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Weekend reading: Another reminder that most active managers fail

Weekend reading

Good reads from around the Web.

While naughty active investors like me can always find something to excite us (cheap income trusts, anyone?), the passive investing slog can be a repetitive one.

Excellent passive investing basically involves setting up your ‘machine’ and then fueling it with cash. If you’re monitoring it and tweaking it too much, you’re doing it wrong.

That makes blogging about passive investing difficult – many of our brightest and best pupils leave us on graduation. Not good for growing a readership!

But it also presents a challenge for passive investors, who might eventually forget why they choose this road.

That’s one reason why we happily bang out the same old tunes every few weeks about cheap funds and trying not to be be too clever.

It might be repetitive to read, but then so is jogging and eating porridge for breakfast and a host of other things that are good for you.

Vitamin data

Another good pick-me-up is a burst of powerful data.

As passive specialist Rick Ferri said recently:

The long-term data comparing active funds to index funds shows actively managed mutual funds underperform in all asset classes and all investment styles. There is no ambiguity in the results, and there’s nothing new to report here. The data has been saying the same thing for decades.
But, we’re only human.

We forget, and lies are constantly being told that cause us to second-guess our resolve.

It’s a good idea to revisit the data at least once a year just to remind ourselves why we believe what we believe: that we should continue to invest in index funds rather than active management.

Ferri cites two new studies that demonstrate the superiority of passive investor for most people. All good stuff.

However it’s often said that a graph is worth 1,000-words of promotional guff from the active fund management industry, and Ferri shares a beauty:

Percentage of active managers underperforming over 5 years ending 2014

Percentage of active managers underperforming over five years to 2014

Source: Rick Ferri

The data shows clearly that most managers fail to beat the market over a five-year period.

Funny how the advertising doesn’t, eh?

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

*Disclosure: I have owned Tesla shares since $30-odd, so am surely biased.

Product of the week: Even institutional fund managers like Neil Woodford and George Luckraft have been getting into peer-to-peer lending by buying shares in P2P Global, an investment trust that focuses on the sector, reports the FT [Search Result]. There’s a 6-8% target yield and potentially low correlation to other assets on offer, but the sector is still relatively young and there could be hidden risks.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • How to find the cheapest and best tracker funds – ThisIsMoney

Active investing

  • Hedge funds paid the usual fortune for mediocre returns – NYT
  • UK-focused firms soar on Conservative victory – ThisIsMoney
  • It’s bonds that are overvalued, not stocks – Wall Street Journal
  • Two ‘winter portfolios’ do the business – Interactive Investor
  • Lots of trends have reversed recently – Bloomberg

Other stuff worth reading

  • The personal finance implications of the Tory win – ThisIsMoney
  • …the wealthy breath a sigh of relief [Search result]FT
  • A big rate rise would sink buy-to-let in most regions – Telegraph
  • Rejected for a mortgage due to pension contributions – Guardian
  • As cognition slips, financial skills can go – NY Times
  • Three positive principles of performance – Forbes

Book of the week: The chaps behind ‘freakonomics’ – a decade-spanning flotilla of pithy blog posts and various books that explain mysteries like why someone would write a blog every Saturday morning for seven years for a pittance – have a new book out. You don’t need to be an economist to know that the title – When to Rob a Bank – will attract a few readers.

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  1. Note some FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 27 comments… add one }
  • 1 dearieme May 9, 2015, 11:44 am

    I love the way Mr Malik retold the old fisherman chestnut, and attributed it to oriental wisdom.

  • 2 dearieme May 9, 2015, 11:46 am

    When to Rob a Bank? When you’ve become CEO of course.

  • 3 MouseCatcher007 May 9, 2015, 7:15 pm

    As clear as it is, the data for passive vs active seems almost entirely to come from an analysis of US funds. Is there any such for the UK or other markets? There seem to me to be a host of active managers here who consistently beat the FTSE 100 TR for example.

  • 4 The Investor May 9, 2015, 8:18 pm

    @mousecatcher — Yes, more research in US but much the same here. There are certainly funds here that have beaten the market, no disputing that. 🙂 It’s (a) that most don’t and (b) that there’s no known way to definitely select winners in advance.

    Remember the funds you hear/read about, even subliminally, are the ones they want you to read about (that they market etc).

    Also vast numbers are closed down/merged!

    See this: http://monevator.com/passive-investing-uk-evidence/

  • 5 Mr and Mrs Geek May 9, 2015, 8:23 pm

    Agree with MouseCatcher007. It would be nice to have visibility around world equity trackers.

