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Article - do any investors benefit from active management in the long run?
Posted: August 16th, 2022, 4:37 pm
by Jon277
short answer - NO - latest academic evidence for passive invtesing
[url]
https://www.evidenceinvestor.com/do-any ... -long-run/[/url]
Jon
Re: Article - do any investors benefit from active management in the long run?
Posted: August 16th, 2022, 4:58 pm
by XFool
I see he uses the old "coin tossing" example - as used by Warren Buffet in his forward to 'The Intelligent Investor'.
Buffet went on to claim some investors did consistently excel - value investors!
“Typically we find that those fund managers that do well over a period of time subsequently underperform, and fund managers that underperform initially subsequently outperform. So there’s a kind of a reversion to the mean. and the mean is essentially on average slight underperformance.”
So... does this suggest a way? Use "funds", but manage the managed funds yourself? If they perform above their benchmark for a period, sell them. Buy a fund that has underperformed its benchmark. Would this work? (Probably not!), if not, why not? Perhaps this outperform/underperform isn't as consistent, predictable or symmetric as it would need to be.
(I wonder if a fund manager has started a fund of funds to try this out?)
Re: Article - do any investors benefit from active management in the long run?
Posted: August 17th, 2022, 9:14 am
by minnow
Not sure if everyone has seen this paper, but it seems to be fairly widely accepted now that Buffett's outperformance arose from a strong tilt towards what are now known as factors, namely quality, low vol and value (that's "value" in the Fama/French sense of low PE ratio and not something more subjective) :
http://docs.lhpedersen.com/BuffettsAlpha.pdf. The point is that there's nothing magic about Buffett's performance, he just chanced upon certain attributes that tend to outperform the broad market long before these attributes had been identified and measured by academics.
Re the "reversion to the mean" idea -- sounds a lot like a momentum strategy ! There's solid evidence for momentum-based approaches working across a wide variety of markets going back hundreds of years, and in principle there's no reason why it couldn't work for individual funds. The difficulty with many momentum-based approaches is that trading costs tend to eat up most of the profits (plus there's the whole other question of whether these effects will persist now that they're so widely known about...)
Re: Article - do any investors benefit from active management in the long run?
Posted: August 17th, 2022, 4:13 pm
by AWOL
I think the main reason Buffet succeeded was because he bought insurance companies for their floats giving him cheap money to invest. He then bought companies at distressed valuations in a win big or die trying basis (extreme value investing). Later he had money to lose and became more cautious but he also had a brand that got him access to deals that others couldn't get on the open market bringing his brand to the table, especially after the GFC. Latterly his performance hasn't been astonishing.
The distribution of returns would suggest that some people will get extremely lucky and some will be extremely unlucky. Buffet fits that theory perfectly.
Re: Article - do any investors benefit from active management in the long run?
Posted: August 17th, 2022, 4:26 pm
by scrumpyjack
I guess the investors who benefit from active management are the ones who invest in trackers and do not pay active managers fees. The active managers in effect set the market price of shares and tracker investors get some benefit from that?
Re: Article - do any investors benefit from active management in the long run?
Posted: August 17th, 2022, 4:53 pm
by tug7
I really don't agree that passive is right for all. For the majority looking for gains & income over a lengthy period of time then yes I can see Passive Funds.
I look for stability, minimal drawdown and I am quite happy with a return that matches inflation over a reasonable period.
There is no passive equivalent, that I am aware of, to a fund such as Troy Trojan that I could contemplate leaving my wife to administer.
Re: Article - do any investors benefit from active management in the long run?
Posted: August 17th, 2022, 7:02 pm
by AWOL
scrumpyjack wrote:I guess the investors who benefit from active management are the ones who invest in trackers and do not pay active managers fees. The active managers in effect set the market price of shares and tracker investors get some benefit from that?
Most of the price discovery happens with institutional trades and institutional trades dwarf passives. I've spent more time than it warrants trying to come up with a scenario where price discovery breaks down and the reality is that the first sign of it would be active managers having a prolonged period of outperformance as clearly the winners would be underpriced. If we ever get there I am sure we will notice and it will show up in the SPIVA reports...
https://www.spglobal.com/spdji/en/spiva ... va-europe/
Re: Article - do any investors benefit from active management in the long run?
Posted: August 17th, 2022, 7:23 pm
by SalvorHardin
scrumpyjack wrote:I guess the investors who benefit from active management are the ones who invest in trackers and do not pay active managers fees. The active managers in effect set the market price of shares and tracker investors get some benefit from that?
Some of us who outperform manage our own money.
If I used passives I'd probably still be working, instead of having retired 19 years ago. Big thanks to those efficient market people who spectacularly misprinted small oil explorers from 2000 to 2007.
I remember having a lecture from someone at a TMF London social in 2006 about how index tracking was the way to go for everyone and how stockpickers were losers. Then the conversation turned to how I disagreed, and how much I had made from Soco. The "lecturer" was distinctly unhappy when I told him how much.
