Donate to Remove ads

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

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Index Trackers usually beat ITs

Closed-end funds and OEICs
absolutezero
Lemon Quarter
Posts: 1505
Joined: November 17th, 2016, 8:17 pm
Has thanked: 542 times
Been thanked: 653 times

Re: Index Trackers usually beat ITs

#450412

Postby absolutezero » October 15th, 2021, 4:50 pm

funduffer wrote:
absolutezero wrote:I do have suspicions about trusts that may well consistently beat the market. Though I could easily be wrong.
For what it's worth, Terry Smith (Fundsmith), James Anderson (who retires from Scottish Mortgage in a few months - though being heavily overweight on Tesla helped them no end - luck or skill?), the team behind RIT Capital Partners.
But then again, Neil Woodford/Bolton China.... They consistently beat the market. Until they don't. :roll:


Bolton/China - a slow start, then he retired, but he was on the right lines. I invested from the start in 2010.

Bought at £1, now £3.25. 11.5% annual return with dividends re-invested. I am happy with that.

It is a question of timescale.

Now Woodford - I agree!

FD

Perhaps. I haven't done any digging into the Bolton China fund other than what is in Hale's book.

If not Bolton, then Woodford. The Golden Boy. Until he isn't.

The question is how to consistently find the successful funds before they have a good run?
And the how much of that is luck?
Give 1000 Chimpanzees a coin each and you shout head or tails while they toss them and one of them will be 'successful' in the long term.
Sorry, not successful. Skilled. :lol:

absolutezero
Lemon Quarter
Posts: 1505
Joined: November 17th, 2016, 8:17 pm
Has thanked: 542 times
Been thanked: 653 times

Re: Index Trackers usually beat ITs

#450414

Postby absolutezero » October 15th, 2021, 4:52 pm

Arborbridge wrote:
absolutezero wrote:I do have suspicions about trusts that may well consistently beat the market. Though I could easily be wrong.
For what it's worth, Terry Smith (Fundsmith), James Anderson (who retires from Scottish Mortgage in a few months - though being heavily overweight on Tesla helped them no end - luck or skill?), the team behind RIT Capital Partners.
But then again, Neil Woodford/Bolton China.... They consistently beat the market. Until they don't. :roll:


Which is why my brother in law insists that LTBH is a dead duck. He has a policy of ditching and switching ITs where necessary based on a process he developed. Keeping to a process does have the advantage of limiting one's emotional responses.

Arb.

I don't see the link between your brother's "LTBH is dead" insistence and my post.
LTBH of indices makes logical sense. Just don't pick the FTSE 100 as this IS a dead duck full of dead ex-growth industries.

JohnW
Lemon Slice
Posts: 506
Joined: June 1st, 2019, 7:00 am
Has thanked: 5 times
Been thanked: 176 times

Re: Index Trackers usually beat ITs

#450511

Postby JohnW » October 16th, 2021, 1:18 am

Alaric wrote:
JohnW wrote: There are active ETF's which wouldn't need to buy overpriced stock just because new investors bought in. The quick and dirty 'ETF = passive' and 'IT = active' is, quick and dirty.


I don't see that an "active" ETF could be described as an Index Tracker.

Indeed. My woolly thinking. Sorry for the confusion.

GeoffF100
Lemon Quarter
Posts: 4720
Joined: November 14th, 2016, 7:33 pm
Has thanked: 178 times
Been thanked: 1363 times

Re: Index Trackers usually beat ITs

#450515

Postby GeoffF100 » October 16th, 2021, 8:06 am

SalvorHardin wrote:1) ITs can be bought at a discount to NAV. If nothing else, that means more income for the money

2) Many ITs have fees which are comparable with index trackers. e.g. F&C and Law Debenture are around 0.3% p.a.

3) ITs can borrow to magnify returns

4) Suspicious of the structure of ETFs, some of which use derivatives. A bit of a "black box" feel to them. IMHO we're overdue an ETF and derivatives-based scandal.

5) ITs are excellent vehicles for investing in illiquid assets. Good luck in finding a tracker that can handly private equity and other unquoted assets

6) Many trackers don't issue certificates and only use nominees. I'm someone who prefers to hold some assets where I'm the legal and beneficial owner, rather than just the beneficial owner.

If this seems a bit paranoid, you're correct. I always bear in mind the risk of nominee company fraud, manager fraud, etc.

7) Index trackers are forced to buy regardless of how overpriced shares might be.

(1). The more popular ITs rarely sell at significant discounts.

(2). Market weighted trackers are cheaper than ITs. In particular, ITs have larger transaction costs, unless they are really market weighted trackers.

