# Tracking or managed



## Archimedes (3 Jul 2006)

I have a lump sum to invest and am weighing up the relative merits of an index tracking fund versus an active managed fund. Anyone have any thoughts/experience to share?


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## ClubMan (3 Jul 2006)

[FONT=Verdana, Arial, Helvetica, sans-serif]Investing              in the stockmarket through a unit linked fund[/FONT]



> [FONT=Verdana, Arial, Helvetica, sans-serif]*TRACKER          FUNDS*[/FONT]
> [FONT=Verdana, Arial, Helvetica, sans-serif]It is widely          accepted in America that fund managers cannot outperform the average consistently          over a period of time. This realization is dawning on British and Irish          consumers. So many fund managers have got rid of their expensive investment          analysts and now just buy a portfolio of shares which tracks the index.          They don't try to beat it. This means that the costs of running such a          fund would be much lower. So in America and the UK , consumers have had          their annual management charges reduced to as low as ½%. The cheapest          trackers in Ireland are still very expensive by international standards.


[/FONT]


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## Sarsfield (3 Jul 2006)

Index trackers tend to have lower costs.

Evidence suggests index trackers also outperform actively managed funds.  Fund managers are human too and fall victim to chasing prices, resulting in overtrading (increased costs) and the fatal error of buying last years winner.


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## diarmuidc (3 Jul 2006)

Archimedes said:
			
		

> I have a lump sum to invest and am weighing up the relative merits of an index tracking fund versus an active managed fund. Anyone have any thoughts/experience to share?


From all the reports and studies I've read the index funds have outperform managed especially in the longer term. ie index beat 45% of managed funds after year 1, 60% after year 5. 80% after year 10 etc... (those figures are off the top of my head. I will source and post a more accurate figure later)

Edited, future -> past.


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## ClubMan (3 Jul 2006)

"Will"!? Nobody can predict the future. The main point is that index funds *should *have lower charges/reductions in yield and *may *have advantages over manual stock selection and attempts to time the market.


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## Archimedes (3 Jul 2006)

Thanks for the comments. Very helpful. Any thoughts on who to use as a vehicle for index linked. Quinn seems good? Is that an illusion and is there a better outfit available?


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## ClubMan (3 Jul 2006)

What do you mean by "good"? If you mean performance wise then that will largely depend on the index being tracked and the accuracy with which the provider tracks it. If you mean charges then _QL _are quite competitive but still not as cheap as index trackers available in the likes of the _US _and other larger markets. Obviously you should not concern yourself unduly with past performance since it is no guide to future returns.


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## kellyiom (4 Jul 2006)

personally, I think the concept of tracking is actually quite dangerous and it disturbs me how much it has become ingrained into the psyche as a low-risk route to equity. Cheap Beta maybe but low risk no way. I favour combining both high cost strategies which do things very differently to indices with index trackers (averaged in monthly to dull the volatility) and try to find smarter indices to track (value, sentiment, fundamentals). Don't have a problem with high costs as long as you're obtaining something in return. Always act firmly against managers who trade around indices and don't add value. Choice of index is crucial. I try and think that although it's passive, someone is taking real-world decisions that affects the price. Take the top 5 companies in most large cap indices; these sway the indices a lot so you ask the question; am I happy with these lot running Vodafone, AIB, Total, whatever, as it will impact the movement of that index...


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## ClubMan (4 Jul 2006)

kellyiom said:
			
		

> low-risk route to equity. Cheap Beta maybe but low risk no way.


 Who said that index tracking was necessarily low risk? Depending on the index tracked a particular fund could be anywhere on the risk/reward scale.  For example if it is a bond index then it will be relatively low risk/reward. If it is a pure/mainly equity index then it will probably be relatively high risk/reward. 


> I favour combining both high cost strategies ...
> 
> Don't have a problem with high costs as long as you're obtaining something in return.


 Very often there is nothing tangible on offer for higher charges. How would you judge a priori if/how high charges are justified?


> Always act firmly against managers who trade around indices and don't add value.


 This sounds like the "good managers can time and [consistently] beat the market/index" argument which is as old as it is fallacious. 


> Choice of index is crucial. I try and think that although it's passive, someone is taking real-world decisions that affects the price. Take the top 5 companies in most large cap indices; these sway the indices a lot so you ask the question; am I happy with these lot running Vodafone, AIB, Total, whatever, as it will impact the movement of that index...


 Of course - choice of index is crucial. As is the composition of the index. And the accuracy with which the provider can match the index.

Nobody has said that index tracking is some sort of panacea. People still have to match investments to their own specific circumstances and needs. On the other hand, all things being equal, low charges are a better bet than higher charges.


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## kellyiom (4 Jul 2006)

ClubMan said:
			
		

> Who said that index tracking was necessarily low risk? Depending on the index tracked a particular fund could be anywhere on the risk/reward scale. For example if it is a bond index then it will be relatively low risk/reward. If it is a pure/mainly equity index then it will probably be relatively high risk/reward.
> 
> _*Nobody here's said that, just my personal opinion; and implicit culture has developed that trackers good, active bad (see stats on how many managers underperform indices etc)*_
> 
> ...


