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Weekend reading: Look for low expense ratios not star power when investing in funds

Weekend reading: Look for low expense ratios not star power when investing in funds post image

What caught my eye this week.

Every few days a comment is left by a new visitor to this website – or I’ll get an email via the contact form – telling us we’re mistaken to champion passive funds as the best choice for most investors.

The reason given is invariably the past performance of manager X or of fund Y. (We’re also invariably informed the commentator has been investing in it for Z years and has done very well, thank you very much.)

Depending on how eloquent the comment is, I may publish it . Sometimes I’ll reply to it, and explain the shortcomings. Often I delete the glib ones.

Now before someone screams “censorship!” imagine how you’d feel replying to the same erroneous line of reasoning for ten years, from people who don’t know half as much as they think they do but are twice as confident about it as you are – and also remember that publishing their comment unchallenged could mean another reader sees it and embarks on a money-wasting strategy, despite the best intentions of your own website.

See? Delete!

It’s just not worth looking for winners

The evidence shows most active funds underperform. Anecdotal asides that this or that fund has done better from a fly-by-night commentator simply highlight the exceptions.

Of course, some active funds do outperform. Some will be lucky, but as an active stock picker myself, I happen to believe that genuine investing skill exists, too. It’s just that very few funds demonstrate it – making it very unlikely you’ll be invested in one that beats the market, let alone the half a dozen you’ll need for a well-diversified portfolio – and that active funds cost more – meaning that searching for the needles in the haystack will reduce your returns.

Low returns in turn mean you’ll have less money to spend when you retire. Which means you’ll be able to buy fewer things you need, or that your money will run out sooner. The decision to try to beat the market against all odds has big consequences.

Unless you’re an investing nut, why bother? Go passive.

Stars in their eyes

The allure of buying better funds persists though, and it’s not hard to see why.

Mostly in life we hire experts and pay more for the better ones. Investing is weird in that doing the complete opposite is a better decision. But people understandably struggle with the concept. It feels wrong. They look for other approaches, but they’d do better to spend more time getting their head around the merits of cheap index funds.

This week for example the Wall Street Journal made a big splash in the financial gossip-o-sphere pointing to the allegedly poor predictive value of Morningstar’s five-star rating system.

Unfortunately the article is behind a paywall, but the introduction sums up the accusation:

Investors everywhere think a 5-star rating from Morningstar means a mutual fund will be a top performer – it doesn’t.

For its part Morningstar disagrees with the Wall Street Journal‘s claim. The company wrote a detailed rebuttal, concluding that:

The Journal’s story notwithstanding, the star rating has been a useful starting point for research that tilts the odds of success in investors’ favor.

The forward-looking Analyst Rating, while newer, has also exhibited predictive power.

Used together, or separately, we think these ratings can improve outcomes and help investors achieve their goals, which is entirely in keeping with our mission as a firm.

I don’t know whether Morningstar’s rating system on average directs investors to the better-performing funds of the future. (Anyone can point to the winners with hindsight.) We’ve noted before that rating systems and best buy lists are pretty useless for passive investors anyway. And while I am an active investor, I buy companies, not open-ended active funds, for myriad reasons.

However I’m inclined to agree with Barry Ritholz who writes over at Bloomberg that:

It should come as no surprise that misunderstanding what fund ratings mean is a very typical error made by, well, just about everyone.

It isn’t a forecast of future returns, nor could it be. If it could successfully do that, Morningstar would have long ago set up a hedge fund to profit from its newly discovered abilities to identify winning investments.

As Ritholz also points out, Morningstar itself has regularly pointed to low expense ratios as “the strongest predictor of performance.”

And in case you haven’t been paying attention, it is passive funds that have the lowest expense ratios. So this finding is code for ‘passive funds beat active funds.’ Again.

You’ll find a list of the cheapest passive funds for UK investors on this very website.

From Monevator

Patient investing requires a little faith – Monevator

Monevator readers discuss fee changes at Interactive Investor / TD Direct – Monevator

From the archive-ator: 10 reasons why houses are a better investment than shares – Monevator


Note: 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.1

Average credit card rates now 50% higher than before the financial crisis – Telegraph

Workplace pension charges to go online in transparency push [Search result]FT

The top 10 UK tax complexities [Search result]FT

Britain is ready for an interest rate rise, says Lloyds boss – Guardian

Jack Bogle: Vanguard might be about as big and as cheap as it can get – Morningstar

Fees on the world’s cheapest ETF portfolio are down to 0.05% – Abnormal Returns

Products and services

What you need to think about when writing a will – ThisIsMoney

3-year Poppy Bond ISA pays 2% – and 0.15% to Royal British Legion – ThisIsMoney

New Amazon service will enable couriers to open customers’ front doors – BBC

Interactive Investor and TD Direct fee changes: how much will you pay? – Telegraph

Help to buy has mostly helped housebuilders – Guardian [As – ahem – I predicted!]

