Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to Fluke,barchid,Howyoudoin,servodude,tjh290633, for Donating to support the site

How time affects the rules-based v active funds debate

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

How time affects the rules-based v active funds debate

#192977

Postby OhNoNotimAgain » January 12th, 2019, 11:52 am

Elsewhere on the site a comment was made that it is best to judge funds over the longest possible period and that 3 years is too short a period to form a view.

That sounds sensible until one looks at the underlying data.

According to Citywire there are 135 managers with track records going back 5 years in the UK All-Companies sector. Yet there are 211 active funds implying that meaningful comparsisons can only be made on 64% of the funds, even if you assume that past performance for active funds has some relevance, which is questionable.

However there are 238 funds in the sector with a five year track record, the difference being made up by passive or rules-based funds. So really only 57% of the funds are eligible for the assessment as there is no point in looking at the track record of funds that have changed manager in the period under review.

Over three years the figure rises to 63%.

So the argument that longer time frames for assesment of a particular strategy are better suffers from the fact that the peer group of active managers that follow the same consistent strategy is shrinking with time.

Eventually of course, given a long enough time frame and human mortality, there will be no active managers left with a long-enough track record to compares to rule-based strategies. So the debate will simpy change to which rules based strategy is better. And therefore debates about active v passive or rules-based funds will cease.

Itsallaguess
Lemon Quarter
Posts: 3996
Joined: November 4th, 2016, 1:16 pm
Has thanked: 1430 times
Been thanked: 2516 times

Re: How time affects the rules-based v active funds debate

#192983

Postby Itsallaguess » January 12th, 2019, 12:03 pm

OhNoNotimAgain wrote:
So the argument that longer time frames for assessment of a particular strategy are better suffers from the fact that the peer group of active managers that follow the same consistent strategy is shrinking with time.


Does this issue only affect the active-management sphere?

Do passive-managers only ever stick with one strategy from conception, and use that for the rest of their working life?

Cheers,

Itsallaguess

OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

Re: How time affects the rules-based v active funds debate

#192988

Postby OhNoNotimAgain » January 12th, 2019, 12:25 pm

Itsallaguess wrote:
OhNoNotimAgain wrote:
So the argument that longer time frames for assessment of a particular strategy are better suffers from the fact that the peer group of active managers that follow the same consistent strategy is shrinking with time.


Does this issue only affect the active-management sphere?

Do passive-managers only ever stick with one strategy from conception, and use that for the rest of their working life?

Cheers,

Itsallaguess


The important point is that the rules-based strategy will survice the demise of the manager and not just prevent ad-hoc changes the manager makes while in post. The rules used for the construction of the index the fund follows are the important issue. An investor should be able to understand what the fund holds and why.

Itsallaguess
Lemon Quarter
Posts: 3996
Joined: November 4th, 2016, 1:16 pm
Has thanked: 1430 times
Been thanked: 2516 times

Re: How time affects the rules-based v active funds debate

#192991

Postby Itsallaguess » January 12th, 2019, 12:29 pm

OhNoNotimAgain wrote:
Itsallaguess wrote:
Does this issue only affect the active-management sphere?

Do passive-managers only ever stick with one strategy from conception, and use that for the rest of their working life?


The important point is that the rules-based strategy will survice the demise of the manager and not just prevent ad-hoc changes the manager makes while in post.

The rules used for the construction of the index the fund follows are the important issue. An investor should be able to understand what the fund holds and why.


I think I may have worded my question poorly.

When a particular passive-strategy sets off, what is the guarantee that the rules behind that passive-strategy will never change?

Can a passive-strategy ever alter it's own rules at all?

Cheers,

Itsallaguess

OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

Re: How time affects the rules-based v active funds debate

#193000

Postby OhNoNotimAgain » January 12th, 2019, 1:09 pm

Itsallaguess wrote:
OhNoNotimAgain wrote:
Itsallaguess wrote:
Does this issue only affect the active-management sphere?

Do passive-managers only ever stick with one strategy from conception, and use that for the rest of their working life?