 
_*yeah, all things being equal- but how often do you get an opportunity to make a truly equal comparison. Like err, I could either buy this Largecap tracker for 0.35% a year, or I could buy the same version run by Anthony Bolton for 0.35% a year on an identical mandate- obvious choice but when are all things equal like that?*_


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## ClubMan (4 Jul 2006)

kellyiom said:
			
		

> _Like err, I could either buy this Largecap tracker for 0.35% a year, or I could buy the same version run by Anthony Bolton for 0.35% a year on an identical mandate- obvious choice but when are all things equal like that?_


I don't understand your point. I haven't a clue who _Anthony Bolton _is. My point is that once an individual (with independent, professional advice if necessary) has done a thorough review of their finances, plans etc. they should identify a range of savings/investments that are suitable to their short, medium and long term needs/plans/goals. One part of a well diversified portfolio should generally be equities. For those that decide that indirect equity investments are appropriate then an index tracker or managed fund with a suitable asset mix is one possible option. When choosing such products one should generally aim to minimise charges. Higher charges should only be paid if there is something *tangible *to be gained - e.g. a wider mix of funds than available elsewhere, better customer service etc. Nobody should pay higher charges in the expectation that the stock picking skills of the manager will be better. There is simply no way to know this a priori and over time all managers will gravitate towards the mean anyway.


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## kellyiom (4 Jul 2006)

my point is clubman, that the scenario you illustrate 'all things being equal' almost never happens. Anthony Bolton I used as an example of how rare your argument is seen in the real world; not this Markowitz heaven you seem to have been inhabiting today when you wrote this. (He's the manager of Fidelity's Special Sits fund btw). That's why you don't get someone with a really good long track record running money for the same fee (all things being equal) as a tracker. Otherwise it would always be a no-brainer. 

And that's the tangible benefit. Don't get me wrong, I'm not saying most active managers aren't worth tuppence, never mind €100k a a year cos I'm no big fan of the industry and I do definitely agree with you 100% about sitting down, setting up your asset allocation and getting comfortable with risk and doing some serious planning. The active passive debate comes much further down the line.

I would disagree so much more than 100% tho about your comment that there's no way of deciding which managers are 'worth it'. If that's the case then perhaps you should tell the fund of funds industry that they're wasting my time. As I said, it's not easy but it is achievable, it just needs a lot of qualitative legwork. 

As for the tosh about gravitating towards the mean, well...what mean?! Mean of all manager returns, index returns? Rubbish. As I mentioned above, you can find managers who outperform in discrete time periods as well as over extended, prolonged periods, they time markets and they don't gravitate towards the mean. As I said, I'll post a list of them if you want! 

Should probably expand on the comment about managers in indexes- what I was saying there was that if you hold trackers, then it doesn't stop you doing some qualitative analysis on what you're holding as ETF investing tends to be very quantitative and driven by the fundamentals or technicals. If you use that you can get a feel for what the head honchos are like- which would have been useful if you held S&P500 in 2000; you'd know there would acquistions, complex financials, etc potential red flags even tho the numbers looked good.


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## diarmuidc (4 Jul 2006)

kellyiom said:
			
		

> As for the tosh about gravitating towards the mean, well...what mean?! Mean of all manager returns, index returns? Rubbish. As I mentioned above, you can find managers who outperform in discrete time periods as well as over extended, prolonged periods, they time markets and they don't gravitate towards the mean. As I said, I'll post a list of them if you want!



Great, you can post a list for fund  manager that have *in the past* beaten the market average. (anyone with access to Morningstar can also do this)

However for your theory to be of any use, please post a list of fund managers here that will outperform the market over the next 10 years. We can review the list in 2016 and see how you (and your money) has done.

However more and more people these days are doing their homework and are able to see what fund managers really are -an added expense of no, possibly even negative, value.


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## zephyro (4 Jul 2006)

kellyiom said:
			
		

> As I mentioned above, you can find managers who outperform in discrete time periods as well as over extended, prolonged periods, they time markets and they don't gravitate towards the mean. As I said, I'll post a list of them if you want!


Research has consistently demonstrated that past performance of active managers is useless in predicting future performance, so a list of active managers who've outperformed in the past is worthless information. Do you have a list of active managers who will outperform their benchmark indices in the future? (any time period will do ...)


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## ClubMan (4 Jul 2006)

kellyiom said:
			
		

> not this Markowitz heaven you seem to have been inhabiting today when you wrote this.
> 
> ...
> 
> ...


 Do yourself and your arguments a favour and ditch the intemperate language. 





> As I mentioned above, you can find managers who outperform in discrete time periods as well as over extended, prolonged periods, they time markets and they don't gravitate towards the mean. As I said, I'll post a list of them if you want!


As others have said above "past performance yadda yadda yadda"...


> I would disagree so much more than 100% tho about your comment that there's no way of deciding which managers are 'worth it'. If that's the case then perhaps you should tell the fund of funds industry that they're wasting my time.



