The Lemon Fool

passive investing is so great how come they never top the performance tables?

On the other hand, they're never at the bottom either.

OhNoNotimAgain wrote:passive investing is so great how come they never top the performance tables?

Because they aren't designed to!

If you define "great" as top the performance table then that isn't what a passive is supposed to do.

Can you think of any meaningful mathematical distribution table where the passive norm is at the extreme. Certainly not anything resembling a normal distribution, or how many would view a stock market return.

However do it for long enough time frames, they will probably better match an index outcome, and outperform the majority with higher fees and frictional costs. That might mean "never" being top, no doubt some active fund will get that slot, but filling the 2nd quartile above the 3rd and 4th dominated by poor actives might be described as "good enough". Or wouldn't it?

Unless you can know in advance which of the non-passives will outperform why wouldn't a risk averse investor not wish to be performing in line with a market with low fees?

https://www.spglobal.com/spdji/en/docum ... d-2020.pdf

Proportion of large cap US funds underperforming the S&P 500:

1y  60.33%
3y  67.01%
5y  75.27%
10y 82.32%
20y 94.00%

OhNoNotimAgain wrote:passive investing is so great how come they never top the performance tables?

Wait long enough and they will get there.

Just to show it's not just the S&P 500 that is hard to beat, from the same paper the percentage of funds underperforming a comparative benchmark:

FUND CATEGORY                 COMPARISON INDEX              3-YEAR  5-YEAR 10-YEAR 20-YEAR
Global Funds                  S&P Global 1200                65.53   71.54   86.44   86.51
International Funds           S&P International 700          66.76   77.10   80.47   92.01
International Small-Cap Funds S&P Developed Ex-U.S. SmallCap 59.52   58.23   59.18   89.66
Emerging Markets Funds        S&P/IFCI Composite             65.74   82.08   76.16   94.59

"International" means non-US.

Passive funds aim to be in the top 15-20% of the fund tables forever ie year in year out
That’s the sort of consistent performance an amateur investor build a successful retirement fund on
xxd09

hiriskpaul wrote:https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2020.pdf

Proportion of large cap US funds underperforming the S&P 500:

1y  60.33%
3y  67.01%
5y  75.27%
10y 82.32%
20y 94.00%

OhNoNotimAgain wrote:passive investing is so great how come they never top the performance tables?

Wait long enough and they will get there.

The data is rather out of date.

The world changed a lot at the end of 2021.

OhNoNotimAgain wrote:

hiriskpaul wrote:https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2020.pdf

Proportion of large cap US funds underperforming the S&P 500:

1y  60.33%
3y  67.01%
5y  75.27%
10y 82.32%
20y 94.00%

OhNoNotimAgain wrote:passive investing is so great how come they never top the performance tables?

Wait long enough and they will get there.

The data is rather out of date.

The world changed a lot at the end of 2021.

Spiva report ending 2021 is not out yet. Can you point me towards data for 2021?

Edit: a quick look at Morningstar data shows S&P 500 index funds and similar all in the top half of the US Equity Large Cap Blend fund list over the last year, so what changed at the end of 2021?

xxd09 wrote:Passive funds aim to be in the top 15-20% of the fund tables forever ie year in year out
That’s the sort of consistent performance an amateur investor build a successful retirement fund on
xxd09

Passive funds don't aim to be anything, by definition!
They just sit there and exist, like myself.

OhNoNotimAgain wrote:passive investing is so great how come they never top the performance tables?

Good point. So why not just buy the fund that does 'top the performance tables'?


I suspect the answer to your question is closely related to the answer to mine!

Unlike passive funds which are consistently in the top15-20% of the performance tables the actual top funds are never the same from year to year
Try building a portfolio on that variable will probably end in tears unless you are very lucky, have insider knowledge or can cheat in some way
None of which is a secure way to build your portfolio
xxd09

ps, for Global Large-Cap Blend Equity funds, Morningstar puts the index funds into the top quartile as well. I really cannot see what has changed.

xxd09 wrote:Passive funds aim to be in the top 15-20% of the fund tables forever ie year in year out
That’s the sort of consistent performance an amateur investor build a successful retirement fund on
xxd09

Precisely! Picking actively managed funds is like betting in a casino. You might get good luck some of the time, but stay there long enough and the casino will eventually take all your money.

hiriskpaul wrote:[
Precisely! Picking actively managed funds is like betting in a casino. You might get good luck some of the time, but stay there long enough and the casino will eventually take all your money.

I have SERIOUS issues with this thread. Ok, I freely admit that I am not a passive investor, yet accept valid arguments made for passive investment. There are many that are valid.

However "betting on a casino", "normal distribution", these are not valid arguments at all. PROVE that the distribution is "normal", rather than having fat and thin tails. Prove that stock selection is like betting on something random like roulette wheel where the house takes a cut. Then again prove that passive investments don't take a cut!