  • 6 Uncertain May 9, 2015, 10:04 pm

    One thing to be cautious of when comparing returns is what your comparator is. The FTSE100 has itself been beaten frequently by the FTAS. If the fund is invested in FTSE 250 companies and smaller companies the FTAS is a more appropriate comparator.
    Likewise many funds take on international shares which have outperformed.

  • 7 Mathmo May 9, 2015, 11:44 pm

    No love for Jonathan Ely this weekend — basically banging the Monevator / Lars drum in the FT?

    “Why my Isa contains just one substantial holding” – FT 9/5/2015.
    [Can’t post a link]

    Shame he’s leaving the Money section: he’s firmly on the Monevator train.

  • 8 The Investor May 10, 2015, 7:59 am

    @Mathmo — Good spot, I didn’t see it and would have included it if I had.

    For other readers, it’s the top search result here: https://goo.gl/7QlbV0

    It’s a shame Jonathan Ely couldn’t have given us a link at some point in his career. I’m pretty sure we’ve influenced the FT’s passive coverage over the years, though who knows for sure. And I’ve send thousands of readers their way.

    This is why I think Simon Lambert at ThisIsMoney is such a class act. He’s not afraid to put a few links into a non-mainstream site like ours, when he sees value for his readers.

  • 9 The Accumulator May 10, 2015, 8:46 am

    The Tesla petrol car article is funny and contrarian, and the best buds’ Texan terrace very sweet.

  • 10 Gruby May 10, 2015, 9:23 am

    The link for “Two ‘winter portfolios’ do the business” is wrong, it’s the same as the previous entry

  • 11 The Investor May 10, 2015, 10:50 am

    @Gruby — Darn, thanks for the pointer. Fixed now! 🙂

  • 12 magneto May 10, 2015, 5:01 pm

    See a number of the links this week are picking up on what may be the start of the long awaited slow bursting of the ‘bond bubble’.
    IGLT price (duration 9.62 years), rose 10% in 2014, but since start of February this year IGLT price has lost about 7%.
    After the 30 year plus bond bull market it may be too early to call the start of a definite bond bear market, but gilt yields have been signalling dangerous territory for a long time.
    For this investor, apart from some inflation protected (INXG), fixed income is mostly cash, as the yields on gilts do not seem to warrant taking the volatilty risk.
    Could well be wrong!
    Watching with interest.

  • 13 The Investor May 10, 2015, 6:23 pm

    @magneto — Yes, likely reflects my nefarious ‘active’ investor view in terms of my editorial choice! 😉 I haven’t owned any government bonds for 4-5 years. (Some years I wish I had, mind… 😉 ) I think cash is less risky at the moment.

    But not holding bonds pales beside my active risks I take (in conventional view — I think my shares/strategy is relatively less risky).

    If I was a passive investor I’d maybe go from say 60/40 to 80/20 at the most, or more likely stay 60/40 but hold 50% of the 40% fixed income in cash.

    There’s no reason for a passive investor to think they’re any better at calling the bond market than the stock market, and the bonds are in there for risk management reasons.

    (There’s no reason for most active investors to think any different either, given most lamentable track records, but by definition ‘we’ do. 🙂 )

  • 14 Mr and Mrs Geek May 10, 2015, 8:24 pm

    I was doing some research and I foud the Credit Suisse Global Investment Returns Yearbook 2015 (google for it). On the report (page 59) they have created a globally diversified tracker and over a 115years period they concluded that the average real return of equities was 5.2%. Very interesting…real good read.

  • 15 The Investor May 10, 2015, 8:38 pm

    @Mr and Mrs — Yes, we’ve written about that excellent report and data before 🙂


  • 16 @algernond May 10, 2015, 9:50 pm

    I am presuming the 0-5 year govt. or investment grade bonds shouldn’t crash more than ~10%. I know that Mathmo recommended the ERNS ultra short bond ETF last week, but it just seems so painful to have to accept such appalling returns in my SIPP from such a fund…

  • 17 Mathmo May 10, 2015, 11:09 pm

    Shortening the term of the FI portion of a portfolio is a classic reaction to the threat of a yield rise.

    For the Passive Zealots among us, is that tantamount to an active position? Well I don’t really know what the passive position is — bond funds tend to be duration, risk, currency and geography based, not truly global. I don’t know what the world’s debt holding’s effective duration is: I’m curious to know.

    But I’m not a Zealot — I’m just someone who thinks I might be the sucker at the table in the bond market. I dumped all my 10yr on Friday and am holding a curious no-yielding FI instrument called “cash” until I squirrel it away in some short-term products (zopa, santander, erns etc).