They are not wasting their time. They may be wasting some people's money/charges though. 



> what I was saying there was that if you hold trackers, then it doesn't stop you doing some qualitative analysis on what you're holding as ETF investing tends to be very quantitative and driven by the fundamentals or technicals. If you use that you can get a feel for what the head honchos are like- which would have been useful if you held S&P500 in 2000; you'd know there would acquistions, complex financials, etc potential red flags even tho the numbers looked good.



An efficient market should by definition be driven by quantitative factors/decisions. You seem to be suggesting that somehow qualitative factors/decisions made by the privileged few in the know can make a difference? Short of illegal insider trading I don't see how this can be the case in the normal course of events.


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## dunkamania (4 Jul 2006)

The rise in popularity of trackers could lead to whole indexes being overvalued as the amount of funds that have to be invested,increases.

That could lead to actice managers beating,tracking managers.

Thoughts?


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## kellyiom (4 Jul 2006)

nahhh, all markets are efficient, all of the time...^^^^ that's my point exactly dunkamania, tracking is a dangerous self-fulfilling game, all in the flawed name of 'efficiency'

hey, no offence intended ClubMan, definitely very sorry if anyone was a bit put off my my language and hope it didn't undo the very stimulating topic you kicked off here, I am admonished and it won't happen again (at least not   today )

I was definitely not advocating insider trading- just that qualitative work is often a good counterbalance to the numbers game. It doesn't need any greater resource than time and effort. Just this would have revealed interesting aspects about Enron, Bernie Ebbers, Kozlowski & Co which some people successfully used as red flags to get out, even though the numbers told them something different. Don't know how doing a different type of research can even be misconstrued as even like insider trading and certainly not restricted to those in privileged positions. I'm not suggesting it, I'm stating it, qualitative analysis can blow apart the cosy worldview of efficient markets. Not got scope to do this here but these markets give the appearance of being efficient...

Zephyro- think you need some wider reading on that topic; past performance is of limited value, not 100% worthless and you'll find a huge number of studies on that topic all with differing conclusions. My view is you'd be an idiot to base a decision on that but that info isn't _useless _and in my experience, anyone who says that isn't being entirely true. So whenever you've made any sort of investment, you've struck the past performance of it from your consciousness? hmmm...perhaps if that is the case you might explain why regulators the world over still insist on past performance being extrapolated out in client projections? I'm not saying it's right, just asking for your take...

Diarmuidc- no, can't even be bothered redirecting people to morningstar as you rightly point out. I reckon you've got a right good idea tho; money where the mouth is and all that. I'll gladly donate €500 to a forum-nominated charity in 2016 if I'm wrong as well. Forget the past, here's the future and I'll also exclude a really short period from the study like the next 12 months so here goes for starters off the top of my head:
- henry maxey
- james ridgewell
- jorma korhonen
- jim simons
- philippe jabre
- daniel loeb
- crispin odey
- paul tudor jones
- larry robbins
- john horseman
- paul bate
-louis bacon
- william von mueffling
- peter thiel 
- dinashkar singh
- thomas sandell
-jacob gottlieb
scott pagel
-zafah ahmadullah
-steven heinz
-bernie madoff
- harlan kervaes
-alan howard
- bill browder

I could put hundreds more but that would do for starters.

Notice Clubman, you haven't exactly answered my point about when the last time you saw a passive and active option priced identically so when was the last time all things were equal?

people, as you probably have guessed, I'm not a particular 'fan' of active management, just that I think a lot of people have a blinkered view about passive vs active and don't really look any further than tracker and that's as bad a dogma as 'always go active'. 

Also, anyone feel like sharing their info with Harvard, CaliforniaPERS and so on as they all still use active management to beat the market. Think they ought to know they're wasting their own and client's monies! On a less facetious note, if you are all so certain, then someone please explain why active management still exists? Surely if you believe in efficient markets, then this anomaly would have been arbitraged out by now. Is it because the edifice of active management is so tough, it has effectively brainwashed millions and controls world capital? Or is it because it actually does work consistently well in some cases? I'm quite happy for you guys to keep tracking as it lets other people exploit the situation and make money for me. Over to you....Clubman, Diarmuid, Zeph...why do these smart investors keep 'wasting' their fees on active?


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## Sunny (4 Jul 2006)

diarmuidc said:
			
		

> However more and more people these days are doing their homework and are able to see what fund managers really are -an added expense of no, possibly even negative, value.


 
Bit of a sweeping statement. You can't possible say that all fund managers bring no value to the funds that they manage. You may want to explain that to poor BIAM who lost billions of AUM when they lost a few fund managers. Their clients obviously believed they added value!

I would have thought that it was not a case of saying trackers are good, but managed are bad. It all depends on the investors risk appetite and requirements. There are some very poor so called trackers out there. Also, managers past performance might not be any guarantee to future performance but it is certainly useful and I would certainly place a great deal of importance on it if I was picking a manager.


