If...

[xxd09]

I must agree that if you are precise in your dictionary terms of course passive investing is as “active” as so called active investing
Both involve “active “ choices”
However I think we should not confuse those amateur investors who come here on a fleeting basis in pursuit of some way of coping with the sudden problems of their finances with an overemphasis of this semantic point
The two methods of investing are quite different
Passive does seem to have filled a need for those who do not want to spend more time than they need to on finance
It does seem to have delivered the required results for this sort of investor
It has also benefited the active investor by its very success causing investing expenses for all of us to be greatly reduced
It’s horses for courses as it should be and the more competition there is for investors hard earned money then the better off all of us will be in the long run
xxd09

[hiriskpaul]

It’s bad and it’s getting worse. Every year, S&P Dow Jones Indices does a study on active versus passive management. Last year, they found that after 10 years, 85% of large-cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index.[/i]

Is that a fair apples and oranges comparison? Would a fairer one be a comparison of large cap funds with an index that excluded companies that were not "large cap"?

Ignoring the active v passive and just considering UK indexes, The FTSE 350 has outperformed the FTSE 100 over the last decade. If we were to do the research and limit active investment to "large cap" investing in the UK then surely they would under perform here wouldn't they? After all the growth here has been in the mid cap sector.

Always ask, what is the question trying to find out and what the answer that it gives actually tells you. In this case it may simply be that large cap companies slightly under perform mid or small cap companies.

I hold Scottish mortgage IT, which is known to invest in "odd" companies and in private equity. It would certainly be wrong to expect it to match ANY market. However for the sake of argument, shall we compare it's 10 year return with morning star's index of developed countries. SMT is/was at the time of comparison up 751% against the index return of 232%.

I'm not suggesting that passive investors buy it. It's expected to be very volatile and recently has had large falls. Indeed at one point it was up 1000% However I supply it as an example of apples and oranges.

As I think I said, passive/active is actually a false dichotomy. Were we to compare the FTSE 100 to the S&P500 we would still be talking apples and oranges, even though both are passive. When you invest in one, the other or some mix, it's an active choice.

The SPIVA report breaks down funds according to large, mid and small caps. It also breaks out value and growth funds and in all cases the same behaviour is observed, so yes they do compare apples with apples. See page 9 of the report for a summary.

I think you are conflating 2 things. The behaviour of investors with the behaviour of funds. Of course the choice funds, passive or active, is an active choice. But the thread is not about that, it is about the performance of active funds compared with passive ones.

I am an active investor, I fully accept that. Lets say I make a decision, an active one, that I want to make a long term investment in large cap US equities and I want to do that using a fund. How do I choose the fund? Well I have decades of research that indicates a S&P 500 tracker is very likely to be in the top quartile over 10 years, top decile over 20. I have no reliable method of picking an active fund that can achieve a similar result. The same is true regardless of whether I want to invest in US small cap value, UK large caps, mid caps, the whole UK market, or indeed the global market. If I pick a tracker I have a great deal of confidence that I will get above average long term returns. For me it's a no-brainer.

By the way, in the US large caps outperformed mid and small caps over the last decade. It is not always the case that mid/small beats large. Similarly with value and growth.

[dealtn]

I replied to a post talking about "casino" like returns but included comments about a different post in the thread where the "normal" distribution was talked about.

I think I am the only person that mentioned "normal distribution", or at least introduced it.

It isn't my claim that stock market returns are of that distribution. I think otherwise. My address was to the OP who seems to think that an investment strategy where its aim is to be (close to) the average (use whatever definition you think appropriate) should be at the extreme of a stock market return distribution. If it isn't there then it is "not great". I merely challenge him to define what such a distribution might look like (and somewhat hopefully, why?).

I merely make the observation such a distribution would look nothing like a normal distribution, nor would it resemble anything most would consider the true distribution of stock market returns.

What is invalid in such a challenge?

[OhNoNotimAgain]

The argument for Passive investing is quite simple.

It says that the bulk of the return from the market comes from the assset allocation, the beta, the index return from all the stocks.

It is possible to add additional return by stock selection, the alpha, by overweighting some stocks and avoiding others.

In practice alpha has proved impossible to identify in advance and in fact can also be negative.

Moreover, the cost of seeking alpha detracts from the return of the market and therefore you might as well be content with just getting the market return at the lowest cost ands without stock specific risk.

What is surprising is that since the start of the GFC in September 2007 the UK All companies Sector, which measures the return of funds after costs, has outperformed the FT All Share Index which has no costs, by a total of 3 percentage points.

Some of that is because funds in the sector can invest in other asset classes, such as overseas equities, unlisted shares and so on. Even so the disparity is odd.

[Urbandreamer]

I think I am the only person that mentioned "normal distribution", or at least introduced it.
It isn't my claim that stock market returns are of that distribution.

Well I misunderstood what you were saying then. Some people do seem to believe that all distributions are "normal".

The SPIVA report breaks down funds according to large, mid and small caps.