The important point is that the rules-based strategy will survice the demise of the manager and not just prevent ad-hoc changes the manager makes while in post.

The rules used for the construction of the index the fund follows are the important issue. An investor should be able to understand what the fund holds and why.


I think I may have worded my question poorly.

When a particular passive-strategy sets off, what is the guarantee that the rules behind that passive-strategy will never change?

Can a passive-strategy ever alter it's own rules at all?

Cheers,

Itsallaguess


In the case of an OEIC the Trustees have the responsibility to ensure that the fund follows the prospectus. In this instance the important issue would be to ensure that it keeps to the investment objective. In the case of a rules-based fund then that would be to track an index.
The fund can of course choose to do something else but that requires legal consultation, approval by the trustees and the FCA. It could also conceivably require a vote I suppose.

colin
Lemon Slice
Posts: 538
Joined: December 10th, 2016, 7:16 pm
Has thanked: 10 times
Been thanked: 73 times

Re: How time affects the rules-based v active funds debate

#193003

Postby colin » January 12th, 2019, 1:12 pm

OhNoNotimAgain wrote
And therefore debates about active v passive or rules-based funds will cease.

I doubt it.

Itsallaguess
Lemon Quarter
Posts: 3996
Joined: November 4th, 2016, 1:16 pm
Has thanked: 1430 times
Been thanked: 2516 times

Re: How time affects the rules-based v active funds debate

#193004

Postby Itsallaguess » January 12th, 2019, 1:13 pm

OhNoNotimAgain wrote:
Itsallaguess wrote:
Can a passive-strategy ever alter it's own rules at all?


In the case of an OEIC the Trustees have the responsibility to ensure that the fund follows the prospectus. In this instance the important issue would be to ensure that it keeps to the investment objective. In the case of a rules-based fund then that would be to track an index.

The fund can of course choose to do something else but that requires legal consultation, approval by the trustees and the FCA. It could also conceivably require a vote I suppose.


So that's a 'Yes', then...

If that were to happen, would you agree that it would affect the legitimacy of the longer-term record of that passive fund?

Cheers,

Itsallaguess

mc2fool
Lemon Quarter
Posts: 1452
Joined: November 4th, 2016, 11:24 am
Has thanked: 5 times
Been thanked: 339 times

Re: How time affects the rules-based v active funds debate

#193009

Postby mc2fool » January 12th, 2019, 1:59 pm

OhNoNotimAgain wrote:According to Citywire there are 135 managers with track records going back 5 years in the UK All-Companies sector. Yet there are 211 active funds implying that meaningful comparsisons can only be made on 64% of the fund, even if you assume that past performance for active funds has some relevance, which is questionable.

Uh? I'm not sure I follow your logic here. The reason there are 135 managers and 211 funds is that some managers run (or are part of a team that run) more than one fund. So what are you saying here? That:

a) if a manager runs more than one fund then all of the funds they run must, somehow, be the same, performance wise? That's very obviously not true.

b) we should disregard the 36% of funds that are run by a manager that also runs one of the other 64%? What, we should just take the first one alphabetically for a "meaningful comparison" and ignore the others?

c) where funds are run by a team, if Fred & Joe run one fund and Fred & Sue run another then you can't make any "meaningful comparisons" for one or the other 'cos Fred is involved in both?

OhNoNotimAgain wrote:there is no point in looking at the track record of funds that have changed manager in the period under review.

Well, there may be an argument for that (although the choice of manager isn't the whole story, the mandate they've been given is also a significant factor), but the headline figures you are basing this on don't tell you anything about manager changes. It's entirely possible that those 135 managers have been running those 211 active funds for time immemorial.

OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

Re: How time affects the rules-based v active funds debate

#193070

Postby OhNoNotimAgain » January 12th, 2019, 5:45 pm

colin wrote:
OhNoNotimAgain wrote
And therefore debates about active v passive or rules-based funds will cease.

I doubt it.


Yes, you are probably right, but the argument will change to whether an active fund can beat a passive fund over a short time frame. Which is certainly possible.

OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

Re: How time affects the rules-based v active funds debate

#193072

Postby OhNoNotimAgain » January 12th, 2019, 5:49 pm

Itsallaguess wrote:
OhNoNotimAgain wrote:
Itsallaguess wrote:
Can a passive-strategy ever alter it's own rules at all?


In the case of an OEIC the Trustees have the responsibility to ensure that the fund follows the prospectus. In this instance the important issue would be to ensure that it keeps to the investment objective. In the case of a rules-based fund then that would be to track an index.

The fund can of course choose to do something else but that requires legal consultation, approval by the trustees and the FCA. It could also conceivably require a vote I suppose.


So that's a 'Yes', then...

If that were to happen, would you agree that it would affect the legitimacy of the longer-term record of that passive fund?

Cheers,

Itsallaguess


Yes of course, but the change in investment objective, and index it tracks, will make the difference clear to all. And it certainly would not be easy to achieve because the FCA would most likely object.
If it were to happen, and it remained rules-based, the track record would still be valid but just held to a different benchmark.

OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

Re: How time affects the rules-based v active funds debate

#193076

Postby OhNoNotimAgain » January 12th, 2019, 6:01 pm

mc2fool wrote:
OhNoNotimAgain wrote:According to Citywire there are 135 managers with track records going back 5 years in the UK All-Companies sector. Yet there are 211 active funds implying that meaningful comparsisons can only be made on 64% of the fund, even if you assume that past performance for active funds has some relevance, which is questionable.

Uh? I'm not sure I follow your logic here. The reason there are 135 managers and 211 funds is that some managers run (or are part of a team that run) more than one fund. So what are you saying here? That:

a) if a manager runs more than one fund then all of the funds they run must, somehow, be the same, performance wise? That's very obviously not true.

b) we should disregard the 36% of funds that are run by a manager that also runs one of the other 64%? What, we should just take the first one alphabetically for a "meaningful comparison" and ignore the others?

c) where funds are run by a team, if Fred & Joe run one fund and Fred & Sue run another then you can't make any "meaningful comparisons" for one or the other 'cos Fred is involved in both?

OhNoNotimAgain wrote:there is no point in looking at the track record of funds that have changed manager in the period under review.

Well, there may be an argument for that (although the choice of manager isn't the whole story, the mandate they've been given is also a significant factor), but the headline figures you are basing this on don't tell you anything about manager changes. It's entirely possible that those 135 managers have been running those 211 active funds for time immemorial.


Citywire include team members in its database so that is not the issue. The 76 other funds are ones where the manager has changed. That is why it has two league tables, one for managers and one for funds, except the funds table does not include passive/rules-based funds. You need to go to Trustnet for that.

As to your point about longevity of fund managers in position it cannot be very high because while it quotes a maximum of 10 year data for funds it only has a maximum of 5 year data for the managers.

mc2fool
Lemon Quarter
Posts: 1452
Joined: November 4th, 2016, 11:24 am
Has thanked: 5 times
Been thanked: 339 times

Re: How time affects the rules-based v active funds debate

#193089

Postby mc2fool » January 12th, 2019, 7:21 pm

OhNoNotimAgain wrote:Citywire include team members in its database so that is not the issue. The 76 other funds are ones where the manager has changed. That is why it has two league tables, one for managers and one for funds...

No, it has two league tables, one for managers and one for funds, because there isn't a one-to-one (and only one) relationship between the two. Managers can run more than one fund.

If you look at the 1 month tables there's 206 managers and 268 funds. Are you seriously claiming that's because nigh on a quarter of all UK All Companies funds changed manager in the last month?!?

As to your point about longevity of fund managers in position it cannot be very high because while it quotes a maximum of 10 year data for funds it only has a maximum of 5 year data for the managers.

That proves absolutely nothing. There are obviously fund managers that have been around for a decade and more, so a lack of them is clearly not the reason CityWire only shows up to a 5 year league table for them.

