The History of Indexing

[OhNoNotimAgain]

Nobody knows. That is true but it will not stop me, at least, trying.

Dod

Excellent work. So glad you people like you sacrifice your returns to keep the market efficient.

Well I try to know (what is dross) but I am not a Warren Buffett and I believe that I can do a least as well as an index fund and hopefully better otherwise there would be no point would there? And unlike many/most active managers I do not feel I have to add a lot of stuff in order to provide diversification.

Dod

You many not have realised that in recent weeks and months that index funds are now outperforming active funds. So you are setting a really high bar for yourself to even just match index funds. And that is before allowing for the additional stock specific risk you are taking to just match the return from the market where your only risk is systematic (beta), i.e an index fund, that has no stock specific risk (alpha).

[GoSeigen]

The vast majority of managed funds cannot possibly beat the cheapest tracker because of their costs. There will always be lots of people paying active managers lots of money to try to beat the market. I am happy to be a freeloader.

This is a bold claim! I'd happily bet the opposite, i.e. I'd bet more than about 20% (the remaining small minority) of actively-managed funds can beat the cheapest tracker. All that is required is for their performance to be a bit better than the tracker over the comparison time period. A huge problem for you is that you are comparing apples and oranges. And also there is probably no such thing as the cheapest tracker. There are thousands of trackers and they cover a bewildering array of different assets, so which is the cheapest? Which one are you going to use to compare to all those active funds? The very act of selecting a tracker to invest in is active investing in any case, as is choosing when to invest and how much. But I've raised most of these points before, I don't expect tracker devotees to pay much attention!


GS

[GoSeigen]

I have never come across a UK active fund that has beaten its index by investing only within the index. It may have happened but it is never been demonstrated to my knowledge.

This also is an absurd statement. OhNoNotimAgain probably hasn't bothered to look very hard, or the above is true by [his own] definition. Which renders the statement meaningless.

The active fund that only invested in the five (or ten or fifteen) best performers in the index probably trounced the tracker especially over a short period -- but did he bother looking for it?? Of course all the little objections will come out now -- has to be a well diversified fund, must be over a long period, must be a period in which the tracker outperformed the active fund LOL etc etc.

GS

[GoSeigen]

If people invest small amounts of money in an equally weighted tracker they depress the price of the large stocks a little, and inflate the price of the small stocks by rather more. If too much money goes into equal weighted trackers, the investors will inevitably lose out. Buying a market weighted tracker does not distort the market prices.

The old canard that someone buying raises a stock price and someone selling lowers it. Nonsense. The stock exists; if one person buys it another sells. Therefore the price both increases AND decreases simultaneously.

Honestly, people who have been investing a long time should know better.

GS

[dealtn]

The vast majority of managed funds cannot possibly beat the cheapest tracker ...

This is a bold claim! I'd happily bet the opposite, i.e. I'd bet more than about 20% (the remaining small minority) of actively-managed funds can beat the cheapest tracker.

How is that the opposite?

You both appear to agree it can be done, but likely only by the minority.

[GeoffF100]

The vast majority of managed funds cannot possibly beat the cheapest tracker because of their costs. There will always be lots of people paying active managers lots of money to try to beat the market. I am happy to be a freeloader.

This is a bold claim! I'd happily bet the opposite, i.e. I'd bet more than about 20% (the remaining small minority) of actively-managed funds can beat the cheapest tracker. All that is required is for their performance to be a bit better than the tracker over the comparison time period. A huge problem for you is that you are comparing apples and oranges. And also there is probably no such thing as the cheapest tracker. There are thousands of trackers and they cover a bewildering array of different assets, so which is the cheapest? Which one are you going to use to compare to all those active funds? The very act of selecting a tracker to invest in is active investing in any case, as is choosing when to invest and how much. But I've raised most of these points before, I don't expect tracker devotees to pay much attention!