Thanks for that, I've looked up the research. Here is a link if others are interested.
https://www.spglobal.com/spdji/en/resea ... hts/spiva/

There are questions of course about fund intentions. The odd one like Ruffer wouldn't distort the figures too much, but in general how do SPIVA cope with such specialist interests? Do they exclude infrastructure funds and REITs for example, or are they included in funds that "under perform" the index? What of investments that cross borders? For example Pacific Horizons invests around the pacific, but the research assumes single country investment. Of course it's difficult to see how they can do otherwise, but how many active funds actually invest in a single market for them to make a comparison?

I would however say that my points were not to argue that active is better, or worse. I just question some of the arguments made to support a position that passive is "better". As I think has been said, it's easy and often cheap. Is more needed?

[hiriskpaul]

The argument for Passive investing is quite simple.

It says that the bulk of the return from the market comes from the assset allocation, the beta, the index return from all the stocks.

It is possible to add additional return by stock selection, the alpha, by overweighting some stocks and avoiding others.

In practice alpha has proved impossible to identify in advance and in fact can also be negative.

Moreover, the cost of seeking alpha detracts from the return of the market and therefore you might as well be content with just getting the market return at the lowest cost ands without stock specific risk.

What is surprising is that since the start of the GFC in September 2007 the UK All companies Sector, which measures the return of funds after costs, has outperformed the FT All Share Index which has no costs, by a total of 3 percentage points.

Some of that is because funds in the sector can invest in other asset classes, such as overseas equities, unlisted shares and so on. Even so the disparity is odd.

That is likely to be a significant factor in flattering the returns of active returns. It is quite a well known one and crops up from time to time in other markets. If your market has produced lousy returns compared to other markets and funds can invest in other markets, then a majority of funds can beat the index.

Another important factor is survivorship bias. A lot of duds are missing from the data. I don't know about since 2007 as I don't have the data, but If I look at the (survivorship biased) Morningstar 10 year performance record on UK Large Cap equity funds, even the expensive Virgin fund is well into the top half, so it is not just about costs. Active fund managers are subject to behavioural biases and there are structural issues with actively managed funds, eg as discussed on this thread: viewtopic.php?f=55&t=30210

[hiriskpaul]

I think I am the only person that mentioned "normal distribution", or at least introduced it.
It isn't my claim that stock market returns are of that distribution.

Well I misunderstood what you were saying then. Some people do seem to believe that all distributions are "normal".

The SPIVA report breaks down funds according to large, mid and small caps.

Thanks for that, I've looked up the research. Here is a link if others are interested.
https://www.spglobal.com/spdji/en/resea ... hts/spiva/

There are questions of course about fund intentions. The odd one like Ruffer wouldn't distort the figures too much, but in general how do SPIVA cope with such specialist interests? Do they exclude infrastructure funds and REITs for example, or are they included in funds that "under perform" the index? What of investments that cross borders? For example Pacific Horizons invests around the pacific, but the research assumes single country investment. Of course it's difficult to see how they can do otherwise, but how many active funds actually invest in a single market for them to make a comparison?

I would however say that my points were not to argue that active is better, or worse. I just question some of the arguments made to support a position that passive is "better". As I think has been said, it's easy and often cheap. Is more needed?

SPIVA do cover other regions, such as non-US, they call that International and funds that cover REITs. Not sure about Pacific or infrastructure. They can only get statisically significant results where there a number of funds that invest the same way and they have an appropriate index.

Better or worse depends on what you mean by better. A cheap tracker fund that covers the market I want to invest in gives me a reliable way of picking an outperforming fund than any other way I no of. For me that is better.

Edit, just to add another important advantage of a passive cap weighted tracker fund is that by choosing one, not only are you highly likely to get above average performance, but you have completely eliminated the risk of the truly appalling performance that some of the funds in the 4th quartile produce.

[88V8]

...another important advantage of a passive cap weighted tracker fund is that by choosing one, not only are you highly likely to get above average performance, but you have completely eliminated the risk of the truly appalling performance that some of the funds in the 4th quartile produce.

Woodford, for example.

Active funds, a degree of luck. The right strategy at the right time. Get on board.
But nothing lasts for ever. The sector runs out of puff. Large cap small cap growth tech innovation USA Asia UK, they all have their day in the sun. Get on get off with good timing and there's your outperformance.

Not so easy. When the puff evaporates, the manager is probably slow to spot it and doesn't know what to do next.

If one holds a parcel of active funds in different sectors the peaks and troughs can be smoothed, but is that really better than passive?

My little direct contact with fund managers showed me that they were far more anxious not to underperform..... relative to a benchmark, or their peers... than they were to outperform. So even actives have a degree of mediocrity built in to their DNA.

I suspect that I would have done better over the last decade in a more passive mode. Not as much fun, but probably a better use of my time. OK, I have a large pot and a 5%ish yield and we are very comfortable, but if I took account of the capital losses that I sweep under my mental carpet, going back to Vanco, Woolworth, Speyhawk, and a few I'm still sitting on, I probably haven't done that well.

Had a degree of luck getting in at the end of the FI wave, riding that upwards. Otherwise, often been in the wrong place at the wrong time, chasing the yield. If I'd been a fund manager I'd have been sacked long ago.