Look there were passive investments charging over 1.5% not that long ago. Do your research on the Virgin Index tracker. I'm sure that 1.5% doesn't stack well against modern active fees (ignoring performance fees). BTW I checked it's now 0.6%, a bit more than SMT who charge 0.45%, but then it's not about fees is it.

Passive investment has it's place, and ARGUMENTS for doing so, but many of the arguments made on this thread are invalid.

OK, I accept that this is the board to talk about passive investments, and that the OP broke that rule. However PROVE these opinions, or accept that you can't prove them and it's an opinion based upon balance. Though how you prove the examples I state.... Well I couldn't provide evidence to prove you right, or wrong.

DON'T STATE OPINION AS FACT!

I don't regard the stock market as a casino and have made money betting against companies that no longer had a market. Nor do I accept that EVERYTHING follows the "normal" distribution. Look at life expectancy for something that is not "normal". It has a very fat "tail". So, if life itself is not "normal", why assume that the stock market is?

Urbandreamer wrote:

hiriskpaul wrote:[
Precisely! Picking actively managed funds is like betting in a casino. You might get good luck some of the time, but stay there long enough and the casino will eventually take all your money.

I have SERIOUS issues with this thread. Ok, I freely admit that I am not a passive investor, yet accept valid arguments made for passive investment. There are many that are valid.

However "betting on a casino", "normal distribution", these are not valid arguments at all. PROVE that the distribution is "normal", rather than having fat and thin tails. Prove that stock selection is like betting on something random like roulette wheel where the house takes a cut. Then again prove that passive investments don't take a cut!

Look there were passive investments charging over 1.5% not that long ago. Do your research on the Virgin Index tracker. I'm sure that 1.5% doesn't stack well against modern active fees (ignoring performance fees). BTW I checked it's now 0.6%, a bit more than SMT who charge 0.45%, but then it's not about fees is it.

Passive investment has it's place, and ARGUMENTS for doing so, but many of the arguments made on this thread are invalid.

OK, I accept that this is the board to talk about passive investments, and that the OP broke that rule. However PROVE these opinions, or accept that you can't prove them and it's an opinion based upon balance. Though how you prove the examples I state.... Well I couldn't provide evidence to prove you right, or wrong.

DON'T STATE OPINION AS FACT!

I don't regard the stock market as a casino and have made money betting against companies that no longer had a market. Nor do I accept that EVERYTHING follows the "normal" distribution. Look at life expectancy for something that is not "normal". It has a very fat "tail". So, if life itself is not "normal", why assume that the stock market is?

Which arguments are invalid?

To start with we are talking about fund returns here not stock returns. Stock returns are definitely not normally distributed. Most stocks across their lifetime have terrible returns, much worse than the market as a whole.

I don't see any claims that fund returns were normally distributed and my guess is that they are not, but what does it matter what the distribution is?

What opinions do you want proven? If you are complaining about a statement of fact that most funds underperform the market, then all I can say is that this is a well established fact. I have linked to one paper that provides evidence, but there is masses more evidence going back decades and no reputable evidence to the contrary.

As for the casino analogy, I think you misunderstood the point I was trying to make. If an index fund can consistently perform better than average, then over time it will beat more and more funds that cannot consistently beat the average. Index funds have an edge, just like casinos have an edge over their customers. It might only be a small edge, but it is sufficient to produce the observed behaviour that as time goes by an increasing proportion of funds underperform the market, just as an increasing proportion of casino gamblers underperform the casino the longer they keep playing.

Another analogy would be a loaded die. You are not going to get a 6 on every throw, but you will have an edge when playing against someone with a straight die and over time you are more likely to win. Not guaranteed, just more likely. The same behaviour is observed with index funds. They don't win against all funds all the time, but they don't have to.

Virgin's tracker has always been outrageously priced and very much an outlier in this respect, although I seem to recall the charge was 1%, not 1.5%. When it was launched I remember that it was possible to invest in L&G trackers for under 0.25%. You can now invest in a number of FTSE allshare trackers for 0.06%, similarly for US trackers and World trackers are available for less than 0.12%. Internal trading costs are negligible as well because cap weighted trackers need very little trading to keep them balanced.

xxd09 wrote:Passive funds aim to be in the top 15-20% of the fund tables forever ie year in year out
That’s the sort of consistent performance an amateur investor build a successful retirement fund on
xxd09

Yes but are they?