(3). ITs can borrow at a high cost to magnify losses. You can gear up if you wish. Most people do the opposite and hold bonds to reduce risk.

(4). The popular Vanguard ETFs do not use derivatives. There is nothing much wrong with derivatives anyway. Dodgy managers mess up funds, not derivatives.

(5). Some ITs do specialise hold illiquid assets, but they are usually expensive. The cost will probably outweigh any illiquidity premium that you were hoping to reap. You can get (cheaper) illiquidity factor ETFs. They effectively become ITs trading at a big discount if there are big redemptions and the underlying assets cannot be sold.

(6). Most of us just use nominee accounts.

(7). Market weighted trackers only buy new holdings when they enter the index for the first time. You do not have to buy a market weighted tracker if you believe that it is overpriced. Fund managers do not have better than chance skill at timing the market. If you lack that skill too, and bought your tracker long ago, you ride the market up and ride the market down. Hopefully, you will end up higher than when you bought.

It is also worth mentioning that you have to pay stamp duty when you buy ITs. The Exchange Market Sizes are also low. and the spreads are wide, for all but the very largest ITs, making it difficult and expensive to do large trades.

Arborbridge
The full Lemon
Posts: 10369
Joined: November 4th, 2016, 9:33 am
Has thanked: 3601 times
Been thanked: 5227 times

Re: Index Trackers usually beat ITs

#450525

Postby Arborbridge » October 16th, 2021, 9:04 am

absolutezero wrote:
Arborbridge wrote:
absolutezero wrote:I do have suspicions about trusts that may well consistently beat the market. Though I could easily be wrong.
For what it's worth, Terry Smith (Fundsmith), James Anderson (who retires from Scottish Mortgage in a few months - though being heavily overweight on Tesla helped them no end - luck or skill?), the team behind RIT Capital Partners.
But then again, Neil Woodford/Bolton China.... They consistently beat the market. Until they don't. :roll:


Which is why my brother in law insists that LTBH is a dead duck. He has a policy of ditching and switching ITs where necessary based on a process he developed. Keeping to a process does have the advantage of limiting one's emotional responses.

Arb.

I don't see the link between your brother's "LTBH is dead" insistence and my post.
LTBH of indices makes logical sense. Just don't pick the FTSE 100 as this IS a dead duck full of dead ex-growth industries.


Aren't you both saying teh same thing? You quote several ITs and comment that: They consistently beat the market. Until they don't. :roll: That is what he is saying too.

SalvorHardin
Lemon Quarter
Posts: 2049
Joined: November 4th, 2016, 10:32 am
Has thanked: 5297 times
Been thanked: 2465 times

Re: Index Trackers usually beat ITs

#450533

Postby SalvorHardin » October 16th, 2021, 9:32 am

GeoffF100 wrote:(1). The more popular ITs rarely sell at significant discounts.

(2). Market weighted trackers are cheaper than ITs. In particular, ITs have larger transaction costs, unless they are really market weighted trackers.

(3). ITs can borrow at a high cost to magnify losses. You can gear up if you wish. Most people do the opposite and hold bonds to reduce risk.

(4). The popular Vanguard ETFs do not use derivatives. There is nothing much wrong with derivatives anyway. Dodgy managers mess up funds, not derivatives.

(5). Some ITs do specialise hold illiquid assets, but they are usually expensive. The cost will probably outweigh any illiquidity premium that you were hoping to reap. You can get (cheaper) illiquidity factor ETFs. They effectively become ITs trading at a big discount if there are big redemptions and the underlying assets cannot be sold.

(6). Most of us just use nominee accounts.

(7). Market weighted trackers only buy new holdings when they enter the index for the first time. You do not have to buy a market weighted tracker if you believe that it is overpriced. Fund managers do not have better than chance skill at timing the market. If you lack that skill too, and bought your tracker long ago, you ride the market up and ride the market down. Hopefully, you will end up higher than when you bought.

It is also worth mentioning that you have to pay stamp duty when you buy ITs. The Exchange Market Sizes are also low. and the spreads are wide, for all but the very largest ITs, making it difficult and expensive to do large trades.

1) Two very popular investment trusts are Finsbury Growth and Income (currently on 4.4% discount) and Henderson Smaller Companies (currently 9.1%). I remember buying Caledonia Investments on a 40% discount (currrently 22.6% though the NAV is a fortnight out of date) and bought a load of Henderson Smaller Companies at a discount close to 20% some years ago.

2) Some market weighted trackers are cheaper. Not all of them.

3) True. Borrowing cuts both ways

4) I'm firmly in the Charlie Munger camp regarding derivatives. Keep away from them as far as possible.