I lost £109k in Santander smishing scam – and the bank did refund‘: Three key steps to stop you falling victim to fraud at the bank – ThisIsMoney

Comment and opinion

What the charts don’t tell you about stock market crashes – A Wealth of Common Sense

Investing in unicorns – Fire V London

Unilever has ‘expensive defensive’ written all over it – UK Value Investor

Value investors: There’s always something you don’t love [Podcast]Meb Faber

It takes no talent to keep predicting a stock market crash – The Reformed Broker

Passive investors should never laugh at active – The Macro Tourist

Have active managers given active management a bad name? – Morningstar

Get rich with conspicuous consumption – Mr Money Mustache

The fund for emergencies and piss-poor financial planning – 3652 Days

The three great misconceptions about retirement saving – Can I Retire Yet?

Cryptocurrency and blockchain

Bitcoin, blockchain, and cryptocurrency [Excellent introductory podcast]Motley Fool

Bitcoin’s bewildering race to $100 billion – Bloomberg

The Bitcoin boom: Asset, currency, commodity or collectible? – Musings on Markets

The flood of cryptocurrency ICOs is an echo of the dotcom boom – The Value Perspective

Off our beat

Nerds and nurses are taking over the US economy – The Atlantic

How I spent three years becoming a minimalist and why you should too – Medium

Does getting super-rich mean getting a taste bypass? – Simple Living in Somerset

And finally…

“Go ahead, take a look at reality. You’re floating in empty space in a universe that goes on forever. If you have to be here, at least be happy and enjoy the experience. You’re going to die anyway. Things are going to happen anyway. Why shouldn’t you be happy? You gain nothing by being bothered by life’s events. It doesn’t change the world; you just suffer. There’s always going to be something that can bother you, if you let it.”
– Michael A. Singer, The Untethered Soul

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{ 44 comments… add one }
  • 1 Oscar Cunningham October 27, 2017, 8:19 pm

    I hate to be another repetitive commenter, but I wish people would stop saying “most active funds underperform” like it’s a bad thing. Imagine if most active funds outperformed! Then necessarily the ones that didn’t would have to fail catastrophically to compensate.

    Of course index funds would be better in both circumstances. But active funds would be even worse if their skew was pointing in the other direction.

    (The actual bad thing is that the *mean* of the active funds underperforms the market (at least after fees).)

  • 2 The Investor October 28, 2017, 12:40 am

    @Oscar — I understand your point, but I’d suggest you haven’t tried writing innumerable times about this in a way that the average person can read, understand, and think about coming back and reading again. If anything this site is too complicated and caveat strewn for 95% of Joe Public already! 🙂

  • 3 dearieme October 28, 2017, 1:06 am

    Years ago I talked to an old friend who had been an investment manager about how he’d run the investments for a family trust. He said he diversified – he spread the money across eight shares! He thought Keynes was right – if you are going to use shares don’t buy too many, or you won’t be able to keep on top of company news.

    It had gone very well, he said; one company was virtually a write-off but the others had more than compensated. I asked him for the secret. Easy, he said; know what you are doing and do it in a rising stock market.

  • 4 Chris B October 28, 2017, 9:51 am

    I agree about this for equity funds. But I’m less convinced for bond funds. If the BoE raises rates next week, the affect on bonds is entirely predicatable. I would have thought just buying a bond fund that re-rates downwards is not a great idea. At least a bond manager should have been able to foresee and mitigate the affect of a rate hike (not entirely, but just so that the damage is less than in a simple tracker)? Views appreciated.

  • 5 Mathmo October 28, 2017, 11:12 am

    Finally finding time on a Saturday morning to read WR in good time!

    On your star ratings, I’ve just been catching up with my Matt Levine (Bloomberg Money Stuff Column) this week and he is fairly good and hilarious on the Morningstar Five Star issue. He expressed surprise that the star rating held any predictive power in his daily newletter (past performance and all that) and Morningstar tweeted gleefully “Thanks, @matt_levine! “The takeaway from [@WSJ article] is that Morningstar is better at picking mutual funds than I would have expected.”