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## kellyiom (4 Jul 2006)

Sunny said:
			
		

> Bit of a sweeping statement. You can't possible say that all fund managers bring no value to the funds that they manage. You may want to explain that to poor BIAM who lost billions of AUM when they lost a few fund managers. Their clients obviously believed they added value!
> 
> I would have thought that it was not a case of saying trackers are good, but managed are bad. It all depends on the investors risk appetite and requirements. There are some very poor so called trackers out there. Also, managers past performance might not be any guarantee to future performance but it is certainly useful and I would certainly place a great deal of importance on it if I was picking a manager.


 
quite, Sunny- a sensible comment I think. All I've been saying is that you take each individual investment on its own merits and look under the bonnet and don't take anything for granted. Following on from your BIAM comment which is spot on I think, I think a sceptic would just say that those clients were mugs for following them! If that's the case then, then they should inform their pension managers to have no holdings in fund management groups as their business is purely illusory!


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## Sunny (4 Jul 2006)

kellyiom said:
			
		

> quite, Sunny- a sensible comment I think. All I've been saying is that you take each individual investment on its own merits and look under the bonnet and don't take anything for granted. Following on from your BIAM comment which is spot on I think, I think a sceptic would just say that those clients were mugs for following them! If that's the case then, then they should inform their pension managers to have no holdings in fund management groups as their business is purely illusory!


 
Imagine all those fund managers hitting the dole office at the same time trying to explain what they did in work every day....FAS retraining courses would be full for years!


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## kellyiom (4 Jul 2006)

heh- I bet you'd hear the violins from miles away! Poor loves! ;-)


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## diarmuidc (4 Jul 2006)

Sunny said:
			
		

> Bit of a sweeping statement. You can't possible say that all fund managers bring no value to the funds that they manage. You may want to explain that to poor BIAM who lost billions of AUM when they lost a few fund managers. Their clients obviously believed they added value!



What I am saying is twofold:
1. Fund managers performance has been shown to be the luck of the draw. Some perform well (for a while) but in the long run (15+years) less than 15% will beat the market
2. You cannot predict which fund managers will be the in the 15% that beat the market in the long run.

Now as a consequence of that, I would claim that fund managers are an added expense with no value. Of couse if you want to gamble and try and pick one of the 15% then you are welcome to do that with your money. For me I am investing and trying to keep the gambling to a minimum.

PS. The 15% I am quoting here is off the top of my head. I will post more accurate figures later when I have access to them


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## kellyiom (4 Jul 2006)

well I think there's a difference in gambling and using skill. Do you not see the irony of this? You don't want to pick a manager yet, you'll pick an index or asset class. The values of those indices are influenced by the actions of the people chosen to run the underlying companies, i.e managers! Given the asset weighting composition, many indices are fairly dependent on the fortunes of relatively few companies...also: re 'you cannot predict which fund manager...'; yes you can (see my above post but we'll need years to actually prove it but yes you can. Perhaps even more so than in predicting individual equities as there are fewer inputs)


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## zephyro (4 Jul 2006)

kellyiom said:
			
		

> past performance is of limited value, not 100% worthless and you'll find a huge number of studies on that topic all with differing conclusions.



This isn't true, I know because I've read many of them. I'd suggest you read the linked paper which is generally regarded as the definitive study on fund persistence as of now.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=8036




			
				kellyiom said:
			
		

> if that is the case you might explain why regulators the world over still insist on past performance being extrapolated out in client projections?


This also isn't true, again see the link.

http://www.sec.gov/investor/pubs/mfperform.htm



			
				kellyiom said:
			
		

> On a less facetious note, if you are all so certain, then someone please explain why active management still exists?


Active management still exists because of a combination of ignorance and the gambling instinct. Many people accept that markets are efficient but nevertheless choose to invest in actively managed funds in the unlikely hope of being lucky.


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## kellyiom (4 Jul 2006)

zephyro said:
			
		

> This isn't true, I know because I've read many of them. I'd suggest you read the linked paper which is generally regarded as the definitive study on fund persistence as of now.
> 
> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=8036
> 
> ...


 
Zeph: can't belive you're quoting that paper which is now nigh-on ten years old...think if you look a bit harder you might find your comment is on shaky ground. Generally regarded?...by whom? Not going to get into a post a link battle- it's there if you want to find it.

OK, perhaps my wording was wrong about insistence by regulators but one link proves nada; there's millions others I could post giving info where regs ask providers to give relevant info like past performance etc. Again, spurious I reckon.

Finally, so let's get this straight: you think active investors, eg George Soros etc ad nauseum are nothing more than deluded gamblers...right? So these people gambling billions in state pensions in California are punters. Why Warren Buffett doesn't just buy an insurance sector tracker rather than General Re? Isn't he gambling? Is this really what you are saying...?


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## diarmuidc (4 Jul 2006)

kellyiom said:
			
		

> also: re 'you cannot predict which fund manager...'; yes you can (see my above post but we'll need years to actually prove it but yes you can.



Look, it's your money. If you choose to ignore any recent study in this then it's your call. We can come back in 10 years and look at your predictions and see how you do.