5) Yes, private equity trusts can be more expensive. That's why I prefer to own shares in the big private equity and alternative asset managers (Brookfield, Carlyle, KKR, etc.)

6) What if there is a nominee account problem? These have happened in the past, usually due to poor record keeping (something I've seen at first hand having had to do some work many years ago on untangling clients' pensions in the Maxwell Group schemes). Nominee account failure is one of those low probability (but potentially massive loss) risks that Nassim Taleb talks about, but if it happens a lot of people are going to be up the proverbial creek if only because they can't get at their money for some time.

I prefer to trade off a bit of investment return due to higher costs for a bit more security. I'm more interested in preserving the real value of what I already have (and which I live off) than chasing higher returns.

7) Manager skill is a thing which does exist. See The Superinvestors of Graham and Doddsville:

https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville

That said I don't put too much in investment trusts (currently about 33% of the portfolio), having increased from about 5% shortly after I retired. My ITs are mostly to cover myself against my operating company selections not being as good as they used to be (I will never again achieve anything like I did with my operating company picks in the 2000s).

The stamp duty cost on an annual basis is trivial if you hold an investment trust for many years.

GeoffF100
Lemon Quarter
Posts: 4720
Joined: November 14th, 2016, 7:33 pm
Has thanked: 178 times
Been thanked: 1363 times

Re: Index Trackers usually beat ITs

#450597

Postby GeoffF100 » October 16th, 2021, 3:02 pm

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%, That is a difference 0.58%. The turnover in the Vanguard tracker will be very low indeed. It is likely to be much higher for Finsbury Growth. Nobody would pay the high cost for LTBH. Even if the transaction costs were the same, break even would be after 4.1 / 0.58 = 7 years after allowing for stamp duty (there will be a spread and brokerage costs too). That is on the assumption that Finsbury Growth manages to match the index before costs. That is not a done deal. 50% chance, perhaps, unless it is taking more risk than its benchmark.

Actually, I have remembered that I do hold a Vanguard fund that uses derivatives. VAGP hedges its bond holdings into GBP using futures contracts. I do not see a big risk there. The worst that is likely to happen is that some of the bonds become unhedged. The supply companies that followed Charlie Munger's advice and failed to buy gas forward are now going bust. They will be wishing that they took their advice from a fish monger.

You have to use nominee accounts for ISAs and for cheap SIPPs. The registrars could fail. It is impossible to get rid of all risk.

xeny
Lemon Slice
Posts: 450
Joined: April 13th, 2017, 11:37 am
Has thanked: 233 times
Been thanked: 154 times

Re: Index Trackers usually beat ITs

#450922

Postby xeny » October 18th, 2021, 7:44 am

SalvorHardin wrote:Old doesn't mean past it :D


I'm partial to "People tend to confuse the words "new" and "improved.""

Arborbridge
The full Lemon
Posts: 10369
Joined: November 4th, 2016, 9:33 am
Has thanked: 3601 times
Been thanked: 5227 times

Re: Index Trackers usually beat ITs

#450937

Postby Arborbridge » October 18th, 2021, 9:35 am

Image

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.

UncleEbenezer
The full Lemon
Posts: 10690
Joined: November 4th, 2016, 8:17 pm
Has thanked: 1459 times
Been thanked: 2965 times

Re: Index Trackers usually beat ITs

#450991

Postby UncleEbenezer » October 18th, 2021, 12:53 pm

TopOfDaMornin wrote:I read on many sights e.g. https://www.spglobal.com/spdji/en/resea ... hts/spiva/ or https://monevator.com/, that a tracker or index fund will usually give a better total return than a collection of related ITs.

For example, a World Tracker will usually beat ‘the average’ Growth ITs.
TDM

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

But it's more than that. Quite apart from the fact that many individual buy and sell decisions have motives other than profit (like when something in my life needs the money now), there's the fundamental reason to invest: value creation. You invest to create value, you reap that value.

Trackers (on average) win the zero-sum part of investing, but underperform in the value-creating parts. So - on average - trackers win only when economies are failing to create adequate value to cover the costs of the active fund.

absolutezero
Lemon Quarter
Posts: 1505
Joined: November 17th, 2016, 8:17 pm
Has thanked: 542 times
Been thanked: 653 times

Re: Index Trackers usually beat ITs

#450992

Postby absolutezero » October 18th, 2021, 1:02 pm

Arborbridge wrote:Image

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.

Not under anything less than a year you wouldn't!