Of course fund managers can change -- and sometimes investors will follow them to their new fund -- but the rate of change you are asserting can't be derived from the simple count of entries in those two league tables. If you want to find out the true number you're going to have to do a lot more research than just comparing those two numbers.

OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

Re: How time affects the rules-based v active funds debate

#193352

Postby OhNoNotimAgain » January 14th, 2019, 8:41 am

mc2fool wrote:
OhNoNotimAgain wrote:Citywire include team members in its database so that is not the issue. The 76 other funds are ones where the manager has changed. That is why it has two league tables, one for managers and one for funds...

No, it has two league tables, one for managers and one for funds, because there isn't a one-to-one (and only one) relationship between the two. Managers can run more than one fund.

If you look at the 1 month tables there's 206 managers and 268 funds. Are you seriously claiming that's because nigh on a quarter of all UK All Companies funds changed manager in the last month?!?

As to your point about longevity of fund managers in position it cannot be very high because while it quotes a maximum of 10 year data for funds it only has a maximum of 5 year data for the managers.

That proves absolutely nothing. There are obviously fund managers that have been around for a decade and more, so a lack of them is clearly not the reason CityWire only shows up to a 5 year league table for them.

Of course fund managers can change -- and sometimes investors will follow them to their new fund -- but the rate of change you are asserting can't be derived from the simple count of entries in those two league tables. If you want to find out the true number you're going to have to do a lot more research than just comparing those two numbers.


There may an instance of one manager running two or more funds in the same sector but I am not aware of it.
If that was the case one would have to wonder why and which strategy he or she is measured on?

Of all the issues raised in the thread to focus on the difference between one month returns in two tables seems the least important of all.

Does the fact that one table ignores 9 funds in the top quartile over 3 years not concern anyone?

JohnB
Lemon Slice
Posts: 767
Joined: January 15th, 2017, 9:20 am
Has thanked: 44 times
Been thanked: 133 times

Re: How time affects the rules-based v active funds debate

#193363

Postby JohnB » January 14th, 2019, 9:22 am

Aren't you ignoring survivor bias? Funds with 10 year histories are likely to be the popular ones that performed well during that period, and aren't representative of the funds available then, or now.

And like football teams, poorly performing funds will have a higher turnover of managers.

Unlike a set of rules, good managers retire or move on, so funds with managers in place for some time can be more likely to be due a change than others.

And some companies, the Chelsea's of the investing world, keep switching managers even if they've done well.

At least rules are defined in prospectuses.

mc2fool
Lemon Quarter
Posts: 1452
Joined: November 4th, 2016, 11:24 am
Has thanked: 5 times
Been thanked: 339 times

Re: How time affects the rules-based v active funds debate

#193380

Postby mc2fool » January 14th, 2019, 10:32 am

OhNoNotimAgain wrote:There may an instance of one manager running two or more funds in the same sector but I am not aware of it.
If that was the case one would have to wonder why and which strategy he or she is measured on?

LOL, well that just demonstrates you really are only looking at the superficial counts of managers and funds and haven't even bothered to look at the list itself!

Mark Slater, number 3 in the 5 year list, runs Slater Recovery and Slater Growth, both of which are in the UK All Companies Sector, and if you click the "Show more" button you'll find plenty of other managers that run more than one fund in UK All Companies. Honestly, don't you do even the most basic of research before making such comments? https://citywire.co.uk/funds-insider/sector/equity-uk-all-companies/i1576

The Fund Managers league table measures, unsurprisingly, the overall performance of the manager, not that of any one fund (strategy).

OhNoNotimAgain wrote:
mc2fool wrote:If you look at the 1 month tables there's 206 managers and 268 funds. Are you seriously claiming that's because nigh on a quarter of all UK All Companies funds changed manager in the last month?!?

Of all the issues raised in the thread to focus on the difference between one month returns in two tables seems the least important of all.

Except that it most obviously demonstrates the falsehood of your original claim that the difference between the two counts is the number of funds that have changed managers in the selected period. That's clearly nonsense.

OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

Re: How time affects the rules-based v active funds debate

#193484

Postby OhNoNotimAgain » January 14th, 2019, 4:59 pm

mc2fool wrote:
OhNoNotimAgain wrote:There may an instance of one manager running two or more funds in the same sector but I am not aware of it.
If that was the case one would have to wonder why and which strategy he or she is measured on?

LOL, well that just demonstrates you really are only looking at the superficial counts of managers and funds and haven't even bothered to look at the list itself!

Mark Slater, number 3 in the 5 year list, runs Slater Recovery and Slater Growth, both of which are in the UK All Companies Sector, and if you click the "Show more" button you'll find plenty of other managers that run more than one fund in UK All Companies. Honestly, don't you do even the most basic of research before making such comments? https://citywire.co.uk/funds-insider/sector/equity-uk-all-companies/i1576

The Fund Managers league table measures, unsurprisingly, the overall performance of the manager, not that of any one fund (strategy).

OhNoNotimAgain wrote:
mc2fool wrote:If you look at the 1 month tables there's 206 managers and 268 funds. Are you seriously claiming that's because nigh on a quarter of all UK All Companies funds changed manager in the last month?!?

Of all the issues raised in the thread to focus on the difference between one month returns in two tables seems the least important of all.

Except that it most obviously demonstrates the falsehood of your original claim that the difference between the two counts is the number of funds that have changed managers in the selected period. That's clearly nonsense.


Ok, I accept the point that there some managers who run more than one fund. But that is the exception and is just noise in the data.

The trend is clear:

Over one year there are 193 rated managers with an average return of -4.6% but 254 active funds with an average return of -4.1%
Over three years there are 157 rated managers with an average return of 15% but 231 active funds with an average return of 16.1%
Over five years there are 135 rated managers with an average return of 25.2% but 211 active funds with an average return of 24.9%
For comparison the UK All Companies sector, which includes passive funds, returned -1.5% over one year, 17.9% over three years and 26.1% over 5 years. In other words the inclusion of passive funds improved the performance of the whole cohort.

So the rated managers only beat all managers over 5 years but underperformed the whole sector over all three time spans. But that is largely irrelevant.
What is important is that the number of rated managers decreases as time increases so self-evidently managers are being replaced.
Crucially this means that over five years the comparison between passive and active should only be made to the 64% of funds that have had the same manager, and therefore presumably the same strategy, over that time.
In other words a passive fund rated at, say, the 60th percentile over five years is in fact ranked at 38th percentile against funds that have maintained the same process over the same period.

Lootman
Lemon Half
Posts: 5957
Joined: November 4th, 2016, 3:58 pm
Has thanked: 35 times
Been thanked: 931 times

Re: How time affects the rules-based v active funds debate

#193487

Postby Lootman » January 14th, 2019, 5:18 pm

OhNoNotimAgain wrote:Ok, I accept the point that there some managers who run more than one fund. But that is the exception and is just noise in the data.

One thing to bear in mind is that there are many kinds of funds run by fund management houses. I believe that you are talking only about retail open-ended funds. But even in that case there are individuals who manage or co-manage several funds, which may or may not be related.

But then there are institutional funds, private accounts, partnership funds, pension funds and so on, that will all be run by the same people. At the large fund management house where I spent a good few years of my working life, some individuals would be running several dozen funds. The job is made easier by templates or model portfolios that can be applied across any number of funds. The trades are traded in one block and then allocated across individual funds. In fact larger houses are able to balance out buys and sells through internal crossing, meaning that there is no commission or spread for orders that are filled in this way.

Now your "house" may only have one employee and one fund - a retail OEIC. But retail is just a part of the activity at the major portfolio managers. And often the retail funds are the worst performing fund in a house, for reasons I won't go into but could if I wanted to alarm people.

Finally, even if an individual manager changes, they are often replaced by another person from the same house, who might typically have been an assistant manager of the same fund or the manager of a similar fund. The pool of research analysts might stay the same and they all have ambitions to be promoted to manager. Then there are oversight committees, compliance officers and trustees whose job is to ensure a consistent approach to the fund. There are more factors than just the style of the individual, which is why very good managers often want the freedom of running a hedge fund instead.

