Remove ads

Introducing the LemonFools Personal Finance Calculators

Active funds take more risk in vain search of higher returns

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: 396
Joined: November 4th, 2016, 11:51 am
Has thanked: 38 times
Been thanked: 57 times

Active funds take more risk in vain search of higher returns

#201251

Postby OhNoNotimAgain » February 14th, 2019, 9:31 am

One possible explanation for the underperformance of active managers involves their typical bias towards high beta, more volatile stocks.

http://www.indexologyblog.com/2019/02/1 ... anagement/

StOmer
Lemon Pip
Posts: 75
Joined: November 12th, 2016, 3:42 pm
Has thanked: 63 times
Been thanked: 19 times

Re: Active funds take more risk in vain search of higher returns

#201978

Postby StOmer » February 17th, 2019, 9:24 pm

Don't these arguments only work when you compare the average of active funds rather than those that regularly do well? On a personal level, passives are failing to beat my personal portfolios on a regular basis. There was a larger fall in my portfolios late in 2018 but long term the underperformance of the passives is very noticeable.

As an example of one portfolio, £100k invested in 2011 with Foreign & Colonial, current value with dividends reinvested is £248,100. Same money in a Vanguard Life Strategy 60 Accumulation is showing as £177,734 and a VLS 80 Acc fund would be £190,697. The outperformance seems worth having to me.

Not wishing to start an argument, we will switch to passives when my wife has to take control of the portfolios.

PrefInvestor
Lemon Pip
Posts: 89
Joined: February 9th, 2019, 8:24 am
Has thanked: 4 times
Been thanked: 24 times

Re: Active funds take more risk in vain search of higher returns

#201988

Postby PrefInvestor » February 17th, 2019, 10:32 pm

The original poster cited “active funds” which I take to mean open ended funds such as OEICs or Unit Trusts, whereas the investment that you have quoted FCIT is an Investment Trust, these being close ended investments. Actively managed yes, but not an “active fund” in my book therefore ?. Sorry if I am being overly pedantic.

The following article provides an interesting analysis of open and closed end investment performance, and comes out in favour of ITs:-

https://citywire.co.uk/investment-trust-insider/news/proof-that-investment-trusts-beat-funds-80-of-the-time/a1076126

Personally I strongly agree with a preference for ITs over OEICs and UTs, in fact personally I would never invest in the latter as I think that their charges are excessive and opaque and in the end tend to damage their performance. Passive investing has its place also though IMV, especially when markets are low - aiming to benefit from a likely “reversion to the mean” of long term gains rather than gambling purely on good investment choices.

ATB

Pref

scotia
Lemon Quarter
Posts: 1056
Joined: November 4th, 2016, 8:43 pm
Has thanked: 150 times
Been thanked: 303 times

Re: Active funds take more risk in vain search of higher returns

#201993

Postby scotia » February 17th, 2019, 10:57 pm

StOmer wrote:As an example of one portfolio, £100k invested in 2011 with Foreign & Colonial, current value with dividends reinvested is £248,100. Same money in a Vanguard Life Strategy 60 Accumulation is showing as £177,734 and a VLS 80 Acc fund would be £190,697.

But are you comparing like with like? The Life Strategy 60 Fund contains 40% Bonds, and the 80 contains 20% Bonds. These are safety nets which you may wish to choose. Currently F&C is all-equity (with 3.1% liquidity), and no Bond safety net. So for a reasonable comparison you should be looking at Vanguard Life Strategy 100. It may not match the F&C return, but it will certainly be nearer than the sums you quote.
And you also have selected a reasonably "good" IT for the comparison - you may have selected another popular IT which turned out to be less successful. And this is significant - active investments rely on the manager, who may have a long run of good fortune, which drags in a large number of investors, then the "star" manager looses their touch (it happens!) - possibly because market behaviour changes, and a plain passive fund will be a better bet.
Incidentally, Fundsmith (a fund, not an IT) has knocked the socks off F&C (and many other ITs). But who would have guessed?
Disclaimer - I hold F&C, Fundsmith, and ETF Passives.