Dod

Hi urbandreamer I think you are mixing up two sets of investors here
Those of us with a wife 2 kids and a mortgage-working hard with little time for anything else let alone researching the stockmarket-probably most investors -and a small group of sophisticated types with time and the interest to trade frequently and successfully
Now that more and more of us are being forced to manage our own pensions ourselves by investing in the stockmarket it does the amateur investor no favours to not point out the problems and perhaps give some more practical and relevant advice
For these less sophisticated types-I would argue that’s most of us -passive investing and indexing is proven to give the required results
Indeed the sophisticated successful investment types from Warren Buffet,Charles Ellis etc all advise that passive indexing is the way for the average investor
Most people have other more important priorities than getting deep into the stockmarket and all its ramifications
For those of us that find the financial world so fascinating active investing can be very exciting and hopefully successful but we are a bit niche!
xxd09

xxd09 wrote:Hi urbandreamer I think you are mixing up two sets of investors here

Possibly the only thing that I disagree with in that post is the concept that married people with children are too busy to have a hobby. I know plenty who do. Just that many have hobbies other than researching investments.

I fear that you are right though that I'm mixing things up. I replied to a post talking about "casino" like returns but included comments about a different post in the thread where the "normal" distribution was talked about. I further mixed things up by explaining why I'm not a passive investor, as I felt a need to apologize for commenting at all. Indeed it's mostly parts of posts that I feel are wrong rather than entire posts.

I was asked "what arguments are invalid". Presumably meaning what arguments for passive investment in funds are invalid. To reply is to put words into others mouths that they didn't say and opinions that they didn't claim to hold. That said, if you have never heard invalid arguments before then you are very lucky.

I already gave an answer to an invalid argument about passive funds. That argument, not made in this thread, is that index trackers are ALWAYS cheaper than active funds. They are not, as was admitted, but judged unimportant in the same post that asked the question.

Why would anyone pay a significant premium for one index tracker over another? Dare I suggest that they may be married with children and possibly not sophisticated types who might check the price without prompting.

The fact that argument or any other is invalid says nothing about passive investing. As I said, there are valid arguments. I just feel that "normal" distribution and comparisons with a "casino" fall into the invalid group. Likewise arguments assuming that all active investment has the aim of outperforming the market return.

Indeed passive/active is a false dichotomy. Is buying a Vanguard 60/40 life strategy fund a passive investment? You have made choices about fixed interest and geographical equity bias in doing so and technically it actually IS an active fund. There are differences between Vanguards lifestratagy 100, All-world etf and global all world index tracker. I'm sure that none of the three would be a bad choice, but it is as active a choice as picking one of them over Virgin's expensive tracker.

Here is an interesting link to a blog about the differences in those three Vanguard funds..
https://occaminvesting.co.uk/best-vangu ... r-fund-uk/

Arguments for passive investing don't answer the OP, because their question carried flawed assumptions as to the reasons that people invest the way that they choose to.

Even though I regard myself as an active investor, I still hold significant amounts in passive index trackers.

Dod101 wrote:

xxd09 wrote:Passive funds aim to be in the top 15-20% of the fund tables forever ie year in year out
That’s the sort of consistent performance an amateur investor build a successful retirement fund on
xxd09

Yes but are they?

Not for performance over just one year, but over many years. See hiriskpaul's data earlier in the thread. Here is more of the same:

https://www.cnbc.com/2020/09/18/stock-p ... worse.html

How bad is active management?

It’s bad and it’s getting worse. Every year, S&P Dow Jones Indices does a study on active versus passive management. Last year, they found that after 10 years, 85% of large-cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index.

GeoffF100 wrote:It’s bad and it’s getting worse. Every year, S&P Dow Jones Indices does a study on active versus passive management. Last year, they found that after 10 years, 85% of large-cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index.[/i]

Is that a fair apples and oranges comparison? Would a fairer one be a comparison of large cap funds with an index that excluded companies that were not "large cap"?

Ignoring the active v passive and just considering UK indexes, The FTSE 350 has outperformed the FTSE 100 over the last decade. If we were to do the research and limit active investment to "large cap" investing in the UK then surely they would under perform here wouldn't they? After all the growth here has been in the mid cap sector.

Always ask, what is the question trying to find out and what the answer that it gives actually tells you. In this case it may simply be that large cap companies slightly under perform mid or small cap companies.

I hold Scottish mortgage IT, which is known to invest in "odd" companies and in private equity. It would certainly be wrong to expect it to match ANY market. However for the sake of argument, shall we compare it's 10 year return with morning star's index of developed countries. SMT is/was at the time of comparison up 751% against the index return of 232%.

I'm not suggesting that passive investors buy it. It's expected to be very volatile and recently has had large falls. Indeed at one point it was up 1000% However I supply it as an example of apples and oranges.

As I think I said, passive/active is actually a false dichotomy. Were we to compare the FTSE 100 to the S&P500 we would still be talking apples and oranges, even though both are passive. When you invest in one, the other or some mix, it's an active choice.