At least now I'm transitioning more towards collectives, but even there one can make the wrong picks... bought Mid Wynd a few weeks ago in a conscious transition towards Growth... I see I'm down 7% already.

V8 (impassive)

[Lootman]

What is surprising is that since the start of the GFC in September 2007 the UK All companies Sector, which measures the return of funds after costs, has outperformed the FT All Share Index which has no costs, by a total of 3 percentage points.

Why would it surprise you or anyone that the UK index would under-perform funds that invest globally?

Given that the UK has been the worst performing major stock market for a good number of years now?

I would be more surprised if that weren't the case. And why would anyone choose to invest only in the UK? Masochism?

[scrumpyjack]

Surely the key factors are:

Research has apparently shown that active managers, on average, do not outperform the market and that, because of their fees, they on average do worse that the market

Using an active manager is more risky than buying the whole market, because your investments are less widely spread

Some active managers will outperform and some will underperform. By all means select one yourself as long as you are mindful of the above. I am happy to have chosen Scottish Mortgage many years ago, and I was lucky not to have chosen Neil Woodford!

[Mike4]

... bought Mid Wynd a few weeks ago in a conscious transition towards Growth... I see I'm down 7% already.

You've been learning from me haven't you?

I am a master at this kind of investing. I learned this 20 years ago and now I'm learning it again.

[GeoffF100]

And why would anyone choose to invest only in the UK? Masochism?

Investing all your money in the UK would be "putting all your eggs in one basket", so I would not recommend it. Nonetheless, the UK market has been absolutely miserable for many years now. The hope for UK investors is that it is now cheap, and the old economy stocks will come back into fashion. The FTSE 100 has outperformed the All-World index by nearly 10% over the past 12 months:

https://imgur.com/7cYO13B

[hiriskpaul]

And why would anyone choose to invest only in the UK? Masochism?

Investing all your money in the UK would be "putting all your eggs in one basket", so I would not recommend it. Nonetheless, the UK market has been absolutely miserable for many years now. The hope for UK investors is that it is now cheap, and the old economy stocks will come back into fashion. The FTSE 100 has outperformed the All-World index by nearly 10% over the past 12 months:

https://imgur.com/7cYO13B

Years of underperformance has turned the FTSE 100 into a Values play and value investing made a big bounceback over the last year. In the US, the Vanguard Value ETF produced 26% compared with 16% for the Growth ETF (and 23% for the S&P 500 ETF).

[Hariseldon58]

My passive allocation to the Uk is an even split between the All Share and the FT250, it has done ok. FT250 over the last 15 years has done quite well.

The UK active funds that have done well, tend to the smaller companies, perhaps an explanation of why they have outperformed the index, sometimes active funds compare themselves to an index which is not a close match and discrepancies may be anticipated.

[OhNoNotimAgain]

My passive allocation to the Uk is an even split between the All Share and the FT250, it has done ok. FT250 over the last 15 years has done quite well.

The UK active funds that have done well, tend to the smaller companies, perhaps an explanation of why they have outperformed the index, sometimes active funds compare themselves to an index which is not a close match and discrepancies may be anticipated.

The easiest way to beat the index is to take on more risk through small caps.

[Lootman]

My passive allocation to the Uk is an even split between the All Share and the FT250, it has done ok. FT250 over the last 15 years has done quite well.

The UK active funds that have done well, tend to the smaller companies, perhaps an explanation of why they have outperformed the index, sometimes active funds compare themselves to an index which is not a close match and discrepancies may be anticipated.

The easiest way to beat the index is to take on more risk through small caps.

Perhaps but taking on more risk, by definition, is also the easiest way to do worse than the index. That is the "risk" part.

[Hariseldon58]

My passive allocation to the Uk is an even split between the All Share and the FT250, it has done ok. FT250 over the last 15 years has done quite well.

The UK active funds that have done well, tend to the smaller companies, perhaps an explanation of why they have outperformed the index, sometimes active funds compare themselves to an index which is not a close match and discrepancies may be anticipated.

The easiest way to beat the index is to take on more risk through small caps.

The FT250 is fishing in a different pool to the rather pedestrian companies in the FTSE100, has been it been riskier over the last 15/20 years or so, I don’t think so.

[OhNoNotimAgain]

Looks like I was wrong

[GeoffF100]

Looks like I was wrong

That has been right recently. The Russell 2000 has been doing badly for a year or so. The FTSE 100 has outperformed the FTSE 250 and the FTSE All-World handsomely over the last 12 months. If small caps (in international terms) become popular, they became overpriced, and they then do badly.

[OhNoNotimAgain]

Looks like I was wrong

That has been right recently. The Russell 2000 has been doing badly for a year or so. The FTSE 100 has outperformed the FTSE 250 and the FTSE All-World handsomely over the last 12 months. If small caps (in international terms) become popular, they became overpriced, and they then do badly.

Its more complex than that.

The la la land of free money is slowly, very slowly coming to an end. So investors are moving away from long duration equities to short duration.
In other words price to hope ratios are being dropped in favour of value metrics that actually mean something.