    Matt’s dry response (“I mean in the interests of accuracy I should note that I also said that I expected you to have zero ability to pick mutual funds.”) was backed up by further analysis yesterday that nearly all of the predictive power of past *net* performance can be done looking at fee levels (past fee levels *are* a predictor of future fee levels) and nearly none to investment performance (not a predictor of future performance). Who knew? Well all of us, I suppose.

  • 6 The Investor October 28, 2017, 11:14 am

    @Chris B — The long answer is very long (a textbook!)

    The short answer is that the affect of a rate rise is NOT entirely predictable. First-level thinking that says ‘rates have gone up so bond fund will go down’ will get a person nowhere in active investing. You need to be thinking second or third level (and be lucky!) and for years on end to beat the market as an active investor.

    To give just a couple of counter examples, if rates rise but the BOE attaches commentary that’s more bearish than expected about the prospect of further rises, UK bonds and bond funds could easily rally. If the rate rise spooks the stock market or drives the pound higher and there’s a mini equity crash, again bonds could rally. Perhaps most obviously of all, since the BOE has been hinting at a rate rise for months, it could all be baked into the price by now and the actual rise be a non-event. These are just three of many dozens of possible scenarios.

    Equally, rates could certainly rise and bond funds could fall — it’s totally possible. But in active investing (and I speak as one) you have to get these calls right again and again — so that you’re mostly right more than you’re wrong, and with the right-sized positions. Not once or twice to talk about at dinner parties. 🙂

    Secondly, there’s the risk/reward of predicting and positioning for a rate rise, as an active bond fund manager. Pundits and commentators to this blog have been saying rates will rise and bonds crash for nearly a decade. Even I threw the towel in — after years of warning readers not to be so sure — and asked if a bond crash might might finally be upon us back in June 2015.

    Luckily, humility won the day and I concluded it looked that way but I wasn’t sure, and that pure passive investors should probably do nothing to change their strategy, or alternatively only tweak it.

    As things turned out yields fell even further (i.e. Bond prices rose and there was no crash). The US 10-year yield has only this month finally gotten back to where it was that summer of 2015 — having nearly halved along the way! The UK 10-year gilt yield is still below where it was then, even after months of talk about an imminent Bank Rate rise.

    Also — the US Federal Reserve raised rates for the first time in December 2015 and a second time in December 2016. Did bond funds fall as was “entirely predictable”? 🙂

    No, yields rose (i.e. bond prices fell!) after the first rate rise. They then rallied with the Trump election, before sliding again after the second rate rise in December 2016.

    See: https://www.bloomberg.com/quote/USGG10YR:IND

    But let’s leave aside the fact that bonds did the opposite of what they would supposedly obviously do. At some point I am sure rates will rise and yields will indeed rise too (i.e. bond prices and bond funds will fall for a while).

    The point is an active bond fund manager has to get these bets right with the right amount of money at the right times to outperform. If a bond manager had decided it was ‘obvious’ yields would rise after those rate cuts I mentioned above, positioned accordingly, and were wrong, then they were now down say 20% over a few months versus the benchmark. They now have to make that back by being right later, and more again to start to outperform. This stuff is hard. 🙂

    Active bond managers are about as expensive as active fund managers, and in corporate bond investing at least they take as much research oomph behind them too. Yet expected bond returns are lower than equities, and right now they are very low. This means the higher fees for active bond management eat up even more of your return.

    Oh, and none of this is to even get into the mathematics of reinvestment — rising yields are bad for bond funds in the short term, but in the long-term they can boost returns (due to reinvesting higher yields) which means someone who only looks at their portfolio every five years say might not even notice there’d been much of a correction unless it was truly catastrophic.

    So there we have it — bond price moves are not entirely predictable, the consensus about the direction of even central bank rates has been wrong for a decade, passive investors reinvesting their bond income might even welcome rate rises over the medium to long term, and in the meantime with active bond funds yielding maybe 3-4%, TERs of say 1+% are monstrously expensive.

    I don’t see going active with bonds is an obvious decision. 🙂

    Incidentally I’ve noticed that for some reason, even people who accept the logic of passive investing in shares seem to think bonds are no-brainers. They are not! The bond market is an even bigger, deeper, harder, and even more competitive market. Perhaps only currencies are bigger/harder (bordering on random in my view over anything other than the multi-decade view, and perhaps even then.)

