The Lemon Fool

You be the judge. But Fidelity US has introduced two zero-cost index funds. There is a 0% expense ratio, no minima and no buy/sell fee. One is a US fund and the other is global.

Zero-fee index funds have been common on the institutional side for 20 years or so. The fund manager makes a crust from stock lending or else that is shared with the client in some way. Now there are retail offerings. For now, only in the US. But fees are coming down here too so if these are successful then who knows?

https://www.fool.com/investing/2018/08/ ... catch.aspx

Is there a way of accessing these in the UK?

This is what I dont like about index funds, it is so obvious that someone is making bank on them and its not the customer.

If this fund is using the holdings for stock lending, that means that a bunch of shorts are going to be regularly lowering the value of your stocks.

When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

Lanark wrote:This is what I dont like about index funds, it is so obvious that someone is making bank on them and its not the customer.

I think you'll find active fund managers also lend out their stocks.

Lanark wrote:When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

I am not sure where we are on that journey but agree that the greater the percentage of price followers the better the opportunity for the price maker. I used to be 100% in the passive camp but have been increasingly investing in active funds (concentrated, high conviction, bottom up research) for this reason.

Pendrainllwyn

Lanark wrote:but I wonder if we are approaching the point where a managed fund might outperform them?

Managed funds have always been able to outperform indexed funds by selecting by luck or otherwise those stocks in the index that do well, or just not investing in stocks in the index. The debate should be whether they were able to do this without increasing "risk", for whatever definition of risk is chosen.

So not accessible in uk yet?

What I find remarkable is index managers have got to 0.1% and now 0 to run a complicated fund, but we are happy to pay 0.25%+ for the broker to look after a few lines in a database

JohnB wrote:What I find remarkable is index managers have got to 0.1% and now 0 to run a complicated fund, but we are happy to pay 0.25%+ for the broker to look after a few lines in a database

And 46bps to the platform
and 100bps to an IFA

Cookie wrote:So not accessible in uk yet?

US only at this point, although if your broker deals with US securities then it might be possible to invest in them.

I think the point is more that this is the logical conclusion of the trend of index funds to cost less and less. Eventually I think that beta will be free and you will only pay for (an attempt at) alpha.

Lanark wrote:When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

It dies not work like that. A managed fund can outperform only another fund underperforms, irrespective of the proportion of index trackers. If it were possible to pick the winners with better than chance probability, nobody would invest in the likely losers. The likely winners would than no longer be likely winners, because there would be no likely losers.

GeoffF100 wrote:

Lanark wrote:When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

It dies not work like that. A managed fund can outperform only another fund underperforms, irrespective of the proportion of index trackers. If it were possible to pick the winners with better than chance probability, nobody would invest in the likely losers. The likely winners would than no longer be likely winners, because there would be no likely losers.

Why does another fund have to underperform? It might make a similar selection of holdings, of even one that does better.

I think that you are suggesting that only funds invest in the market, and that their universe of holdings is limited to the same holdings.

TJH

tjh290633 wrote:

GeoffF100 wrote:

Lanark wrote:When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

It dies not work like that. A managed fund can outperform only another fund underperforms, irrespective of the proportion of index trackers. If it were possible to pick the winners with better than chance probability, nobody would invest in the likely losers. The likely winners would than no longer be likely winners, because there would be no likely losers.

Why does another fund have to underperform? It might make a similar selection of holdings, of even one that does better.

I think that you are suggesting that only funds invest in the market, and that their universe of holdings is limited to the same holdings.

TJH

Strictly speaking all managed funds could outperform, although statistically this is very unlikely. For this to happen the aggregate of all the shares not in actively managed funds must underperform as the total of all shares in managed funds and those not in managed funds performs in line with the market, because that total is the market.

Interesting to see the management charge finally going to zero, but even more interesting to see that Fidelity were first to get there. For many years they were dead against index investing. Running their own index lacks transparency somewhat though. Be interesting to see how their in house indexes do compared to more established providers.

I am not aware of any UK brokers offering US mutual funds - it is difficult to buy US listed ETFS now as well. I think anyone interested would need to open an account with a US broker, which again is very difficult to do these days.

hiriskpaul wrote:Strictly speaking all managed funds could outperform, although statistically this is very unlikely. For this to happen the aggregate of all the shares not in actively managed funds must underperform as the total of all shares in managed funds and those not in managed funds performs in line with the market, because that total is the market..

It is a matter of definition here. I am defining index funds to be market weighted trackers. I am also defining managed funds to be everything else. (My portfolio is a managed fund by that definition.) With these definitions, clearly the index funds track the market. The market weighted average of the managed funds is the market minus a proportion of the market, and therefore also tracks the market. Clearly, there can only be winners if there are losers. As I have said, if it were possible to pick winners with better than chance success, nobody would invest in the others, but then there would be no losers, so there could not be any winners either. Picking winners is futile. If it works, it defeats itself.