BTW Just out of curosity how are you going to pick these fund managers? Please don't say their performance from the last 3 years.


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## kellyiom (4 Jul 2006)

Well I'm not ignoring _any recent_ study on it, just those which support your limited point. Don't think you've really addressed my point there anyway about gambling and investing and how economic returns are actually earned. How am I going to pick those fund managers- well of course I wouldn't upset you by saying the last three years performance. I have a mystic hedgehog which snuffles them on a big board in my garden!


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## Sunny (4 Jul 2006)

Just out of interest, how do you choose the good trackers from the bad ones? does past performance come into play by chance?


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## zephyro (4 Jul 2006)

kellyiom said:
			
		

> Generally regarded?...by whom? Not going to get into a post a link battle- it's there if you want to find it.


 Academia. No need to get into a link battle, a single link to a paper that statistically disproves its conclusions will do. I emphasise the phrase "statistically disproves", I'm aware of papers that dispute it's findings but completely sacrifice statistical rigour for the sake of an attention-grabbing conclusion.



			
				kellyiom said:
			
		

> OK, perhaps my wording was wrong about insistence by regulators but one link proves nada; there's millions others I could post giving info where regs ask providers to give relevant info like past performance etc. Again, spurious I reckon.


 Again, a single example from a reputable regulator will do.



			
				kellyiom said:
			
		

> Finally, so let's get this straight: you think active investors, eg George Soros etc ad nauseum are nothing more than deluded gamblers...right?


 I think and the evidence supports the position that "George Soros etc ad nauseum" are gamblers. I never said deluded, people may realise the odds are against them and nevertheless gamble and win. 



			
				kellyiom said:
			
		

> So these people gambling billions in state pensions in California are punters.


 CalPERS manages the majority of it's assets passively and believes the market is efficient, see the link.

[broken link removed]


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## Sunny (4 Jul 2006)

But calpers also state they use managers with expertise in certain sectors to actively manage some of their portfolio. It all comes down to the fact that there are pros and cons of each and to write off one or the other is completely stupid


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## bocade (4 Jul 2006)

Sunny said:
			
		

> Just out of interest, how do you choose the good trackers from the bad ones? does past performance come into play by chance?


 
Easy, compare their performance against the index they say they are tracking. Then compare their charging structures.


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## Sunny (4 Jul 2006)

bocade said:
			
		

> Easy, compare their performance against the index they say they are tracking. Then compare their charging structures.


 
I wouldn't have thought that past performance of tracking errors wouldn't be a useful indication of future performance!


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## kellyiom (4 Jul 2006)

zephyro said:
			
		

> Academia. No need to get into a link battle, a single link to a paper that statistically disproves its conclusions will do. I emphasise the phrase "statistically disproves", I'm aware of papers that dispute it's findings but completely sacrifice statistical rigour for the sake of an attention-grabbing conclusion.
> 
> *no probs but isn't 'statistically disproves' a tautology?!*
> 
> ...


 
also [broken link removed]

clearly allocating more to active than passive! (55% to 44%) *Please explain why Mark Anson ex-CIO of CalPERS left to head up an active company?!* And why Jack Meyer of Harvard did the same?! Smart alecs who can milk the fees or genuine investment talents who can repeatedly demonstrate returns in excess of the 'market'? 

Think sunny's said the most sensible comment on the whole thread on this ^^^. I don't for one minute believe that people who make money from investing for a living get bogged down in debates over active & passive. How do you explain arbitrageurs? How come any of them exist at all, never mind that some last for decades! Don't understand why this topic generates such blinkered dogma. I mean, nobody has a problem understanding that Michael Schumacher exists, yet he's better than most and repeats it. Why then do some people have a fit when you try and claim a fund manager can do it. Personally, think it's envy and insecurity as people can't admit mistakes or believe that someone can do something they can't. But then I'm a behaviouralist and that's a whole different thread!


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## diarmuidc (4 Jul 2006)

kellyiom said:
			
		

> . I have a mystic hedgehog which snuffles them on a big board in my garden!



That sounds about right.


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## diarmuidc (4 Jul 2006)

kellyiom said:
			
		

> also [broken link removed]
> 
> clearly allocating more to active than passive! (55% to 44%)


You have a pdf in front of you and are misrepresenting the actual figures in it !!

In fact of the *equities* held in the fund ($122Billion)
 75% of the Domestic are passively managed and 
 56% of the International are passively managed

But of course the guys managing this 122Billion dollar fund don't have your foresight to pick the fund managers that will outperform the market so they have to settle for a passively managed fund.


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## kellyiom (6 Jul 2006)

Diarmuidc, this is a very weak post; how can linking a verbatim pdf which clearly shows the overall position be misrepresenting? Clutching at straws I think...
Since when were we focusing on equities only anyway? This thread has discussed active & passive management - bonds were mentioned earlier.

Your point if I can recap boils down to 'that fund managers are an added expense with no value'.

My point is why then are the world's most successful (in absolute, not relative terms) investors using active management? 