I then pointed out that envy was the worst of the seven deadly sins because you couldn't have any fun with it, and made a swift exit and after a five minute walk I arrived at my local when I worked in the West End.
Re: Article - do any investors benefit from active management in the long run?
Posted: August 17th, 2022, 7:42 pm
by mc2fool
Relevant article in CityWire today.
On average (and that term on average is the key) active funds underperform, even though some active managers can and do regularly outperform.
:
My initial scepticism is not because I doubt the validity of the data – I don’t. Too many academics have done the same studies and come to the same conclusions. It’s just that it’s a partial picture, analysing data through one lens, which ignores the increasingly diverse sources of returns in most modern, diversified portfolios.
:
I have included the table below, which is my take on which niches, geographies, styles and themes fit into a simple passive/active binary. I’m not going to go through each but a general point emerges: where a market is deep, liquid and well researched, in my view, passive wins out most times. Where liquidity is tighter, research patchy and many deals take place on private valuations, I tend to favour actively managed funds.
Preference for active Preference for passive
Asia ex-Japan equities Global large- and mid-cap equities
Smaller companies US equities
Japan equities UK all-cap equities
Global frontier markets Global emerging markets
India equities China equities
Latin America equities Single strategy bonds
Multi-strategy bonds Style: dividend-weighted, equal weight and momentum
Absolute return Lifecycle/target risk (purely cost consideration)
Style: quality and value Commodities
Private equity Diversified commodities (using systematic ETFs)
Venture capital Most single equity sectors
Infrastructure
Impact strategies
Biotech
Tech (though thematic tech ETFs are useful)
https://citywire.com/funds-insider/news/david-stevenson-the-active-passive-debate-has-grown-stale/a2395038
Re: Article - do any investors benefit from active management in the long run?
Posted: August 17th, 2022, 8:35 pm
by forrado
SalvorHardin wrote:Some of us who outperform manage our own money.
That's because in the words of the late John Templeton,
"If you want to have a better performance than the crowd, you must do things differently from the crowd."Similar to SalvorHardin, I was able to call it a day a little more than 20 years ago by taking risks in order to do things differently from the crowd. Though, having won the game I don't have to play anymore. These days I'm more of a spectator than a player who is quiet happy to sit back and settle for the market average. However, I'm still not able to fully convert myself to a true believer when it comes to indexing. If one is both hungry enough and inclined to take risks, then who am I to say to anyone not to do things different from the crowd. You never know till you try, you might even be good at it - just as a minority of others seem to have been over the years.
Re: Article - do any investors benefit from active management in the long run?
Posted: August 18th, 2022, 7:44 am
by minnow
I think this is the report that the Citywire article is referring to :
https://www.ajbell.co.uk/sites/ajbell.c ... y_2022.pdf. The fact that it's published by AJ Bell already makes me a little skeptical, but leaving that aside I don't see a single reference to
risk-adjusted returns in the report. I know that's a bit of an alien concept for a lot of retail investors, but it's critical. After all, beating the benchmark by 10% is hardly an accomplishment if you have to suffer twice the volatility to get there.
This sort of oversight seems to be fairly common. I suspect that many investors think of Baillie Gifford's SMT as some sort of "star" fund that consistently delivers market-beating returns, but plot it with QQQ and it becomes apparent that SMT is simply taking more risk :
https://www.google.com/finance/quote/SM ... &window=5Y (I haven't attempted to calculate the ratios but visually you can see that one line is more wiggly than the other) For my own part, I bought some bitcoin several years ago which is now up 20x. Evidence of manager skill or reckless risk-taking that happened to pay off through pure random chance ?
I'm not taking a side on the active v passive thing btw. I don't deny that it's possible for active to outperform, although I reckon it's increasingly hard to do in this age of machine learning and sophisticated quant funds. I just think it's important to be realistic about the effects of alpha v beta and luck v skill.
Re: Article - do any investors benefit from active management in the long run?
Posted: August 18th, 2022, 11:18 am
by JohnW
Where liquidity is tighter, research patchy and many deals take place on private valuations, I tend to favour actively managed funds.
Good for him. But do they do better, that's what matters to us? I hope the rest of the article says something more useful.
I prefer ketchup in my coffee, but would anyone else even try it?
Re: Article - do any investors benefit from active management in the long run?
Posted: August 18th, 2022, 11:24 am
by JohnW
There is no passive equivalent, that I am aware of, to a fund such as Troy Trojan that I could contemplate leaving my wife to administer.
Worth exploring. What about a conservative 'balanced' fund of bonds and stocks like a 'Life Strategy' or similar, 'set and forget' fund whose components were index trackers? What would be the shortcomings if Mrs was left with it?
Re: Article - do any investors benefit from active management in the long run?
Posted: August 21st, 2022, 7:06 pm
by vand
If thats how OP feels then he should just stick to passive index funds! Nobody's forcing them to do any more than that. Take the free ride and stop trying to convince the world... the day everyone is a passive investor is the day that capital markets stop fulfilling their primary function, so be grateful for us idiots still participating in price discovery.