StOmer
Lemon Pip
Posts: 75
Joined: November 12th, 2016, 3:42 pm
Has thanked: 63 times
Been thanked: 19 times

Re: Active funds take more risk in vain search of higher returns

#202015

Postby StOmer » February 18th, 2019, 8:23 am

Well, if you compare the Vanguard 100% fund with the portfolio then you get £248,100 versus £203,166, an outperformance of £45k from £100k over 7 1/2 years.

I think claiming that OEICS and IT's are a different form of 'active' is stretching it a little. It is quite easy to select a portfolio of OEICS that would do better or match the F&C IT, eg. Fundsmith as mentioned. As I said, not seeking an argument on active v passive, just suggesting that these articles depend upon comparing a passive against the average of actives rather than the reality of selecting a portfolio of investments.

DavidM13
Lemon Pip
Posts: 63
Joined: October 12th, 2018, 5:01 pm
Has thanked: 7 times
Been thanked: 67 times

Re: Active funds take more risk in vain search of higher returns

#202023

Postby DavidM13 » February 18th, 2019, 9:47 am

PrefInvestor wrote:The original poster cited “active funds” which I take to mean open ended funds such as OEICs or Unit Trusts, whereas the investment that you have quoted FCIT is an Investment Trust, these being close ended investments. Actively managed yes, but not an “active fund” in my book therefore ?. Sorry if I am being overly pedantic.

The following article provides an interesting analysis of open and closed end investment performance, and comes out in favour of ITs:-

https://citywire.co.uk/investment-trust-insider/news/proof-that-investment-trusts-beat-funds-80-of-the-time/a1076126

Personally I strongly agree with a preference for ITs over OEICs and UTs, in fact personally I would never invest in the latter as I think that their charges are excessive and opaque and in the end tend to damage their performance. Passive investing has its place also though IMV, especially when markets are low - aiming to benefit from a likely “reversion to the mean” of long term gains rather than gambling purely on good investment choices.

ATB

Pref


I disagree with the first point. Active funds to me simply mean the manager is doing some stock picking actively compared to an index fund/etf that simply tracks the index passively. I have not heard it used to contrast OE and CEFs ever anywhere in the industry.

Raptor
Lemon Quarter
Posts: 1651
Joined: November 4th, 2016, 1:39 pm
Has thanked: 148 times
Been thanked: 307 times

Re: Active funds take more risk in vain search of higher returns

#202038

Postby Raptor » February 18th, 2019, 10:47 am

Moderator Message:
Moving to Investment Strategies, with a shadow left on Investment & Unit Trusts. As the article is clearly advocating passive versus active strategies. Raptor.

daveh
Lemon Slice
Posts: 439
Joined: November 4th, 2016, 11:06 am
Has thanked: 24 times
Been thanked: 119 times

Re: Active funds take more risk in vain search of higher returns

#202039

Postby daveh » February 18th, 2019, 10:48 am

StOmer wrote:Well, if you compare the Vanguard 100% fund with the portfolio then you get £248,100 versus £203,166, an outperformance of £45k from £100k over 7 1/2 years.

I think claiming that OEICS and IT's are a different form of 'active' is stretching it a little. It is quite easy to select a portfolio of OEICS that would do better or match the F&C IT, eg. Fundsmith as mentioned. As I said, not seeking an argument on active v passive, just suggesting that these articles depend upon comparing a passive against the average of actives rather than the reality of selecting a portfolio of investments.


So which active fund or funds are you recommending to buy today to outperform passives, just so we can see how good your crystal ball is. ;)
Me personally I do my own investing so I'm an active fund manager for myself with the addition of a % of passive ETFs that track specific HY indices.

mc2fool
Lemon Quarter
Posts: 1217
Joined: November 4th, 2016, 11:24 am
Has thanked: 4 times
Been thanked: 258 times

Re: Active funds take more risk in vain search of higher returns

#202051

Postby mc2fool » February 18th, 2019, 11:31 am

PrefInvestor wrote:The original poster cited “active funds” which I take to mean open ended funds such as OEICs or Unit Trusts, whereas the investment that you have quoted FCIT is an Investment Trust, these being close ended investments. Actively managed yes, but not an “active fund” in my book therefore ?. Sorry if I am being overly pedantic.