I then post a pdf which clearly shows one of the world's leading pension funds with $211bn assets employing 55% of its assets in active management. Explain this discrepancy a little more and expand please on my 'misrepresentation'.

Diarmuidc, think you need some further education on this area; I would suggest that the reason CalPERS passively manages 75% of its domestic equity is that the US markets are deep, liquid and relatively efficient; suited for passive strategies. By the way, $25bn in domestic equities is still given over to active management- does that sound like they really believe active can't add value to you? Do you think they thought 'ah well, if we put it all in trackers, that'll hurt a lot of fund managers so we'd better give them something?'!

Moving on to international equities, as you rightly mention, they're crazy enough to give over 56% to active managers! The same managers perhaps that you allude to which is a shame as they clearly 'don't have your foresight to pick the fund managers that will outperform the market'; Actually, if you do some homework and ask CalPERS nicely, they'll probably tell you who they are and you'll probably find a number of names overlapping in their list and the one I posted, but don't let facts get in the way of a good argument, eh! I'd suggest that they recognise active management can add value in less liquid, less researched and sector-driven investing, thus their higher allocation when in non-US sectors. I'd also suggest actively investing a whole $200bn would be difficult putting it 100% with active managers. That's been my argument all along; most managers detract from performance but there are many who add it; that sort of talent though does not have infinite capacity to manage unlimited capital. Moreover, it's not impossible for some investors to identify those managers likely to outperform.

While you're at it, I'd respect your points a bit more if you attempted to answer any of the questions I raised; like, why then did Mark Anson, former CIO of CalPERS leave them to go to an active management group. How have Harvard managed to achieve consistent absolute returns using active management? Do you know how and why people like George Soros 'gamblers' to quote zephyro, have consistently made money? 

Also, I'd like to point out I've never said anywhere in this thread that past performance is a key factor in selecting a manager; that data is not without value however. I therefore expect zephyro to put their money where their mouth is and next time they interview someone for a job, don't look at their CV; next time you get a builder in to do some work, don;t ask about their track record, what jobs they did, etc- because that's what you're saying yeah? You KNOW past performance has no worth....

Another nice little touch to think about when you're putting money in trackers is to think about who else uses them; they're actually a useful hedging mechanism and stocklending facility which is often used by the very same people to add value which you claim do not exist! Next time you're in London, go and have a walk around Berkeley Square, you'll see plenty of them with your own eyes!

I love sceptics; ask an awkward question and immediately you start getting ' on page 200 of that link it says....' and a load of ducking and diving!


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## Sarsfield (6 Jul 2006)

kellyiom said:
			
		

> My point is why then are the world's most successful (in absolute, not relative terms) investors using active management?


 
The only way to beat the market in a big way is to engage in active management as index tracking, by definition, will only track the market.  But that proves nothing.  The winners in this case are the exceptions.

It still doesn't mean you can tell in advance which active managers will be the minority of active managers who will outperform next year and the year after and so on.

I do have one issue with passive management as it does base itself on past performance of the economy as a whole.  It assumes the global economy will continue to grow.  This assumption is really only based on the last century or so - the oil century.  The assumption that the economy will continue to grow post peak oil production may prove to be incorrect.  And peak oil is likely to arrive before I depart!  I need to add an index to my portfolio that isn't affected by oil!


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## kellyiom (6 Jul 2006)

Sarsfield said:
			
		

> The only way to beat the market in a big way is to engage in active management as index tracking, by definition, will only track the market.  But that proves nothing.  The winners in this case are the exceptions.
> 
> _* It still doesn't mean you can tell in advance which active managers will be the minority of active managers who will outperform next year and the year after and so on*_.
> 
> I do have one issue with passive management as it does base itself on past performance of the economy as a whole.  It assumes the global economy will continue to grow.  This assumption is really only based on the last century or so - the oil century.  The assumption that the economy will continue to grow post peak oil production may prove to be incorrect.  And peak oil is likely to arrive before I depart!  I need to add an index to my portfolio that isn't affected by oil!



*but my point is; these investors can...and do! read their (CalPERS, Harvard, UTIMCO) annual reports for details. It's not easy but is achievable. in just the same way as the managers they select can outperform in their selected assets year after year. But it's not logical for us to say that they can manage unpredictable assets in a superior way, but the way they do it prevents anyone else from predicting who 'they' will be. Proof of the pudding and all that- the details are stated in black and white in those reports like the one we looked at; examine the tenure of their managers; many outperformers, all selected through skill, not chance, over multi-year periods.

*....I do agree wholeheartedly tho with your example re: Oil- think that's a very useful situation to illustrate the best 'bits' of trackers if you like. Ironically, I sort of agree there, we need more trackers not less. And be a bit smarter how we use them.


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## diarmuidc (6 Jul 2006)

kellyiom said:
			
		

> Moving on to international equities, as you rightly mention, they're crazy enough to give over 56% to active managers!


What ? Please read the pdf you are posting.