"According to a 2020 report, over a 15-year period, nearly 90% of actively managed investment funds failed to beat the market."

https://www.businessinsider.com/persona ... ?r=US&IR=T

Plenty of competition for the cheapest S&P 500 tracker. The cost from Vanguard, BlackRock and State Street is 0.03%:

https://www.investopedia.com/investing/top-sp-500-etfs/

[GeoffF100]

If people invest small amounts of money in an equally weighted tracker they depress the price of the large stocks a little, and inflate the price of the small stocks by rather more. If too much money goes into equal weighted trackers, the investors will inevitably lose out. Buying a market weighted tracker does not distort the market prices.

The old canard that someone buying raises a stock price and someone selling lowers it. Nonsense. The stock exists; if one person buys it another sells. Therefore the price both increases AND decreases simultaneously.

Yes, there is a buyer and seller for every transaction. Nonetheless, each new forced buyer typically pushes the price up a little, because there will usually be price sellers in the market who will sell only if the price is right. That effect is called market impact:

https://www.econstor.eu/bitstream/10419 ... 447751.pdf

Market impact can be the largest trading cost for institutional funds.

[GeoffF100]

If people invest small amounts of money in an equally weighted tracker they depress the price of the large stocks a little, and inflate the price of the small stocks by rather more. If too much money goes into equal weighted trackers, the investors will inevitably lose out. Buying a market weighted tracker does not distort the market prices.

The old canard that someone buying raises a stock price and someone selling lowers it. Nonsense. The stock exists; if one person buys it another sells. Therefore the price both increases AND decreases simultaneously.

Yes, there is a buyer and seller for every transaction. Nonetheless, each new forced buyer typically pushes the price up a little, because there will usually be price sellers in the market who will sell only if the price is right. That effect is called market impact:

https://www.econstor.eu/bitstream/10419 ... 447751.pdf

Market impact can be the largest trading cost for institutional funds.

Another way of understanding it is to apply some basic economics: the market clearing price is the price at which the supply and demand curves cross. If demand for small caps increases and the supply remains the same, the market price increases.

[GoSeigen]

The vast majority of managed funds cannot possibly beat the cheapest tracker ...

This is a bold claim! I'd happily bet the opposite, i.e. I'd bet more than about 20% (the remaining small minority) of actively-managed funds can beat the cheapest tracker.

How is that the opposite?

You both appear to agree it can be done, but likely only by the minority.

GeoffF100 said the vast majority, I interpreted that as more than 80%. If he wants to adjust that a bit I don't mind. Not that it makes much practical difference given how vague the claim was in other respects (undefined "managed fund", "cheapest", "outperform", "tracker" etc) -- as I said one can very easily make the statement true by definition.

GS

[Alaric]

The active fund that only invested in the five (or ten or fifteen) best performers in the index probably trounced the tracker especially over a short period

Or even invest in the components of the index but identify and exclude the dogs either by luck or skill. But shouldn't the quote about managed funds not beating an index be qualified by the modifier that they only do it by increasing risk?

[hiriskpaul]

Sharpe's timeless article is worth reading, or re-reading. His logic doesn't even require a market to be efficient.

If "active" and "passive" management styles are defined in sensible ways, it must be the case that

(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar

https://web.stanford.edu/~wfsharpe/art/ ... active.htm

Warren Buffett bangs on about this all the time. His view is that there are active managers capable of beating the market after costs, but they are vanishingly small in number and over the long term the chance of you a) picking them and b) being with them at the right time, is incredibly slim.

Point b I think is an often overlooked problem. A fund manager can do really well early on and subsequently underperform. Money typically flows towards a fund manager after they have done well, so most punters don't see that early upside. Woodford is a good example of this. He massively underperformed during the dot-com run-up, but somehow kept his job and went on to do really well because of his underweight position in the dot-com stocks. He then went on to dodge another bullet in the GFC by being underweight financials. After he set up on his own, he did very well again for a couple of years and attracted huge inflows. We all know what happened next. If you look at the price of a "unit" he managed throughout his career he may still look very good (I don't know this, just speculating) but if you were one of those who jumped on board 2 years before his demise that outperformance means nothing to you.