    Also, to the point in my article above, it’s taken me about 20 minutes to write and double check this reply. I have written something similar about bonds at least 50-100 times over the past 10 years. This is not your fault at all — I fully understand you’re a commendably curious investor looking for views, and you are welcome to take or leave mine as you see fit — but you see how it all gets a bit tiring. 🙂

  • 7 The Investor October 28, 2017, 11:14 am

    @dearieme — I’d indulge that anecdote at a dinner party but it doesn’t tell us much that’s useful. All equity fund managers these days are super intelligent and know what they are doing. They are mostly all well incentivized to succeed. They have all read about Buffett and Keynes and know about the risk/reward of concentration. We have been in a rising stock market since March 2009.

    Yet they have mostly failed to beat the market.

    Also, your friend’s experience is from our perspective indistinguishable from luck, anyway. You need to re-run these things hundreds of times (or look at hundreds of different such investors).

  • 8 Chris B October 28, 2017, 12:13 pm

    The long reply is most appreciated. My reference to bonds being ‘entirely predictable’ was my error.
    But for me to conclude that the benefits of a cheap tracker are identical for bond funds and equity funds alike, I’d have to conclude that bonds were as unpredictable as equities. That just feels wrong to me.
    So, if I said that bonds are less unpredictable (ie more predictable) than equities, therefore it follows that a cheap bond tracker is of less benefit than a cheap equity tracker – would you agree with that?

  • 9 arj October 28, 2017, 12:50 pm

    I am investing for draw down to start in 2020 and intend to live off the income generated and preserve the capital (unless annuity rates improve substantially). The other 50% of my pension income will come from a Defined Benefit pension and the State Pension. I agree when investing to grow your pension pot an index based portfolio is hard to beat and probably too much effort for most people to challenge with actively managed funds. But in the retirement phase of your pension I cannot see any other option but to use actively managed funds to generate a draw down income of 4%.

  • 10 hosimpson October 28, 2017, 1:11 pm

    I enjoyed Tim Denning’s article about becoming a minimalist. I’ve (unsuccessfully) tried it many times.
    To be fair, over the past 3 years or so I paired down a lot of my physical possessions. But Tim’s comments about data hoarding are spot on. If my digital garbage was all printed on paper and stacked in the living room, the family would have to stage an intervention. And I don’t even want to think about my 21,215 songs (57.7 effing days!) of digital music, which includes demos from friends’ non-starter bands, and half of which I haven’t listened to in years. I really should do something about it.

  • 11 FI Warrior October 28, 2017, 1:26 pm

    The more I learn, the more I realise how much more there is to learn. As such, it’s hard to take seriously those people who are so convinced they know everything, especially when almost all the so-called experts didn’t predict the 2008 crash. As just an individual, reflecting on my few years of investing experience, remembering those times when I was so sure there could only be one outcome, only to be shocked that there was a totally new variable you didn’t even know existed, that changed everything, it’s taught me to never preach.

    Diversity is one of the few no-brainers that protect against whatever fate throws at you and whether passive or a stock-picker, having only a handful of shares is certainly not diversifying, it has to be ratcheting up the risk. If you know that and are consciously having a punt, then fine, but don’t delude yourself that you’re diversifying to decrease risk, unless you’re being paid to play around, in which case, sure why not have some fun.

  • 12 The Investor October 28, 2017, 2:53 pm

    @arj — There are certainly other options. 🙂 As much discussed around here, you can sell capital/accumulation funds via variations of the ‘safe withdrawal rate strategies — e.g. see last week’s post on one option).

    That said I agree with you that using income funds and living off the yield is a good option, if you can afford it. (And often find myself debating the merits with those who say it’s illogical etc!) Just remember you’re probably paying for the benefits of this strategy with lower overall returns (due to costs) and possibly under-performance (because it’s an active fund). But personally I think both are of secondary importance in drawdown — again, presuming you can afford it.

  • 13 FI Piper October 28, 2017, 3:50 pm

    Long time lurker, first time poster. Love the site 🙂
    On the low-cost ETFs getting even cheaper – it seems that we don’t have as low price on these at this side of the Atlantic – any ideas why that is? Is it the multitude of country specific tax-reporting requirements that exist in Europe? (Eg Vanguard FTSE All-World UCITS ETF (VWRL) is .25% versus .04% for SPDR S&P World ex-US ETF (GWL) [minus the US component, which we do get for about .05%] )
    We also have less country-specific ETF options – should you wish to target a specific country.