    @algernond — I feel your pain. I rationalise it this way: don’t focus on the terrible yield. It’s tempting to look at that and declare that it has no part in your portfolio. This ignores the risk/volatility associated with the yield, and the rebalancing benefit that you get from having a non-correlated asset in your portfolio (if you don’t value either of these things, then you hold 100% equities).

    Equities are the engine room of your portfolio. ERNS is a place to store wealth while you wait for equities to get cheap. In that sense, its qualities of low volatility and capital preservation are what stand out. Its true “yield” is the size of the next big equity correction — ie the bargain you’ll get when you spend a portion of it on cheap equities in the future rather than pricey equities now.

  • 18 The Investor May 11, 2015, 9:35 am

    Very well put Mathmo.

    It’s not that there’s no benefit. It’s that it’s too easy not to see it. (Not 100 miles from low-yielding cash currently, too).

    It’s like a travel insurance policy. Every year I buy one for the next year, and every year I dig out the old one and check what it cost me. That’s — thankfully — the only time I’ve needed to look at it all year.

    That apparent lack of utility doesn’t mean it didn’t have value, or a job to do.

  • 19 @algernond May 11, 2015, 2:51 pm

    Was kind of rhetorical my previous post above, as it was quite predictable what the response from Mathmo & TI would be. It’s good to have regular re-affirmation of such things though. Thanks!

    So it’s not too difficult to decide what to do with next bond allocation in my SIPP. I am wondering though if I need to come out of the couple of Vangaurd Lifestrategy funds I have, as the bond allocation in those certainly isn’t pushed towards short & ultra-short duration.. (I’ve been using VLS20% as a simple way to have diverse bond allocation).

  • 20 david May 11, 2015, 6:03 pm

    From the Oddball stocks link: “I’ve come to the conclusion that if an investor were to limit their portfolio to only companies trading for more than $1,000, or even $500 a share they would crush the market.”

    Strangely he doesn’t back-test his idea, he just says it. Another “market-beating” idea with no proof behind it.

  • 21 The Investor May 11, 2015, 6:29 pm

    @david — A point worth making on his site perhaps? He’s quite responsive to reader comments in my observation over the years. If he does answer/back-test please do let us know!

    All that said I’m quite wary of backtesting, and actually prefer an elegant theory. I know how that sounds, don’t worry. But back testing is a minefield.

    Say $1000 doesn’t work after all and nor does $500, but stocks priced between $635 and $852 do. Is that reasonable? No doubt someone would start theorizing how it’s “in the sweet spot” before 4-figures looms or some similar nonsense.

    In some ways a logical theory is preferable to a jerry-rigged back test. Just as long as it’s only your own money at risk and you’re not claiming to have evidence it’s right.

    All heretical I know. This is the active investor side of me I generally keep a lid on here talking, off the cuff, after a long day. 😉

  • 22 David May 11, 2015, 8:46 pm

    I am a little scared after reading comments that bonds may be entering hard times I recently opened VLS 40& 60% s&s isa do I need to be wary I am a 1st time investor with 10-15yrs time limit thanks for any advice

  • 23 M from There's Value May 11, 2015, 10:23 pm

    I know it’s got pretty much nothing to do with investing, but I love the story about the friends who built some tiny houses all next to each other. And they are actually tiny, unlike what many Americans think are small houses – these ones really are. However, and that’s a BIG, fancy ‘but’, the friends also build a communal building, like a community hall in the middle of their little enclave, so they do actually kind of have more space than you think at first. And I think the whole idea is SO cool.

    Perhaps it IS about investing after all, and epecially about value investing – these people value their friends and family so dearly, that they invested in this new mini-community together. That is awesome.

  • 24 dearieme May 11, 2015, 10:28 pm

    Sounds rather like university: student accommodation + Common Room = Hall of Residence or College.

  • 25 M from There's Value May 11, 2015, 10:36 pm

    @dearieme – yeah I guess it does sound a bit like uni, although if you see these houses, they’re a lot cooler (and cleaner) than any uni accommodation I’ve ever seen…

  • 26 The Investor May 12, 2015, 10:52 am

    Also, many people I know had an awful lot of fun at university, and then have gradually become more isolated ever since, which has its pros of course but also its cons.

    I loved the story and included it despite the less than obvious investing theme for that reason. The houses are beautiful too. 🙂

  • 27 Mathmo May 12, 2015, 2:57 pm

    @David – don’t worry: you have an optimal passive strategy. On average doing something else won’t win. Relax and enjoy the ride.

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