While the term "funds" is often used to refer to (just) OEICs/UTs it is also often used for any/all collective investment instruments, including OEICs, UTs, ITs and ETFs (Exchange Traded Funds), and I am confident that Rob, the OP, was intending the point to be read as being about any/all actively managed collective instruments, as he's been pointing out any evidence he finds to that effect at pretty much every opportunity for many years. :D

OEICs, UTs, ITs and ETFs can all be active or passive funds, although I believe all UK ITs are active nowadays, the last (only?) passive IT, tracking the S&P 500, having given up and changed its objective to an active one some years ago (can't remember the name...)

PrefInvestor wrote:Personally I strongly agree with a preference for ITs over OEICs and UTs, in fact personally I would never invest in the latter as I think that their charges are excessive and opaque and in the end tend to damage their performance. Passive investing has its place also though IMV, especially when markets are low - aiming to benefit from a likely “reversion to the mean” of long term gains rather than gambling purely on good investment choices.

The excessive charges of OEICs & UTs isn't such a good generalisation nowadays, you have to look at individual cases. Since RDR (the FCA's Retail Distribution Review) along with the pressures of competition over the last decade (esp. from the likes of Vanguard), charges have generally dropped, in some cases precipitously, with passive OEICs & UTs in major markets in particular having charges of tenths of a percent.

If you look at Monevator's list of low cost index trackers, covering both OEICs/UTs and ETFs, you'll find that the OEICs/UTs come out as the cheapest in a lot of categories. https://monevator.com/low-cost-index-trackers/.

DavidM13
Lemon Pip
Posts: 63
Joined: October 12th, 2018, 5:01 pm
Has thanked: 7 times
Been thanked: 67 times

Re: Active funds take more risk in vain search of higher returns

#202058

Postby DavidM13 » February 18th, 2019, 11:58 am

mc2fool wrote:
PrefInvestor wrote:The original poster cited “active funds” which I take to mean open ended funds such as OEICs or Unit Trusts, whereas the investment that you have quoted FCIT is an Investment Trust, these being close ended investments. Actively managed yes, but not an “active fund” in my book therefore ?. Sorry if I am being overly pedantic.

While the term "funds" is often used to refer to (just) OEICs/UTs it is also often used for any/all collective investment instruments, including OEICs, UTs, ITs and ETFs (Exchange Traded Funds), and I am confident that Rob, the OP, was intending the point to be read as being about any/all actively managed collective instruments, as he's been pointing out any evidence he finds to that effect at pretty much every opportunity for many years. :D

OEICs, UTs, ITs and ETFs can all be active or passive funds, although I believe all UK ITs are active nowadays, the last (only?) passive IT, tracking the S&P 500, having given up and changed its objective to an active one some years ago (can't remember the name...)

PrefInvestor wrote:Personally I strongly agree with a preference for ITs over OEICs and UTs, in fact personally I would never invest in the latter as I think that their charges are excessive and opaque and in the end tend to damage their performance. Passive investing has its place also though IMV, especially when markets are low - aiming to benefit from a likely “reversion to the mean” of long term gains rather than gambling purely on good investment choices.

The excessive charges of OEICs & UTs isn't such a good generalisation nowadays, you have to look at individual cases. Since RDR (the FCA's Retail Distribution Review) along with the pressures of competition over the last decade (esp. from the likes of Vanguard), charges have generally dropped, in some cases precipitously, with passive OEICs & UTs in major markets in particular having charges of tenths of a percent.

If you look at Monevator's list of low cost index trackers, covering both OEICs/UTs and ETFs, you'll find that the OEICs/UTs come out as the cheapest in a lot of categories. https://monevator.com/low-cost-index-trackers/.



Yes there used to be two index trackers in the shape of CEFs (Edinburgh US Tracker and Edinburgh UK Tracker changed name to Aberdeen) i cannot for the life of me understand why they were ever in a closed ended structure!! They did have a low OGC but still not as low as an ETF

StOmer
Lemon Pip
Posts: 75
Joined: November 12th, 2016, 3:42 pm
Has thanked: 63 times
Been thanked: 19 times

Re: Active funds take more risk in vain search of higher returns

#202180

Postby StOmer » February 18th, 2019, 7:35 pm

daveh wrote:So which active fund or funds are you recommending to buy today to outperform passives, just so we can see how good your crystal ball is. ;)
Me personally I do my own investing so I'm an active fund manager for myself with the addition of a % of passive ETFs that track specific HY indices.