  • 14 Mathmo October 29, 2017, 12:02 am

    It used to be that the news had such a definite theme. The crash was coming. The crash wasn’t coming. Is it just me, or is the news all over the place these days? The crash is still coming – or is it? US equities are still over-valued — or are US companies just performing better than they ever did? Interest rate rises are – yup: you guessed it – just around the corner. News fatigue? I still manage to find the energy to be worried about valuations even if the headlines writers have moved on.

    Enjoyed the proximity of AWOCS allowing us to enjoy the tight metallic taste of living through a crash and warning that too often we fight the last battle instead of learning to be phlegmatic — and then the next one I read is FIRE v London reluctant to pull out of a forty-bagger because he pulled out to early last time. Was every ounce of me screaming to get out at least 75% of his holding simply because I chose the other way last time? Who can tell. And ultimately we are not told whether the proceeds make a meaningful difference to life: the value of wealth is not linear with wealth — and that’s what need to drive the decision more than many other things.

    Oh look. Ermine’s moved. But even he doesn’t quite understand the metropolis’ transport infrastructure…

  • 15 Chris B October 29, 2017, 12:10 am

    @Investor. My question above is ignored. Why?

  • 16 Egremont October 29, 2017, 9:09 am

    @mathmo the post by The Macro Tourist in the links gives a really good feel for where we might be at the moment. I am in the process of moving my pension which involves cashing it in because it is in weird proprietary units. I don’t do market timing but I am thinking I might not hurry at all to reinvest it when it reaches its new home.

  • 17 PC October 29, 2017, 9:44 am

    @hosimpson on digital hoarding – my first reaction was that because the cost of storage keeps dropping, it’s not worth your time sorting through it.

    But then I read the article – he’s accumulated 10TB ..

    I keep anything important, or anything I’ve created on dropbox and I’m still doing it for free because it’s under 5GB ..

    The rest of the digital stuff I’ve accumulated is music or video that I think of as disposable, if I ever run out of space I just delete the oldest stuff. But I haven’t had to do that for years because storage has got cheaper faster than I’ve accumulated data.

  • 18 The Investor October 29, 2017, 10:12 am

    @Chris B — I’m not interested in converting individual readers, and frankly you now sound like a troll looking for a debate over straw men. Perhaps my mistake on the latter but life is short. 🙂 Good luck with your investing.

  • 19 arty October 29, 2017, 10:14 am

    While we’re on the subject of the abilities of bond fund managers, this one might be of interest:

  • 20 Chris B October 29, 2017, 11:21 am

    Thanks to you and others I’m already converted to low cost trackers, and have been for many years. I don’t need to read another article on that. And it seems you’re in no mood to write yet another on it!
    That’s not my question though; I’m wondering whether the benefits are equal across all asset classes, or whether for some the difference is marginal. I think that’s a valid question on a site like this, but I appreciate you’re not interested.

  • 21 The Investor October 29, 2017, 12:02 pm

    @Chris — Fair enough. 🙂 I am sure passively tracking some asset classes has been more advantageous than others. But I think for 99% of average investors the question is academic if not irrelevant. Of course you’re more than entitled to be intellectually curious yourself about this. 🙂 I wouldn’t say that was how your initial question came across though, and that was the one I was replying to though, as I read it. Anyway, as I say good luck, glad you’ve found the site useful! 🙂

  • 22 The Borderer October 29, 2017, 12:56 pm

    Re: Help to buy helping housebuilders. Out of curiosity I had a look at the performance of just some of the more well known builders from the date of your article to date. They are:-
    Barratt Developments +566%
    Redrow +482%
    Persimmon +472%
    Bellway +413%
    FTSE All Share +49%

    Talk about prescient – I think TI is in the wrong game!

  • 23 Grislybear October 29, 2017, 3:26 pm

    @Chris. From my past experience with bond funds the answer to your origional question is no. Just like in equity funds there are managers who have amazing returns in a particular year and those with poor returns. The same old problem occurs which one to choose. In theory a bond fund manager should be able to anticipate whats going to happen to interest rates etc. In the real world it just doesnt happen and the manager of your bond fund dishes you up pretty poor returns while the manager of the fund you didnt pick invested in Bolivian mining bonds and returned 30%.

  • 24 Mathmo October 30, 2017, 12:25 am

    Bond funds are odd — I think the moment you start worrying about active management performance, you’ve lost sight of why you own them. Typically in a balanced portfolio, bonds are there to be a place to store wealth while you wait for equities to get cheap. As a store, then, they need to protect against fx and inflation changes and be negatively correlated with equities.

