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Index Trackers usually beat ITs

Closed-end funds and OEICs
TopOfDaMornin
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Index Trackers usually beat ITs

#450196

Postby TopOfDaMornin » October 14th, 2021, 8:20 pm

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.

This then begs the question why do people go for ITs in the first places?
Is it because they fall for the marketing hype?
Do they believe that they can pick an IT that will beat the relevant tracker?
Is it because the ITs can hold back dividend payment to ensure they keep their unbroken multiple years of rising dividend?


I am aware that some ITs invest in specific areas where there may be limited trackers, and hence people may invest in these ITs for specific diversification.

What are your thoughts?

TDM

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Re: Index Trackers usually beat ITs

#450199

Postby Alaric » October 14th, 2021, 8:29 pm

quote="TopOfDaMornin"]For example, a World Tracker will usually beat ‘the average’ Growth ITs.
[/quote]

it can be more nuanced than that. Increased returns can be available with increased risk. The "wisdom" really should be that actively managed funds only beat their passive counterparts by taking on increased risk.

On a different tack, those needing to draw down income from trackers would have done badly for dividend distributions from about April 2020, only starting to recover now.

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Re: Index Trackers usually beat ITs

#450203

Postby richfool » October 14th, 2021, 8:42 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.

This then begs the question why do people go for ITs in the first places?
Is it because they fall for the marketing hype?
Do they believe that they can pick an IT that will beat the relevant tracker?
Is it because the ITs can hold back dividend payment to ensure they keep their unbroken multiple years of rising dividend?


I am aware that some ITs invest in specific areas where there may be limited trackers, and hence people may invest in these ITs for specific diversification.

What are your thoughts?

TDM

It will depend on the ones you pick (ETF's and IT's).

One thing I keep in mind, is that a tracker will certainly track the market/index down. I am happy to hold a large collection of IT's diversified across many sectors and geographies and that are actively managed. Thus I take the view that the manager should take action to enhance the upside and protect the downside, particularly in periods of volatility or black swan events.

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Re: Index Trackers usually beat ITs

#450204

Postby Arborbridge » October 14th, 2021, 8:43 pm

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

This then begs the question why do people go for ITs in the first places?



"usually" and "average" seem to be two weasle words here. I guess most of us would hope to choose an IT which was not average - whether they do or not is a different question. I know one investor has done very well from ITs by being choosy in this way, and switching as soon as they start to underperform. However, he puts a lot of work in to his method which I am too lazy to follow.

Other people just prefer an investment run by real people and a board of directors - they feel it's better that way. I've also played around with trackers etc, but I have never found one I feel compatible with.

In the end, you learn what suits you after years of experiment. Sleeping soundly at night is a good feature to aim for, and if that is a tracker, then so be it. Others are still suspicious of the whole ETF thing some of which smell like a artificial constructs.

Personally, I have a mixture, but overwhelmingly direct shares and ITs designed to throw off dividends which I live off. I'm not too bothered about long term capital growth because I probably do not have a long term.

Arb.

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Re: Index Trackers usually beat ITs

#450206

Postby Lootman » October 14th, 2021, 8:50 pm

TopOfDaMornin wrote:I am aware that some ITs invest in specific areas where there may be limited trackers, and hence people may invest in these ITs for specific diversification.

In my view that is where ITs come into their own. And especially if the underlying securities are illiquid. During a bad market, an open-ended fund will have to sell assets into a weak market. Whilst an ETF may not have to sell, its market participants will find it more difficult to hedge and arbitrage, leading to widening spreads. An IT might also go to larger discounts at such a time but will not have to sell assets, and you have the option of staying with it without the fund being compromised.

At the opposite extreme I have little use for the so-called global generalist ITs any more. Nor have institutions who used to use them more but now typically have their own on-house research department or use ETFs. So generalists have become the domain of individual investors, who can be loyal which is exactly what IT providers want. However returns have been mundane and several former generalist ITs have been lost e.g. Globe (formerly the largest), Scottish Eastern and TR Industrial and General.

The one (former) generalist that has done well is Scottish Mortgage, but that completely changed its spots and morphed into betting on high growth names mostly in the US and Chine which has, so far, done very well. The rest are so-so and I do not own any of them, preferring cheaper ETFs for my core portfolio.