So I don't think you can assume that returns for active funds will suffer from some type of performance entropy which will render them ever less relevant. In fact it is the active managers that make a market. You can't have passive funds without active funds and active market participants. We need both.

mc2fool
Lemon Quarter
Posts: 1452
Joined: November 4th, 2016, 11:24 am
Has thanked: 5 times
Been thanked: 339 times

Re: How time affects the rules-based v active funds debate

#193490

Postby mc2fool » January 14th, 2019, 5:33 pm

OhNoNotimAgain wrote:Crucially this means that over five years the comparison between passive and active should only be made to the 64% of funds that have had the same manager...

That bogus 64% figure is the same nonsense that you tried to assert in your OP that I've already shown is false. You cannot compare the headline managers vs funds counts to determine the number of funds that have had the same manager throughout the period. It's wrong to do so and so the conclusions you are trying to assert on it are baseless.

It's numerical codswallop, and hopefully everyone else can see that, even if you can't.

OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

Re: How time affects the rules-based v active funds debate

#193548

Postby OhNoNotimAgain » January 14th, 2019, 9:25 pm

Lootman wrote:
OhNoNotimAgain wrote:Ok, I accept the point that there some managers who run more than one fund. But that is the exception and is just noise in the data.

One thing to bear in mind is that there are many kinds of funds run by fund management houses. I believe that you are talking only about retail open-ended funds. But even in that case there are individuals who manage or co-manage several funds, which may or may not be related.

But then there are institutional funds, private accounts, partnership funds, pension funds and so on, that will all be run by the same people. At the large fund management house where I spent a good few years of my working life, some individuals would be running several dozen funds. The job is made easier by templates or model portfolios that can be applied across any number of funds. The trades are traded in one block and then allocated across individual funds. In fact larger houses are able to balance out buys and sells through internal crossing, meaning that there is no commission or spread for orders that are filled in this way.

Now your "house" may only have one employee and one fund - a retail OEIC. But retail is just a part of the activity at the major portfolio managers. And often the retail funds are the worst performing fund in a house, for reasons I won't go into but could if I wanted to alarm people.

Finally, even if an individual manager changes, they are often replaced by another person from the same house, who might typically have been an assistant manager of the same fund or the manager of a similar fund. The pool of research analysts might stay the same and they all have ambitions to be promoted to manager. Then there are oversight committees, compliance officers and trustees whose job is to ensure a consistent approach to the fund. There are more factors than just the style of the individual, which is why very good managers often want the freedom of running a hedge fund instead.

So I don't think you can assume that returns for active funds will suffer from some type of performance entropy which will render them ever less relevant. In fact it is the active managers that make a market. You can't have passive funds without active funds and active market participants. We need both.


I am not saying it will be better or worse, just different, which makes league tables irrelevant. No active manager will write down his investment process for his team or assistants to use. That would just guarantee his redundancy.
Of course houses run lots of funds and only some are retail, so I am looking only at what is available to the public with publicly available data.

OhNoNotimAgain
Lemon Slice
Posts: 449
Joined: November 4th, 2016, 11:51 am
Has thanked: 40 times
Been thanked: 72 times

Re: How time affects the rules-based v active funds debate

#193549

Postby OhNoNotimAgain » January 14th, 2019, 9:29 pm

mc2fool wrote:
OhNoNotimAgain wrote:Crucially this means that over five years the comparison between passive and active should only be made to the 64% of funds that have had the same manager...

That bogus 64% figure is the same nonsense that you tried to assert in your OP that I've already shown is false. You cannot compare the headline managers vs funds counts to determine the number of funds that have had the same manager throughout the period. It's wrong to do so and so the conclusions you are trying to assert on it are baseless.

It's numerical codswallop, and hopefully everyone else can see that, even if you can't.


But you accept the basic premise of the argument.


Return to “Investment Strategies”

Who is online

Users browsing this forum: No registered users and 2 guests