56% of  international equities are PASSIVELY mangaged. It's there in black and white. Again you are misrepresenting the document. 


			
				kellyiom said:
			
		

> Since when were we focusing on equities only anyway? This thread hasdiscussed active & passive management - bonds were mentionedearlier.


Bonds may be mentioned, but the assets in the fund are divided into real estate, equities and income. Now income and real estate cannot be passively managed. In any case the whole thread is about equities+bonds not cash and real estate


			
				kellyiom said:
			
		

> By the way, $25bn in domestic equities is still given over to activemanagement- does that sound like they really believe active can't addvalue to you?


Wrong. 24% of $85B is actively managed. That $20B vs $65B passively. I don't know why they are using active mgt but if they are adding significant value why not have 100% actively managed?


			
				kellyiom said:
			
		

> Why then did Mark Anson, former CIO of CalPERS leave them to go to an active management group


No idea who he is or why he left but if the fund I was managing was increasingly replacing my job with a computer then I would be looking elsewhere for employment too.


			
				kellyiom said:
			
		

> interview someone for a job, don't look at their CV; next time you geta builder in to do some work, don;t ask about their track record, whatjobs they did, etc- because that's what you're saying yeah? You KNOWpast performance has no worth....


Your analogy doesn't hold up. If I'm looking for a roulette player I don;t look at his pprevious results and pick the player based on that.


			
				kellyiom said:
			
		

> I love sceptics; ask an awkward question and immediately you startgetting ' on page 200 of that link it says....' and a load of duckingand diving!


And I love snakeoil salesmen. When they are presented with facts and figures they distort, misquote and misrepresent.


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## kellyiom (6 Jul 2006)

diarmuidc said:
			
		

> What ? Please read the pdf you are posting.
> 
> 56% of international equities are PASSIVELY mangaged. It's there in black and white. Again you are misrepresenting the document.
> 
> ...


 
*Think you need to revisit ClubMan's comment about civil comments...I got one so you can too!*


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## Sunny (6 Jul 2006)

I think this post may be going slightly off track!! I am not sure I fully understand the reason for the arguments (as much fun as they are). As far as I can see Kellyiom is just saying that fund managers can sometimes add value to the fund that they are managing and it is possible to pick the good from the bad. He is not slating all passively managed funds. He is just stating that it is not a case of one being right and the other being wrong. What is so controversial about that???


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## diarmuidc (6 Jul 2006)

Sunny said:
			
		

> I think this post may be going slightly off track!! I am not sure I fully understand the reason for the arguments (as much fun as they are). As far as I can see Kellyiom is just saying that fund managers can sometimes add value to the fund that they are managing and it is possible to pick the good from the bad. He is not slating all passively managed funds. He is just stating that it is not a case of one being right and the other being wrong. What is so controversial about that???


You are right. I think I'm heading off track. The reason don't like active is that the costs in lots of funds are high and sometimes quite well hidden. This is especially true of funds which are aimed at small, less informed investors. You only have to look at some of the SSIA equities funds. I think it was Irish Permanents offerring in which if you had contributed the max amount you would have paid 1800Euro in fees !! That's absolutely disgraceful.


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## diarmuidc (6 Jul 2006)

kellyiom said:
			
		

> *Think you need to revisit ClubMan's comment about civil comments...I got one so you can too!*





OK I take that final comment back. The rest stands though


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## kellyiom (6 Jul 2006)

heh, cheers man! time will tell eh...the cream always rises to the top as they say in dairy country...        ;-)


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## Sunny (6 Jul 2006)

diarmuidc said:
			
		

> I think it was Irish Permanents offerring in which if you had contributed the max amount you would have paid 1800Euro in fees !! That's absolutely disgraceful.


 
Fair point but then again we do live in Rip Off Ireland!


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## kellyiom (6 Jul 2006)

Sunny said:
			
		

> Fair point but then again we do live in Rip Off Ireland!


 
like that one; seems like the man in the street gets stung everywhere by fund managers. That's one reason why they have such poor reputations for underperformance and wasting money, cos it is actually true.


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## kellyiom (6 Jul 2006)

diarmuidc said:
			
		

> OK I take that final comment back. The rest stands though


 
even the bit about 'you can't passively manage bonds or property'?


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## diarmuidc (6 Jul 2006)

kellyiom said:
			
		

> even the bit about 'you can't passively manage bonds or property'?



?? Don;t get me going again. 
My quote was "income and real estate cannot be passively managed." no mention of bonds.


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## kellyiom (6 Jul 2006)

sorry thought you meant _fixed_ income which normally means bonds. In which case you must mean cash or near-cash. In which case, yes you can and yes, it's done all the time. Like you can with real estate/property.