Likewise a lot of ITs are invested in the UK and in income shares, which is fine but that is of little interest to me and, again, I own none.

I still hold a bunch of ITs but they are more specialised as you suggest. A balanced portfolio might have trackers at the core to deliver beta. And then some fun around the edges using more specialised ITs that you have conviction in.

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Re: Index Trackers usually beat ITs

#450218

Postby JohnW » October 14th, 2021, 9:43 pm

There'll be a mix of reasons, perhaps including that IT's are longer established but have become legacy products in many cases. How many old cameras or calculators do you have sitting in a drawer, well beyond their best before date?
IT's were a great product once, allowing ordinary folk to easily diversify - one of the foundational principles of sensible equity investing. But index tracking came along, and with it (maybe only by coincidence) the ETF structure. Nothing competes for reliably getting market returns, than a broadly diversified cap weight tracker with a low management fee - the characteristics of an easily identified ETF. But identifying an IT that can do better with a similar risk, that's a lot harder.
So those who recognised and espoused the beauty of IT's in the pre-ETF days might find it hard to turn their back on them; after all, we all like to be consistent in our values and beliefs or at least be seen to be.

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Re: Index Trackers usually beat ITs

#450224

Postby SalvorHardin » October 14th, 2021, 10:36 pm

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.

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Re: Index Trackers usually beat ITs

#450226

Postby SalvorHardin » October 14th, 2021, 10:46 pm

JohnW wrote:There'll be a mix of reasons, perhaps including that IT's are longer established but have become legacy products in many cases. How many old cameras or calculators do you have sitting in a drawer, well beyond their best before date?

Old doesn't mean past it :D

I still use a Hewlett Packard HP28S calculator which I bought in 1988. It can handle complex numbers, matrix multiplication, calculus and even solve polynomial and simultaneous equations. The vast majority of modern calculators can't hold a candle to it

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Re: Index Trackers usually beat ITs

#450231

Postby JohnW » October 14th, 2021, 10:59 pm

1. And with that discount comes the threat of needing to sell when the price is discounted even more than when you bought in.
2. I suppose we're not talking much here with 0.15%/year in difference between 0.3% and a global tracker at 0.15%, but that's 0.15% for the etf we could all well do with. Does 0.3% cover the IT with broad appeal?
3. Leveraged ETF's are coming, god help us. If you're 100% in equities, and that's not enough risk for you, then I suppose a leveraged IT has some merit. But simply increasing you equity holdings from <100% to 100% would seem safer for those who stray into that territory.
4, Valid concern, big time. Take care with synthetic ETF's.
5. Could be a winner. You'd expect better returns with illiquid assets, since they are harder to price, and harder to sell. I don't know that their risk/return nature is better than equities which trade every second. Any evidence?
6. Fair enough.
7. Yes, but that's just part of the process. The outcome which is the important bit, we know: market returns, which active investors struggle to achieve, particularly after costs. But I guess we should be clear about this: that refers to passive ETF's. 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.

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Re: Index Trackers usually beat ITs

#450264

Postby TUK020 » October 15th, 2021, 8:38 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.

Nice round up.
Which ITs are you buying/on your watch list at the moment?

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Re: Index Trackers usually beat ITs

#450270

Postby Nocton » October 15th, 2021, 8:57 am

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.

The key words here are 'average' and 'related'.

Since there are a large number of ITs invested in a large number of shares, the 'average' IT is likely to perform like the average of the market. Hence, with somewhat higher charges, forgetting about gearing, the average IT would be expected to under-perform the ETF of a market index. Plus if the ITs are 'related' you then get no balance over different markets or market sectors.

On the other hand, if you invest in say, ten, ITs spread across different markets and market sectors, including some of the 'generalists' you will almost certainly get a better result than ETFs. At least that is my experience and the clear experience of some of the posters here. In 2011, I invested a substantial sum split equally among ten ITs, chosen to give a good balance of markets and sectors I am quite happy with the compound growth of over 10%pa plus a dividend yield of about 1.5%. It has been a passive investment - I have made only one change.