A cheap global tracker has a higher expected return than a portfolio of actively managed funds of equivalent risk. The longer the holding period, the more likely it is that the global tracker will outperform the actively managed portfolio. It is not absolutely guaranteed that the tracker will outperform though, just more likely.

[OhNoNotimAgain]

I have never come across a UK active fund that has beaten its index by investing only within the index. It may have happened but it is never been demonstrated to my knowledge.

This also is an absurd statement. OhNoNotimAgain probably hasn't bothered to look very hard, or the above is true by [his own] definition. Which renders the statement meaningless.

The active fund that only invested in the five (or ten or fifteen) best performers in the index probably trounced the tracker especially over a short period -- but did he bother looking for it?? Of course all the little objections will come out now -- has to be a well diversified fund, must be over a long period, must be a period in which the tracker outperformed the active fund LOL etc etc.

GS

Believe me I have. And you would know that no regulated fund available to the investing public could ever have as few as 15 stocks.
The onus is on you to prove your statement.
But I can prove the opposite; that index funds have beaten all active funds over a specified time period.

[dealtn]

The active fund that only invested in the five (or ten or fifteen) best performers in the index probably trounced the tracker especially over a short period

Or even invest in the components of the index but identify and exclude the dogs either by luck or skill. But shouldn't the quote about managed funds not beating an index be qualified by the modifier that they only do it by increasing risk?

No, because that's not the only way. A low risk managed fund can beat an Index, even through,mere luck, if the stock selection turns out to have been right.

[GoSeigen]

I have never come across a UK active fund that has beaten its index by investing only within the index. It may have happened but it is never been demonstrated to my knowledge.

This also is an absurd statement. OhNoNotimAgain probably hasn't bothered to look very hard, or the above is true by [his own] definition. Which renders the statement meaningless.

The active fund that only invested in the five (or ten or fifteen) best performers in the index probably trounced the tracker especially over a short period -- but did he bother looking for it?? Of course all the little objections will come out now -- has to be a well diversified fund, must be over a long period, must be a period in which the tracker outperformed the active fund LOL etc etc.

GS

Believe me I have. And you would know that no regulated fund available to the investing public could ever have as few as 15 stocks.

It was a re-framing to make the point easier to understand. Failed there then...

The onus is on you to prove your statement.
But I can prove the opposite; that index funds have beaten all active funds over a specified time period.

Ah there we go! Now it's a regulated fund. Not hedge funds then. Fine. Next it will be "but that's not its index" or "that's not the period I was thinking of"... And on it will go until we reach in effect the statement "No active fund in the set of funds which have always failed to beat their index has ever beaten its index". Meaningless.

GS
EDIT: I will prove it if you give me a sensible list of index funds and active funds that you consider valid, and the particular time period you are thinking of. If you do that though it will simply demonstrate what a narrow point you were making masquerading as a generality.

[genou]

I will prove it if you give me a sensible list of index funds and active funds that you consider valid, and the particular time period you are thinking of. If you do that though it will simply demonstrate what a narrow point you were making masquerading as a generality.

OK, I'll bite, if you are willing. I nominate as the near ultimate passive VWRL. Inception date 22 May 2012. I'll leave you to pick the managed funds, on the criteria that they existed at 22 May 2012, and still exist today.

If an accumulator is too painful, then VEVE, 30 Sep 2014. Same rules.

[OhNoNotimAgain]

This also is an absurd statement. OhNoNotimAgain probably hasn't bothered to look very hard, or the above is true by [his own] definition. Which renders the statement meaningless.

The active fund that only invested in the five (or ten or fifteen) best performers in the index probably trounced the tracker especially over a short period -- but did he bother looking for it?? Of course all the little objections will come out now -- has to be a well diversified fund, must be over a long period, must be a period in which the tracker outperformed the active fund LOL etc etc.

GS

Believe me I have. And you would know that no regulated fund available to the investing public could ever have as few as 15 stocks.

It was a re-framing to make the point easier to understand. Failed there then...

The onus is on you to prove your statement.
But I can prove the opposite; that index funds have beaten all active funds over a specified time period.