GeoffF100 wrote:

hiriskpaul wrote:Strictly speaking all managed funds could outperform, although statistically this is very unlikely. For this to happen the aggregate of all the shares not in actively managed funds must underperform as the total of all shares in managed funds and those not in managed funds performs in line with the market, because that total is the market..

It is a matter of definition here. I am defining index funds to be market weighted trackers. I am also defining managed funds to be everything else. (My portfolio is a managed fund by that definition.) With these definitions, clearly the index funds track the market. The market weighted average of the managed funds is the market minus a proportion of the market, and therefore also tracks the market. Clearly, there can only be winners if there are losers. As I have said, if it were possible to pick winners with better than chance success, nobody would invest in the others, but then there would be no losers, so there could not be any winners either. Picking winners is futile. If it works, it defeats itself.

By your definition of a fund, I completely agree with your comments. For some "funds" to do better than the market, 1 or more other funds must do worse - simple arithmetic. There are of course many types of fund caught by your definition, ITs/UTs/OEICs, US mutual funds, sovereign wealth funds, pension funds, endowment funds, non-cap weighted index funds/ETFs, hedge funds, etc. Given the diversity, it is possible for a category of these funds to occasionally beat the market. S&P regularly analyse US mutual funds (https://us.spindices.com/spiva/) and occasionally you get a situation where an unusually large set of funds beat their benchmarks. Not often, of course and it does not persist, but one of the reasons is that not all actively managed funds are US mutual funds. As such it would be statistically unlikely for a subset of funds to not occasionally beat the market. It just means some other "funds" not being considered have done worse than the market.

GeoffF100 wrote:

hiriskpaul wrote:Strictly speaking all managed funds could outperform, although statistically this is very unlikely. For this to happen the aggregate of all the shares not in actively managed funds must underperform as the total of all shares in managed funds and those not in managed funds performs in line with the market, because that total is the market..

It is a matter of definition here. I am defining index funds to be market weighted trackers. I am also defining managed funds to be everything else. (My portfolio is a managed fund by that definition.) With these definitions, clearly the index funds track the market. The market weighted average of the managed funds is the market minus a proportion of the market, and therefore also tracks the market. Clearly, there can only be winners if there are losers. As I have said, if it were possible to pick winners with better than chance success, nobody would invest in the others, but then there would be no losers, so there could not be any winners either. Picking winners is futile. If it works, it defeats itself.

By your definition of a fund, I completely agree with your comments. For some "funds" to do better than the market, 1 or more other funds must do worse - simple arithmetic. There are of course many types of fund caught by your definition, ITs/UTs/OEICs, US mutual funds, sovereign wealth funds, pension funds, endowment funds, non-cap weighted index funds/ETFs, hedge funds, etc. Given the diversity, it is possible for a category of these funds to occasionally beat the market. S&P regularly analyse US mutual funds (https://us.spindices.com/spiva/) and occasionally you get a situation where an unusually large set of funds beat their benchmarks. Not often, of course and it does not persist, but one of the reasons is that not all actively managed funds are US mutual funds. As such it would be statistically unlikely for a subset of funds to not occasionally beat the market. It just means some other "funds" not being considered have done worse than the market.

I think that you guys are missing the point as far as managed funds are concerned. They do not have to invest in every share in their universe, nor do they have to follow market weighting.

If you take the shares in the FTSE350, for example, over the course of the year some shares will do better and some worse than the index itself. It only requires active fund managers to pick more of the better ones, and to weight their holdings differently, for them to outperform. They tend not to do this, of course, because of their sheep-like behaviour. There is no statistical reason for it, just their behaviour.

TJH

tjh290633 wrote:If you take the shares in the FTSE350, for example, over the course of the year some shares will do better and some worse than the index itself. It only requires active fund managers to pick more of the better ones, and to weight their holdings differently, for them to outperform.

The problem is that there is no convincing evidence that anyone can do this with better than chance success. Some do succeed, but nobody has found a way of predicting which ones will succeed in advance with better than chance success.

Well Buffet can, and so can a few other people. But I know I can’t, and don’t have an idea how to pick the clever people either. I wonder how big the fraction of the market is for inherited, or ignored private holdings is. Pretty small I guess, so active means all but indexes. If what I can do is understand tax and fees, I should aim to minimise them, so index funds in SIPPs and ISAs for me

JohnB wrote:Well Buffet can, and so can a few other people.

Buffet did, but that is in the past. "Can" is in the future. He had underperformed the index for ten years when I last looked.

Perhaps, at age 78, and just becoming the richest person in the world, he decided to let others have a go!