I did not mention any crystal ball but just wished to suggest that these articles relied on comparing the average of all actives rather than a select group. Not sure why you feel the need to introduce ridicule or any other form of attempt to belittle my input. I thought the idea was to exchange views and discuss. Apologies for intruding on the passives board.

Hariseldon58
Lemon Slice
Posts: 307
Joined: November 4th, 2016, 9:42 pm
Has thanked: 12 times
Been thanked: 124 times

Re: Active funds take more risk in vain search of higher returns

#202202

Postby Hariseldon58 » February 18th, 2019, 10:09 pm

@StOmer

Foreign and Colonial is a good investment trust, but when comparing performance its worth noting that in 2011 it stood at a 10% or so discount to NAV and at present the discount is about zero, thus 10% of the return is simply from the discount narrowing... that's not to detract from a good return.

Investment trusts bought at a discount, with modest gearing and low costs, will compare favourably to very low cost trackers. The effect of the discount and modest gearing is to reduce the costs to below zero, if a trust does well and the discount closes then you get a double benefit.

(I hold passive and active ETFs as well....)

colin
Lemon Slice
Posts: 473
Joined: December 10th, 2016, 7:16 pm
Has thanked: 9 times
Been thanked: 67 times

Re: Active funds take more risk in vain search of higher returns

#202409

Postby colin » February 19th, 2019, 6:37 pm

Hariseldon58 wrote:@StOmer

Foreign and Colonial is a good investment trust, but when comparing performance its worth noting that in 2011 it stood at a 10% or so discount to NAV and at present the discount is about zero, thus 10% of the return is simply from the discount narrowing... that's not to detract from a good return.

Investment trusts bought at a discount, with modest gearing and low costs, will compare favourably to very low cost trackers. The effect of the discount and modest gearing is to reduce the costs to below zero, if a trust does well and the discount closes then you get a double benefit.

(I hold passive and active ETFs as well....)

Yes this is an important point to consider when comparing investment trust returns with any collective investment which trades close to NAV, if Foreign and Colonial stood at a 10% discount in 2011 then that implies an underperformance in previous years compared to a similarly diversified fund which traded at all times close to NAV.
Taking advantage of such discounts represents an opportunity which trusts present from time to time, it may well not be any 'active' management which has led the trust to outperform an index but a closing of the discount due to more positive sentiment.For myself when I have bought trusts which have subsequently closed a wide discount I have thought it prudent to sell some or all and re-invest in something less volatile, because one day the discount will open up again.

Hariseldon58
Lemon Slice
Posts: 307
Joined: November 4th, 2016, 9:42 pm
Has thanked: 12 times
Been thanked: 124 times

Re: Active funds take more risk in vain search of higher returns

#202481

Postby Hariseldon58 » February 20th, 2019, 12:43 am

colin wrote:
Hariseldon58 wrote:@StOmer

it may well not be any 'active' management which has led the trust to outperform an index but a closing of the discount due to more positive sentiment.


The reason why a discount occurs can be many reasons apart from sentiment.in the case of Foreign and Colonial did outperform due to stock selection and got rewarded with a closing of the discount.

ITs bought at a discount with low cost moderate gearing can outperform an index without any alpha. ( They may not but they start with a gentle tailwind)

There are not many successful active funds in the large cap USA market, the trackers provide ferocious competition...

It’s interesting when we look at UK Equity Income Trusts, I have followed these for many years and my own research suggest the active investment trusts generally outperform the various rule driven ‘passive’ funds. It could well be that the simple mechanical rules for these funds are too crude and more sophisticated products will follow, interesting times!

I must admit that sectors where Investment Trusts typically trade at discounts, flash a sell signal when the discounts close... although some trusts have developed strategies to control the discount from widening in the first place.

tjh290633
Lemon Quarter
Posts: 3055
Joined: November 4th, 2016, 11:20 am
Has thanked: 203 times
Been thanked: 978 times

Re: Active funds take more risk in vain search of higher returns

#202512

Postby tjh290633 » February 20th, 2019, 9:10 am

F&C, like many other ITs, operate a discount control mechanism, by buying back shares to reduce discounts and issuing new shares when at a premium. Looking at recent RNS posts, they have been reissuing shares from Treasury, which they had previously bought back.