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Re: Index Trackers usually beat ITs

#450273

Postby SalvorHardin » October 15th, 2021, 9:29 am

TUK020 wrote:Nice round up.
Which ITs are you buying/on your watch list at the moment?

Recent new holdings: Seraphim Space. I bought at the IPO last July and have topped up a couple of times since then. As the name says it invests in early-stage companies with interests in space technology (satellites, drones, detecting space junk, etc.). To me it's a venture capital / private equity fund disguised in plain sight as an investment trust. There's a short thread about it on TLF with some article links:

https://www.lemonfool.co.uk/viewtopic.php?f=54&t=30175

https://investors.seraphim.vc/

Recent top up: Henderson Smaller Companies. The discount to NAV of 7.5% is a bit smaller than I'd normally expect to see (the previous top up was at almost 16% discount)

Monthly savings plan: Monthly investments into Foreign & Colonial (aka F&C) and TR Property. F&C is the granddaddy of international investment trusts and has beaten its benchmark over 5 years.

https://www.bmogam.com/fandc-investment-trust/fund-updates/

TR Property regularly beats its benchmark (FTSE EPRA/NAREIT Developed Europe)

Watchlist to top up: Finsbury Growth & Income (FGT). Managed by Nick Train whose investment philosophy is very similar to mine as it mostly invests in large multinationals which have strong brands / other strong moats (I have fairly sizeable holdings in four of its ten largest holdings). It has been a great performer over the years, but hasn't done too well since the lockdown:

"Star fund manager Nick Train has apologised for a rare period of underperformance by the £2bn Finsbury Growth & Income (FGT) investment trust he has run for over 20 years. The UK equity income trust, the largest in its sector, has beaten the FTSE All-Share index in nine out of the last 10 calendar years but in its latest half-year period significantly trailed the benchmark as Train’s defensive portfolio of global consumer brands failed to participate in the UK’s ‘vaccine’ rally."

https://citywire.co.uk/funds-insider/news/train-sorry-as-finsbury-growth-and-income-lags-vaccine-rally/a1506042

Other top up candidates are Bankers and Brunner which is currently on a discount of about 10%. I was considering starting a new holding in BMO Private Equity but instead the money went to topping up the American investment company KKR & Co. Inc. (which specialises in private equity and real assets)

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Re: Index Trackers usually beat ITs

#450296

Postby Alaric » October 15th, 2021, 10:25 am

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.

There's a question of legal structure, ETF v IT v OEICs. Within that choice, the investment management can be passive where an explicit index or more are followed, or active where managers make their own decisions. ETFs structures are more suited to index trackers and ITs to active management, but as suggested it's not exclusive.

For investment areas where there's no index or no reliable one, IT structure seems most suitable. OEIC structure really requires that a reliable market value is known every day as well as some degree of certainty that assets can be realised at short notice at values close to the assumed market values.

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Re: Index Trackers usually beat ITs

#450302

Postby 77ss » October 15th, 2021, 10:44 am

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.

This then begs the question why do people go for ITs in the first places?
Is it because they fall for the marketing hype?
Do they believe that they can pick an IT that will beat the relevant tracker?
Is it because the ITs can hold back dividend payment to ensure they keep their unbroken multiple years of rising dividend?


I am aware that some ITs invest in specific areas where there may be limited trackers, and hence people may invest in these ITs for specific diversification.

What are your thoughts?

TDM


My thoughts? As far as I can see neither of your links mention Investment Trusts at all! They are both rambling on about funds.

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Re: Index Trackers usually beat ITs

#450312

Postby absolutezero » October 15th, 2021, 11:06 am

As I said elsewhere, I am reading Smarter Investing by Tim Hale.
Definitely worth a read.
He makes a very good case for a passive investing strategy over an active one.
A lot of ITs are disguised trackers -only with higher fees.

Hale says there are some actively managed fund managers (he uses Anthony Bolton as his example) who can consistently beat the market but the problem is working out who these are in advance and sticking with them.

