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Index Trackers usually beat ITs

Closed-end funds and OEICs
Arborbridge
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Re: Index Trackers usually beat ITs

#451188

Postby Arborbridge » October 19th, 2021, 9:35 am

xeny wrote:
Arborbridge wrote:
This seems to suggest that if I had listened to the fees argument to make a choice ten years ago, I would have lost out. Charts with income reinvested.


Arb.


It's perfectly possible to identify in retrospect an active investment that will outperform. What is tricky is identifying them in advance, knowing that they'll essentially have at least a finger tied behind their back due to the higher cost base.


Well, in fact I did identify it in advance, and the chart confirms the choice was right. Of course, I agree with what you say about hindsight generally, and I just had a lucky moment.
I chose FGT on its previous history at that time - backward looking, as you say - which cannot be relied on.
However, at any given time with a choice between two funds A) with low fees and modest TR history,
B) with higher fees but a much better TR history, for what reason would I choose A)?

Fees are only one factor and do not tell us which is the better buy.

Arb.

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Re: Index Trackers usually beat ITs

#451190

Postby Arborbridge » October 19th, 2021, 9:43 am

GeoffF100 wrote:
DavidM13 wrote:For 10y there were 18/23 companies in the same sector as FGT that outperformed the equivalent of the FTSE All Share.

You are cherry picking the worst performing index for comparison. The global index is a more appropriate choice.


As regards my chart, I only picked on the FTSE comparison because that was what you mentioned with regard to fees:

Finsbury growth does currently have a 4.6% discount. It also has 0.64% TER. Vanguard FTSE All Share has an OCF of 0.06%


I just took my own cue from that. However, I do agree that a World tracker would be a different matter, but that wasn't in the context of that conversation, so I didn't use it. If you thought the FTSE All Share was so awful, I'm surprised you mentioned it ;) I agree it is awful, but it was the one you brought up.

Arb.

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Re: Index Trackers usually beat ITs

#451191

Postby 1nvest » October 19th, 2021, 9:45 am

Lootman wrote:In fact the long-term return from equity markets is something like 8% a year, or a doubling every 9 years with reinvestment. An index fund will capture that beta. Some investors will do better than that, but most will not and even investors who do out-perform with an active approach typically cannot do so consistently.

But there are also plenty of examples of market activity that is a zero sum game e.g. day trading, trading options and futures, and so on.

But stocks are volatile. Stocks have seen periods of large declines, 1900 to 1920 for instance; And other periods of broadly flat, 1958 to 1982, during which stocks were at times down by half; Or 2000 to 2010. And those examples are for FT All Share total return (dividends reinvested), with basic rate taxation assumed. Other periods and stocks have done very well, 1983 to 1999 for instance. The broader average of reasonable/good results are subject to being in for the "long-term" i.e. 30 to 40+ years AND not also drawing any income that might otherwise deplete the capital base across 20+ years of 'flat' outcomes.

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Re: Index Trackers usually beat ITs

#451197

Postby GeoffF100 » October 19th, 2021, 9:55 am

DavidM13 wrote:
GeoffF100 wrote:
DavidM13 wrote:For 10y there were 18/23 companies in the same sector as FGT that outperformed the equivalent of the FTSE All Share.

You are cherry picking the worst performing index for comparison. The global index is a more appropriate choice.


No I am not and no it is not! I am picking a UK generalist index for the UK Equity Income sector!

From the FGT factsheet

"Investment Objective and Benchmark Index Finsbury Growth & Income Trust PLC invests principally in the securities of UK listed
companies with the objective of achieving capital and income growth and providing a total return in excess of that of its benchmark, the FTSE All-Share Index (net dividends reinvested)."

But many thanks for the vote of confidence to my data integrity. ;)

But why would you choose to invest in just the UK market? It makes much more sense to spread you risk further.

As far as comparing FGT to its benchmark is concerned, you have not adjusted for risk. You are also considering a small subset of the funds that invest in the all share, and that small subset has done well. It is always possible to find a small subset of funds that has beaten the market, even if fund performance is just a matter of chance.

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Re: Index Trackers usually beat ITs

#451201

Postby GeoffF100 » October 19th, 2021, 10:00 am

Arborbridge wrote:If you thought the FTSE All Share was so awful, I'm surprised you mentioned it ;) I agree it is awful, but it was the one you brought up.