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## tyoung (6 Jul 2006)

Can we all agree that the worst type of fund is the closet index fund? That is an actively managed fund that sticks very closely to it's index in composition. Because of it's higher fee structure returns will consistently be behind the index. I think most of the actively managed funds in the Irish market are closet indexers. There is a rationale to this approach for the average fund manager. You are more likely to lose your job if you have  a really bad year or two  ( more likely with true active management ) than if you just consistently lag the index.  The best example of this is the chap who followed Peter Lynch at Magellan (Fidelity). He made a big bet on bonds just before the stockmarket took off in 1995 and lost his job when fund had a terrible year or two. The fact that he subsequently became a very successful hedge fund manager doesn't change the lesson for the average fund manager. Stick close to the index!
 Antony Bolton was mentioned earlier in the thread. He was interviewed in the FT recently. One of the points made was that his success (whether skill or luck) had attracted large amounts of cash which would make future success much harder. This has been a consistent problem for successful  managers including Buffet.
 I think the indexing debate is over. Most studies show most of the return differential is due to asset allocation. e.g. small cap fund managers outperform when small caps do well but will underperform when large caps lead. Perhaps a manager can bring value to certain segments of the market like small caps or emerging markets where indexing is more expensive and there may be more inefficiencies in the market. Yey even in these areas when compared with the correct index managers still fare poorly.
 Most of your money should be passively managed. 
 The debate should be about appropriate asset allocation.
 Regards


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## kellyiom (7 Jul 2006)

I certainly couldn’t argue with that. Weak active managers have been responsible for some of the worst breaches of professional ethics I’ve ever seen in any field. I do feel though that while passive investing has its place, it’s now become a kind of rigid orthodoxy, one which has replaced the old orthodoxy of ‘active is best’. It’s been mentioned elsewhere in this thread that nobody here’s claimed that tracking is a panacea yet judging from some of the virulent comments sparked when you even begin to question the ‘passive is best’ ethos seems to show it’s a fairly deeply-ingrained belief system rather than a cool analytical approach. 

I don’t think it’s sufficient either to say that in Ireland we’re stuck with the usual suspects and I don’t deny, lots of UK & Ireland fund managers do their clients a disservice as we’re all part of the eurozone and better value can be found without resorting to rule-bending.

My main contention is that tracking indices, as it has been discussed here is an illusion. Nothing more. This was my issue with diarmuidc’s comments about no manager can beat the index and nobody can ever identify in advance who they would be anyway so track. 

My point is you’re merely swapping one form of manager selection for another but rebranding it into another category to give yourself some sort of psychological security. 

You’re not trying to select which manager will outperform in the years ahead but you are *implicitly *selecting which managers of a company will outperform in the years ahead. Now this is even more irrational if you consider that we might all profess to knowing a bit about investing but what industry-specific knowledge do we have that can help us compare one CEO of Allied Irish say to another, say Anglo Irish? 

But that’s what tracking leads you into; a blind faith leap into weightings that are decided by others. 

The risks of tracking are enormous but we just don’t know it and we don’t think about it in just the same way as active investors got stuffed due to safety in numbers and herd mentality.

The one common thing about Peter Lynch, Anthony Bolton is that they are effectively employees and have no real control over the inflows due to the pressures of their asset-gatherers. Owner-managers do not have this conflict.

Look at the ISEQ; top weight is Allied Irish at 16.5%, then CRH 14.8%, Bk Ireland, 13.6%, Anglo 8.6%, Ryanair 6%, Elan 5.5%, Ire Life&P 5%. That’s nearly seventy per cent of capital allocated to just seven companies. The majority of the index’s returns will be decided by just 7 CEOs. And people invest like that without any knowledge of how good those CEOs are at managing their respective businesses, they’ve just resigned themselves to this false belief that you have no possible way of identifying managers who can add value or even worse, that no manager can ever consistently outperform.

It becomes more interesting when you look at who actually holds those companies; BoI owns 6% of Allied, Fidelity own 10%, JP Morgan 2.7%, Capital Mgt 1.3%. With CRH, BoI owns 8%, Capital 8%, UBS 5%, Fidelity another couple. For BoI itself, 7% is BoI, 3% Harris, Capital 1%. Ryanair’s biggest shareholder is Fidelity at 14%, Capital again at 7%, Wellington 7% and so on.

The common thread here is that active investors actually own the companies in which you invest in passively so you’re not escaping the vagaries of manager out- or under-performance, you’re just masking this issue by passively investing. The weights are decided automatically and effectively decided by active investors! I think this disproves the argument in the first posted link to Chapter 6 which argues against active management namely:

“If Irish Life decides to buy Smurfit who can they buy them from except another fund manager ? So New Ireland must have decided to sell Smurfit. The net effect of all this is that the average fund manager can only expect average performance” 

The same truly applies then to this effect on passive funds as the share price will be moved by these manager-to-manager sales, so tracking can’t really solve this problem. 

I am as it happens very positive about passive investments in general and very negative about a great many active managers however I do know and think I’ve proved that many institutions do in fact select and retain active managers who consistently outperform. Just that everything has its place and all investments carry caveat emptor. Don’t take any risk you’re not being rewarded for and all that. But I do fear that passive is going to become the new dogma for the 21st century that will end in tears for a lot of people just like blind faith in active did in the 20th. 

And just a final thought on asset allocation; academics dispute the amount of returns sourced from this but it must be significant. However, how do we reach that; actively, perhaps?


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