He also notes Bolton's China fund didn't manage to replicate Bolton's earlier success (see also Neil Woodford) and how Bolton was dragged into the office several times in the 1980s for failing to even match the benchmarks and came close to the sack.
His Special Situations fund was 45% behind the market at one point.
After this he had an amazing record. Would you have stuck with him?
As Bolton said 'to beat the market, you have to hold securities that are different to the market.' This does not always work in your favour.

Do you have:
1/ The skills to identify the successful managers who will consistently beat the market in advance?
2/ The foresight to stick with them when they are behind the market?
3/ The knowledge that the same manager will manage the fund continuously and not retire or move elsewhere?

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Re: Index Trackers usually beat ITs

#450317

Postby JohnB » October 15th, 2021, 11:17 am

TopOfDaMornin wrote:Since there are a large number of ITs invested in a large number of shares, the 'average' IT is likely to perform like the average of the market. Hence, with somewhat higher charges, forgetting about gearing, the average IT would be expected to under-perform the ETF of a market index. Plus if the ITs are 'related' you then get no balance over different markets or market sectors.

On the other hand, if you invest in say, ten, ITs spread across different markets and market sectors, including some of the 'generalists' you will almost certainly get a better result than ETFs. At least that is my experience and the clear experience of some of the posters here.


The classic tracker argument is that if you don't think you have special skill in picking stocks, or funds, have a bit of everything. The same applies to ITs, of course some will outperform their indexes, others will be dogs. And it tends to be those who've picked a good set that will talk about it, either because they do have an edge, or were lucky.

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Re: Index Trackers usually beat ITs

#450326

Postby absolutezero » October 15th, 2021, 11:48 am

absolutezero wrote:As I said elsewhere, I am reading Smarter Investing by Tim Hale.
Definitely worth a read.
He makes a very good case for a passive investing strategy over an active one.
A lot of ITs are disguised trackers -only with higher fees.

Hale says there are some actively managed fund managers (he uses Anthony Bolton as his example) who can consistently beat the market but the problem is working out who these are in advance and sticking with them.

He also notes Bolton's China fund didn't manage to replicate Bolton's earlier success (see also Neil Woodford) and how Bolton was dragged into the office several times in the 1980s for failing to even match the benchmarks and came close to the sack.
His Special Situations fund was 45% behind the market at one point.
After this he had an amazing record. Would you have stuck with him?
As Bolton said 'to beat the market, you have to hold securities that are different to the market.' This does not always work in your favour.

Do you have:
1/ The skills to identify the successful managers who will consistently beat the market in advance?
2/ The foresight to stick with them when they are behind the market?
3/ The knowledge that the same manager will manage the fund continuously and not retire or move elsewhere?

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:

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Re: Index Trackers usually beat ITs

#450336

Postby Lootman » October 15th, 2021, 12:50 pm

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

There are relatively few major market indices but there are thousands of ETFs globally. Most of those ETFs will operate off a customised index, rather than an index that is familiar to you. And the construction of that customised index can be pretty much anything you want. It might be more helpful to think of such customised indices more like a template than an index. A template is just a map of the allocated securities you wish to hold in some proportion, whilst an index has a broader use since managers and investors use it as a benchmark to see how they are doing.

Also think about how often an index changes. For the S&P 500 or the FTSE-100, it is quarterly. At that point trackers following those index have to make changes. The customised indices may change more often, say monthly. With an active ETF that underlying template may change more often than that, perhaps weekly or daily. But the fund is still running off an underlying template, just one that changes frequently.

And in fact active funds usually have an underlying portfolio template anyway i.e. the model portfolio that the fund is trying to follow. So there is really a continuum here rather than a binary situation.

From the perspective of a fund provider, ETFs have two big advantages. The first is that the provider does not have to deal with millions of individual investors and all the record-keeping and compliance issues that implies. The second is that the provider doesn't actually have to run a fund in the conventional sense; it just buys and sells units to market participants who then in turn sell to investors via brokers. And that is why ETFs are so cheap - free in some cases, in the US anyway.

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Re: Index Trackers usually beat ITs

#450343

Postby Arborbridge » October 15th, 2021, 1:03 pm

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.

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Re: Index Trackers usually beat ITs

#450365

Postby funduffer » October 15th, 2021, 2:34 pm

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


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