Arborbridge
The full Lemon
Posts: 10369
Joined: November 4th, 2016, 9:33 am
Has thanked: 3601 times
Been thanked: 5227 times

Re: Index Trackers usually beat ITs

#450995

Postby Arborbridge » October 18th, 2021, 1:15 pm

absolutezero wrote:Not under anything less than a year you wouldn't!


Having trouble with all those negatives :lol:

xeny
Lemon Slice
Posts: 450
Joined: April 13th, 2017, 11:37 am
Has thanked: 233 times
Been thanked: 154 times

Re: Index Trackers usually beat ITs

#451008

Postby xeny » October 18th, 2021, 1:52 pm

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.

DavidM13
Lemon Slice
Posts: 423
Joined: October 12th, 2018, 5:01 pm
Has thanked: 46 times
Been thanked: 405 times

Re: Index Trackers usually beat ITs

#451037

Postby DavidM13 » October 18th, 2021, 3:56 pm

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.


For 10y there were 18/23 companies in the same sector as FGT that outperformed the equivalent of the FTSE All Share. And that is assuming a nil cost tracker product. I will take my chances with CEFs personally. And I do put my money where my mouth is. 97% of my pension pot is in CEFs. I have one direct stock which is crap :D

absolutezero
Lemon Quarter
Posts: 1505
Joined: November 17th, 2016, 8:17 pm
Has thanked: 542 times
Been thanked: 653 times

Re: Index Trackers usually beat ITs

#451043

Postby absolutezero » October 18th, 2021, 4:28 pm

Arborbridge wrote:
absolutezero wrote:Not under anything less than a year you wouldn't!


Having trouble with all those negatives :lol:

No. But you seem to be ;)

Lootman
The full Lemon
Posts: 18681
Joined: November 4th, 2016, 3:58 pm
Has thanked: 628 times
Been thanked: 6563 times

Re: Index Trackers usually beat ITs

#451051

Postby Lootman » October 18th, 2021, 4:59 pm

UncleEbenezer wrote:
TopOfDaMornin wrote:I read on many sights e.g. https://www.spglobal.com/spdji/en/resea ... hts/spiva/ or https://monevator.com/, that a tracker or index fund will usually give a better total return than a collection of related ITs.

For example, a World Tracker will usually beat ‘the average’ Growth ITs.
TDM

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

But it's more than that. Quite apart from the fact that many individual buy and sell decisions have motives other than profit (like when something in my life needs the money now), there's the fundamental reason to invest: value creation. You invest to create value, you reap that value.

Trackers (on average) win the zero-sum part of investing, but underperform in the value-creating parts. So - on average - trackers win only when economies are failing to create adequate value to cover the costs of the active fund.

I think the word "value" there may be ambiguous. Any share that goes up in price has a higher valuation. But, at least to some, there is another sense of value which is the net gain to society and the economy. It is entirely possible for a share to go up in value because of factors that many think do not add real value e.g. by firing staff, borrowing more, hostile takeover bids or outright speculative interest.

In a sense it is a trivial tautology that an increased share price adds value. But in the real world nothing (else) may have happened to warrant it.

I might agree that investing is not a zero sum gain. After all equity markets tend to grow over time, at least as long as the world's population and economies grow. So all investors can make money through rising markets; nobody has to lose. 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.

UncleEbenezer
The full Lemon
Posts: 10690
Joined: November 4th, 2016, 8:17 pm
Has thanked: 1459 times
Been thanked: 2965 times

Re: Index Trackers usually beat ITs

#451070

Postby UncleEbenezer » October 18th, 2021, 6:18 pm

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.

GeoffF100
Lemon Quarter
Posts: 4720
Joined: November 14th, 2016, 7:33 pm
Has thanked: 178 times
Been thanked: 1363 times

Re: Index Trackers usually beat ITs

#451158

Postby GeoffF100 » October 19th, 2021, 7:44 am

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.
Last edited by GeoffF100 on October 19th, 2021, 7:51 am, edited 1 time in total.

GeoffF100
Lemon Quarter
Posts: 4720
Joined: November 14th, 2016, 7:33 pm
Has thanked: 178 times
Been thanked: 1363 times

Re: Index Trackers usually beat ITs

#451160

Postby GeoffF100 » October 19th, 2021, 7:50 am

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.

DavidM13
Lemon Slice
Posts: 423
Joined: October 12th, 2018, 5:01 pm
Has thanked: 46 times
Been thanked: 405 times

Re: Index Trackers usually beat ITs

#451170

Postby DavidM13 » October 19th, 2021, 8:56 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.


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. ;)


Return to “Investment Trusts and Unit Trusts”

Who is online

Users browsing this forum: No registered users and 7 guests