as the investing environment isn't changing dramatically. If there's a significant change there, then a fund fishing in a different pool will do better, both than its previous performance, and better relative to the fund you'd picked for good historical performance.
The advantage of an index is that you've got a decent chance of getting all the pools (so the good and the bad, as they move around with changing environment) at a relatively low overhead in fees. The risk with active funds is that if the environment changes (and I wonder if we've seen an unusually consistent environment for the past decade or so since the GFC) you could easily lose money quite fast as the characteristic moves out of fashion (leading to an internal debate on is the environment going to return) while at the same time continuing to pay active management for the privilege.
Active funds are often touted as the thing to have when the future is uncertain, as their managers can "react". I'm actually wondering if the converse is true, and the most diversified passive fund possible is the place to be.