Ah there we go! Now it's a regulated fund. Not hedge funds then. Fine. Next it will be "but that's not its index" or "that's not the period I was thinking of"... And on it will go until we reach in effect the statement "No active fund in the set of funds which have always failed to beat their index has ever beaten its index". Meaningless.

GS
EDIT: I will prove it if you give me a sensible list of index funds and active funds that you consider valid, and the particular time period you are thinking of. If you do that though it will simply demonstrate what a narrow point you were making masquerading as a generality.

UK equites over a variety of time periods.
Almost all active UK equity funds include overseas and unlisted stocks so it will be dirty data, but that is all there is. Remember that some fund comparison web sites don't include index funds.

[swill453]

OK, I'll bite, if you are willing. I nominate as the near ultimate passive VWRL. Inception date 22 May 2012. I'll leave you to pick the managed funds, on the criteria that they existed at 22 May 2012, and still exist today.

If an accumulator is too painful, then VEVE, 30 Sep 2014. Same rules.

VWRL isn't an accumulator.

Scott.

[genou]

OK, I'll bite, if you are willing. I nominate as the near ultimate passive VWRL. Inception date 22 May 2012. I'll leave you to pick the managed funds, on the criteria that they existed at 22 May 2012, and still exist today.

If an accumulator is too painful, then VEVE, 30 Sep 2014. Same rules.

VWRL isn't an accumulator.

Scott.

You are quite right. Never do TIDM's from memory ( Obviously too fixated on Vanguard ) . What I meant to say was

SWDA ( iShares Core MSCI World UCITS ETF ) , date of inception 25/Sep/2009. as an accumulator

[kempiejon]

OK, I'll bite, if you are willing. I nominate as the near ultimate passive VWRL. Inception date 22 May 2012. I'll leave you to pick the managed funds, on the criteria that they existed at 22 May 2012, and still exist today.

If an accumulator is too painful, then VEVE, 30 Sep 2014. Same rules.

VWRL isn't an accumulator.

Scott.

Vanguard do an accumulator VWRP

[hiriskpaul]

OK, I'll bite, if you are willing. I nominate as the near ultimate passive VWRL. Inception date 22 May 2012. I'll leave you to pick the managed funds, on the criteria that they existed at 22 May 2012, and still exist today.

If an accumulator is too painful, then VEVE, 30 Sep 2014. Same rules.

VWRL isn't an accumulator.

Scott.

You are quite right. Never do TIDM's from memory ( Obviously too fixated on Vanguard ) . What I meant to say was

SWDA ( iShares Core MSCI World UCITS ETF ) , date of inception 25/Sep/2009. as an accumulator

SWDA is a good one as it is accumulating and priced in pounds. 10 year annualised return to 16/12/21 was 13.9%. I checked on the Morningstar web site for "Global Flex-Cap Equity" as that seems to be the most flexible category. There are 516 funds, but just 111 with a 10 year track record. Of those funds 33 (30%) beat SWDA, the best being Rathbone Global Opportunities Fund S Acc, with a 10 year rate of return of 17.5%. Worst performer was Kennox Strategic Value with 5.15% annualised return.

There may of course have been other funds that existed 10 years ago but did not survive. The main reason for not surviving is poor performance, so a 30% success rate flatters active management.

There is some multiple counting going on with these funds as some funds are listed more than once, with different share classes. To do this properly it would be best to go through picking out the lowest charging retail share class for each fund, but I suspect a similar result would be obtained.

In choosing an actively managed fund, retail investors are up against:
1) Most active funds underperform in the long run
2) Of those that do outperform, the outperformance is less than the underperformance of the worst performers.

In summary in order to outperform it is necessary to take on the considerable risk of significant underperformance AND underperformance is more likely than outperformance.

ps, just had a quick look at Global Equity Income Category to see how that did and it was even worse. Of the 305 funds that beat SWDA only 3 managed to beat it, all from CCLA, whoever they are. Top performer was CCLA CBF Global Equity Income Acc with 14.6%, worse ASI World Income Equity Fund A Acc at 4.8%.