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Why funds underperform

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
JamesMuenchen
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Why funds underperform

#212765

Postby JamesMuenchen » April 4th, 2019, 7:53 pm

https://www.marketwatch.com/story/inves ... 2019-04-03
This article quotes a study that finds that fund managers do add value when they choose to trade, but punters piling in and bailing out of their funds according to past performance + fear & greed leads to forced trading and underperformance.

In other words, mutual fund managers would do a better job if investors would just leave them alone.
Instead, the public plunges into hot markets, hot funds and hot stocks after they’ve outperformed — and then sells out again when they’ve underperformed. So money managers are forced to keep buying hot stocks even after they’ve risen too far, and to sell them after they’ve fallen too far.

It goes on to suggest that investors in passive funds and ETFs suffer from the same underperformance due to trading in and out.

It's not the conclusion of the article, but it seems to me that unless you're a great fund-picker that can spot the hot-stuff early, this indicates the best strategy to be regular buy-and-hold into a cheap tracker, a la TMF 101.

Fool on!

Urbandreamer
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Re: Why funds underperform

#212802

Postby Urbandreamer » April 4th, 2019, 10:27 pm

Interesting article.

However ignoring James's Passive/Active remark, it is worth pointing out that it's about US mutual funds (like our unit trusts) and index trackers.
Investment trust managers are under less pressure to sell underlying investments when opinion changes (indeed many hold unquoted or private equity). Sure the board of trustees will want to see that the managment is not being idiots, but that's not the same as simply predicting things wrong. Hence they will be less fickle than the article would predict.

Re the P/A remark, personally I'm happy to buy shares in individual companies in addition to investment trusts and index trackers. I don't see it as an either/or decision.

Regarding "funds", there are some unit trusts that adopt a buy and hold stratergy. They state the fact that they are likely to hold long term and hence only attract investors who are happy with that. I'm thinking in particular of Lindsell Train. I don't own any LT, but it does seem to pay off for those that do.


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