I mentioned it because the fund quoted that as its benchmark. The all share has been awful, but that is in the past. We do not know about the future. Nonetheless, investing all your money in your home country is not a good idea.

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Re: Index Trackers usually beat ITs

#451202

Postby xeny » October 19th, 2021, 10:05 am

Arborbridge wrote:
Well, in fact I did identify it in advance, and the chart confirms the choice was right. Of course, I agree with what you say about hindsight generally, and I just had a lucky moment.
I chose FGT on its previous history at that time - backward looking, as you say - which cannot be relied on.
However, at any given time with a choice between two funds A) with low fees and modest TR history,
B) with higher fees but a much better TR history, for what reason would I choose A)?

Fees are only one factor and do not tell us which is the better buy.



I've similarly done very nicely by looking at historic performance and accepting a higher management fee than an index find.

My concern however is this (and apologies if what follows is egg sucking):

Active funds tend to have themes. There are vanishingly few of them that metaphorically sit down on a Saturday morning and spend the day assessing every company on every exchange, assess likely TR for their investment horizon, and then build a portfolio for the next time period out of the highest anticipated. Instead they tend to fish in a smaller pool of companies/characteristics that they are familiar with and have historically done well with.

The latter approach is all very well as long as the investing environment isn't changing dramatically. If there's a significant change there, then a fund fishing in a different pool will do better, both than its previous performance, and better relative to the fund you'd picked for good historical performance.

The advantage of an index is that you've got a decent chance of getting all the pools (so the good and the bad, as they move around with changing environment) at a relatively low overhead in fees. The risk with active funds is that if the environment changes (and I wonder if we've seen an unusually consistent environment for the past decade or so since the GFC) you could easily lose money quite fast as the characteristic moves out of fashion (leading to an internal debate on is the environment going to return) while at the same time continuing to pay active management for the privilege.

Active funds are often touted as the thing to have when the future is uncertain, as their managers can "react". I'm actually wondering if the converse is true, and the most diversified passive fund possible is the place to be.

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Re: Index Trackers usually beat ITs

#451220

Postby DavidM13 » October 19th, 2021, 10:29 am

GeoffF100 wrote:
DavidM13 wrote:
GeoffF100 wrote:You are cherry picking the worst performing index for comparison. The global index is a more appropriate choice.


No I am not and no it is not! I am picking a UK generalist index for the UK Equity Income sector!

From the FGT factsheet

"Investment Objective and Benchmark Index Finsbury Growth & Income Trust PLC invests principally in the securities of UK listed
companies with the objective of achieving capital and income growth and providing a total return in excess of that of its benchmark, the FTSE All-Share Index (net dividends reinvested)."

But many thanks for the vote of confidence to my data integrity. ;)

But why would you choose to invest in just the UK market? It makes much more sense to spread you risk further.

As far as comparing FGT to its benchmark is concerned, you have not adjusted for risk. You are also considering a small subset of the funds that invest in the all share, and that small subset has done well. It is always possible to find a small subset of funds that has beaten the market, even if fund performance is just a matter of chance.


I did not suggest to invest solely in UK market. I certainly haven't personally. I was addressing the chain regarding FGT.

The AIC global sector weighted return over the same period has also beaten the MSCI World equivalent by a country mile (a lot due to SMT). The Unweighted sector has outperformed the market index by over 30% over the same time period.

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Re: Index Trackers usually beat ITs

#451233

Postby Adamski » October 19th, 2021, 10:54 am

My investments are largely in trackers and mixed investments, but do have some active funds on the side. I do think for most people trackers are the way to go... as us personal investors panic sell when things go south.

However maybe it's greed but you look at past performance of top funds they blow trackers out the water. Eg. SMT 5 years annualised growth 35%!

I know chunk of this was cause of Tesla and covid tech bounce but if you can handle the volatility they would offer much better returns.

A young investor with a long term horizon and handle crashes, could park in trackers whilst finding somewhere better, but should hold likes of SMT, Ark, Crypto, China tech for the long term as tech and growth story still compelling long term.

Unfortunately a lot of UK/western industry Oil giants, tobacco, retail won't be around in 20 years. Well be sitting in our cold zero carbon homes thinking wth happened :lol: but that's another matter!!