TJH

Urbandreamer
Lemon Slice
Posts: 558
Joined: December 7th, 2016, 9:09 pm
Has thanked: 30 times
Been thanked: 106 times

Re: Active funds take more risk in vain search of higher returns

#202520

Postby Urbandreamer » February 20th, 2019, 9:30 am

I'm not sure that I should raise these points, but how do we measure "performance"?

The question of IT discounts has been raised. Is a falling discount out performance and a rising one under performance? Surely all that you track with the discount/premium is popularity.

Another point made was of balanced funds such as those traditionally offered by pension funds, or over the counter by Vangard. Despite or because they are only part equity (in this case index tracker) they can out perform or under perform a pure index tracker, depending on the market. I haven't checked, but would be surprised it they hadn't under "performed" over the last decade.

It has been said that people buy them as they contain a safety net, which makes sense. Do you include them in the average index tracker that you compare against active funds? I note that "indexologyblog" does not, but not why not? Indeed it would be wrong to even claim that they consider an average index tracker, they don't. They compare against the index.

Those who choose to buy active funds often build a portfolio containing some high growth equity funds, some high income (arguably low growth) equity funds and some bond funds. Do you include the high income and bond funds in the average of the active funds?

We know that "indexologyblog" does not (in Active Managment for volatile times, quoted in your link), instead picking "large cap" funds. However we might question that choice. As I understand it, while small cap companies are not out performing the way that they use to, they certainly did. Strangely, although the initial link claimed to be baised upon that, it then consider big to low cap funds considering how they, rather than the original choice meet the funds benchmark.

Here is the link (contained within the first link) to what passes for their research.
http://www.indexologyblog.com/2019/02/0 ... ile-times/

I'm afraid that I find the analyisis dubious. It MUST be said though that it only covers US mutual funds. They correctly identify the need of open ended funds to keep a cash allocation to meet operational requirements, which may provide a drag on performance. They don't consider the risks and possible out performance of leverage (borrowing to invest) as mutual funds can't do that though IT's can and do. I would argue that even if correct, their "research" can't be extended to all markets or all Active investments.

FWIW, I have index trackers in one pension, a small cap and a specialist IT in another, F&C and SMT in an ISA. I also have HEFL which I EXPECT the capital value of to underperform the market.

colin
Lemon Slice
Posts: 473
Joined: December 10th, 2016, 7:16 pm
Has thanked: 9 times
Been thanked: 67 times

Re: Active funds take more risk in vain search of higher returns

#202534

Postby colin » February 20th, 2019, 10:07 am

Foreign and Colonial did outperform due to stock selection and got rewarded with a closing of the discount.

Why was the discount there in the first place?

DavidM13
Lemon Pip
Posts: 63
Joined: October 12th, 2018, 5:01 pm
Has thanked: 7 times
Been thanked: 67 times

Re: Active funds take more risk in vain search of higher returns

#202548

Postby DavidM13 » February 20th, 2019, 10:35 am

Because price was lower than NAV ;)

colin
Lemon Slice
Posts: 473
Joined: December 10th, 2016, 7:16 pm
Has thanked: 9 times
Been thanked: 67 times

Re: Active funds take more risk in vain search of higher returns

#202686

Postby colin » February 20th, 2019, 5:27 pm

Yes but why was that? :?:

Hariseldon58
Lemon Slice
Posts: 307
Joined: November 4th, 2016, 9:42 pm
Has thanked: 12 times
Been thanked: 124 times

Re: Active funds take more risk in vain search of higher returns

#202695

Postby Hariseldon58 » February 20th, 2019, 5:47 pm

The reason for a discount can be a mixture of supply and demand , indifferent performance etc.

I held For & Col from 1991 onwards and a
Discount was the norm, EG Alinance and Sexond Alliance Trust were at 20% discounts for many, manu years , they merged and the discount is around 7% now.

It’s nothing new, Ben Graham write about a similar phenomenon in US Closed Wnd companies in “The Intelligent Investor” in the sixties... PS he thought they were a no brained compared to high load mutual funds at the time.


Return to “Investment Strategies”

Who is online

Users browsing this forum: Google [Bot] and 1 guest