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Re: Index Trackers usually beat ITs

#451251

Postby Spet0789 » October 19th, 2021, 11:44 am

Great opportunity to buy FCIT currently. Sitting on a 10% discount. Pays for 30 years of fees!

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Re: Index Trackers usually beat ITs

#451255

Postby absolutezero » October 19th, 2021, 11:53 am

Arborbridge wrote:
This seems to suggest that if I had listened to the fees argument to make a choice ten years ago, I would have lost out. Charts with income reinvested.


Arb.

What happens on a different time scale and with different comparator indices?
Interestingly, Finsbury 'lost out' (total return around 50%) to both a passive all world tracker (VWRL 70% total return) and an S&P 500 tracker (VUSA 100% total return) over the last 5 years.

Putting pictures on here is a faff, but use this: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/j/janus-henderson-asian-dividend-income-income-inclusive/charts to get the graph
Last edited by absolutezero on October 19th, 2021, 11:57 am, edited 1 time in total.

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Re: Index Trackers usually beat ITs

#451256

Postby absolutezero » October 19th, 2021, 11:55 am

Adamski wrote:Eg. SMT 5 years annualised growth 35%!

I know chunk of this was cause of Tesla and covid tech bounce but if you can handle the volatility they would offer much better returns.

So was SMT's choice of Tesla down to skill or luck? And can they repeat this consistently either way?

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Re: Index Trackers usually beat ITs

#451259

Postby DavidM13 » October 19th, 2021, 12:07 pm

absolutezero wrote:
Arborbridge wrote:
This seems to suggest that if I had listened to the fees argument to make a choice ten years ago, I would have lost out. Charts with income reinvested.


Arb.

What happens on a different time scale and with different comparator indices?
Interestingly, Finsbury 'lost out' (total return around 50%) to both a passive all world tracker (VWRL 70% total return) and an S&P 500 tracker (VUSA 100% total return) over the last 5 years.

Putting pictures on here is a faff, but use this: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/j/janus-henderson-asian-dividend-income-income-inclusive/charts to get the graph


I genuinely don't understand the rationale for comparing with irrelevant Benchmark indices.

The discussion (I thought) is not if global trackers are better than UK funds the argument is does a UK Equity fund beat a UK Equity Tracker. Does a global fund beat a global tracker does a US Fund beat a US Tracker (most people think no for that one) etc. The argument is for each area you are on should you be in active or passive?

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Re: Index Trackers usually beat ITs

#451277

Postby Lootman » October 19th, 2021, 1:07 pm

UncleEbenezer wrote:
Lootman wrote:]I think the word "value" there may be ambiguous.

I wouldn't disagree with that if I'd used the word "value". But I used the phrase "value creation", which doesn't have that ambiguity.

I think I thereby also implicitly excluded such parasitic activities as your zero-sum game examples from any definition of "investing" relevant to my post.

Ah, but if you agree that the word "value" has two meanings, then which of those two meanings do you mean by the word "value" in the phrase "value creation"?

"Parasitic" is a rather strong word to use to describe playing zero sum games, don't you think?

GeoffF100 wrote:
UncleEbenezer wrote:This argument is based on the premise that investing is a zero-sum game. One investor's gain is another's loss.

Investing is a zero sum game relative to the index. In order for one investor to beat the index, another has to do worse than the index. The market weighted performance of all investors in the market is the market weighted index. That is not a premise. It is a mathematical fact.

But it is not a mathematical fact that there is one out-performer for every under-performer, relative to an index. There could for instance be a small number of large winners and a large number of small losers. Or vice versa although that seems less likely.

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Re: Index Trackers usually beat ITs

#451289

Postby UncleEbenezer » October 19th, 2021, 2:08 pm

GeoffF100 wrote:
UncleEbenezer wrote:This argument is based on the premise that investing is a zero-sum game. One investor's gain is another's loss.

Investing is a zero sum game relative to the index. In order for one investor to beat the index, another has to do worse than the index. The market weighted performance of all investors in the market is the market weighted index. That is not a premise. It is a mathematical fact.

Not true at all.

It's true of individual transactions, but only if we discount the idea that the buyer is investing while the seller is raising cash from an investment for reasons of their individual circumstances.

It's not even applicable, let alone true, to investments outside the scope of your index.

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Re: Index Trackers usually beat ITs

#451292

Postby Alaric » October 19th, 2021, 2:12 pm

Lootman wrote:But it is not a mathematical fact that there is one out-performer for every under-performer, relative to an index. There could for instance be a small number of large winners and a large number of small losers. Or vice versa although that seems less likely.


There's no compulsion for active funds to confine their investments to the constituents of a particular index. Equally they could seek out lower volatility or higher volatility investments even inside the index universe. Also they might have differing requirements for dividend yield than the implied market average.

I have this feeling that insider trading ought to be capable of beating market indexes. That's illegal,, but superior knowledge, say by decoding accounting tricks used for window dressing published statements isn't.

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Re: Index Trackers usually beat ITs

#451306

Postby JohnB » October 19th, 2021, 2:42 pm

Research shows that funds performing in the top quartiles in one period often perform in the bottom quartiles in the next. This shows the impact of luck and reversion to the mean as much as changing manager skill. And no-one ever talks ruefully how they invested in a fund that underperformed the index so much it was merged into another fund and disappeared.

There is a lot of survivor bias and boasting in fund discussions.

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Re: Index Trackers usually beat ITs

#451308

Postby Lootman » October 19th, 2021, 2:47 pm

JohnB wrote:Research shows that funds performing in the top quartiles in one period often perform in the bottom quartiles in the next. This shows the impact of luck and reversion to the mean as much as changing manager skill.

There was the case of Bill Miller, a legendary US fund manager with Legg Mason, who beat the S&P 500 for 15 consecutive years, a remarkable achievement that appeared to give the impression of consistent and reliable outperformance. Then he crashed and burned:

https://www.businessinsider.com/2008/12 ... ill-miller

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Re: Index Trackers usually beat ITs

#451311

Postby SalvorHardin » October 19th, 2021, 2:55 pm

Alaric wrote:I have this feeling that insider trading ought to be capable of beating market indexes. That's illegal,, but superior knowledge, say by decoding accounting tricks used for window dressing published statements isn't.

One group of people who've shown that insider trading beats the market is America's elected representatives; senators and congressmen (and women). Until 2012 it was perfectly legal for them to engage in insider trading, unlike almost everyone else. They beat the market by a substantial amount over 16 years. According to research in 2011:

"Members of the House of Representatives considerably outperform the stock market in their personal investments, according to a new academic study. Four university researchers examined 16,000 common stock transactions made by approximately 300 House representatives from 1985 to 2001, and found what they call "significant positive abnormal returns," with portfolios based on congressional trades beating the market by about 6 percent annually."

https://www.huffingtonpost.co.uk/entry/members-of-congress-get-a_n_866387

Early last year several Senators were accused of insider trading, when it emerged that they had dumped their shares after receiving a private briefing on the coronavirus in February 2020, shortly before the market crashed once the situation became clearer. It won't come as a surprise that no charges were brought and the investigation has been closed.

https://en.wikipedia.org/wiki/2020_congressional_insider_trading_scandal

Casting votes for laws which benefit companies in which they own shares remains perfectly legal

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Re: Index Trackers usually beat ITs

#451318

Postby 1nvest » October 19th, 2021, 3:13 pm

Adamski wrote:Unfortunately a lot of UK/western industry Oil giants, tobacco, retail won't be around in 20 years. Well be sitting in our cold zero carbon homes thinking wth happened :lol: but that's another matter!!

But when the ice age does finally end and we return to a Jurassic climate with no polar ice, the UK weather might be quite pleasant, more a case of just a need for air conditioning during peak summer months. Less of the UK however with rising sea levels.

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Re: Index Trackers usually beat ITs

#451333

Postby Arborbridge » October 19th, 2021, 3:56 pm

absolutezero wrote:
Arborbridge wrote:
This seems to suggest that if I had listened to the fees argument to make a choice ten years ago, I would have lost out. Charts with income reinvested.


Arb.

What happens on a different time scale and with different comparator indices?
Interestingly, Finsbury 'lost out' (total return around 50%) to both a passive all world tracker (VWRL 70% total return) and an S&P 500 tracker (VUSA 100% total return) over the last 5 years.

Putting pictures on here is a faff, but use this: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/j/janus-henderson-asian-dividend-income-income-inclusive/charts to get the graph


Is see what you did there: changed the goal posts :lol:

But that wasn't the comparison mooted: it was FGT to FTSE all share. No one is disputing one could find something better than that!

Arb.


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