    That pretty much makes a home currency pure government bond index the doctor’s order. (I struggle slightly with the currency choice here if I am a likely buyer of global equities, but a likely spender of invested £ only — any nsights, anyone?). Corporate bonds have too much correlation and are a sop to the desire to chase yield (the job of your equity tranche). The fees argument is already well made.

    So VGOV if you like ten years. Something shorter for the scardy-cats of the big bad rate rise. (Like me). £ or Gold for the extreme version.

  • 25 zxspectrum48k October 30, 2017, 9:13 am

    @Chris. There is no argument for the ability of active bond managers to outperform active equity because somehow it is more predictable. If only it was that easy. If there is an argument it’s that fixed income has a larger proportion of non-economic agents such as central banks, banks and insurers meeting regulatory requirements, and corporate’s hedging. By construction, active investing is a zero net sum game but if agents are driven by factors other than investment returns, then it can be possible to see active managers outperform at their expense.

    In the late 90s there was little evidence that domestic bond managers were outperforming their indices. Active global bond managers, however, were outperforming by average of 150bp/annum, with an information ratio of 0.5 (compared to S&P managers who had IRs of zero). This was due to convergence trades (Italian BTPs vs. German Bunds) and being underweight duration in JGBs (which given debt dynamics had a large weight in global indices).

    That outperformance disappeared in the 2000s. EMU had passed and as yields fell, the fees of active managers became a larger hurdle rate to overcome. This decade, however, some evidence of out-performance has started to appear again. PIMCO (significant bias alert!) did a piece earlier this year called “Bonds Are Different: Active Versus Passive Management in 12 Points”. It could be that dominance of non-economic agents, such as central banks (QE) and regulations such as Basel III and Solvency II, is large enough to create some consistent active returns.

    Nonetheless, I would still go passive if I was invested in long-only G10-type fixed income. Reducing fees is such an easy win when yields (and more importantly yield volatility) is low. US Treasuries are now in their tightest range since 1965 which is not conducive to generating active returns. The only areas I would go active are places where passive funds tend to struggle to replicate indices intelligently. When I switched from the FTSE to long-duration Gilts in 2011 (i.e. average duration 20y+), I moved from passive to active because the downside bias on the tracking error in most passive funds was poor. EM local market bond funds are also an example where active can beat passive because active can avoid churning components of the index which incur high transaction costs, anticipate index changes (which passive by construction can’t) etc.

  • 26 The Investor October 30, 2017, 9:44 am

    Talk about prescient – I think TI is in the wrong game!

    @The Borderer — Hah, cheers for digging up that data. Remember they’ve been paying big dividends for the past few years, too, which won’t be reflected in share price moves, so even better if you’ve just pulled those numbers from Google Finance or similar.

    As to me and my game, remember as I’ve said many times I personally *am* an active investor (stock picker). 🙂 That said I wish they all went anything like as well as this, and that I *had* stuffed my portfolio *to the brim* with housebuilders for the past five years!

  • 27 Shrivathsa Raghunathan October 30, 2017, 12:06 pm

    Hi TI,

    I think you have hit the nail on the head, when you said that unlike other fields, investing is probably the only field, where doing the opposite of trusting in experts is the right thing to do.

    After a lot of flailing around, i made the switch to passive investing a few years back and the results, at least what I have tracked are stunning.

    Just maintaining market exposure has led to a lot less of volatility and a lot better in terms of returns.

    Most of the time, weeks or sometimes months go, before I look at the portfolio and all I have do is to buy the worst performing market to top up (which is a rule, I made up) exposure.

    I do read CNBC, Bloomberg etc, but mostly for entertainment, because every single expert is invariably wrong.

    I cannot recommend it strongly enough and I am sure you do.

    I do visit the Monevator site once a week to read up on what you have written.

    Keep up the great work

  • 28 Factor October 30, 2017, 12:25 pm

    Off topic but possibly of help – an online message from IWeb this morning asked for confirmation of my full name. Feeling sure that the message was genuine but erring on the side of caution, I phoned to check and yes, it is genuine, and is prompted by “changes in the regulatory requirements”.

  • 29 Bluejeansman October 30, 2017, 4:01 pm

    By reading this and so many other articles along similar lines, it certainly makes sense to go with passive investing than trying to guess-pick the few active active funds that might outperform. To do the latter, I guess you would need some special skill to pick the winning manager who will continue to win for a long long time. But there do exist some superstars (Neil Woodford and Anthony Bolton come to mind), so if you are going to do this, why not go with some superman fund manager with an IQ greater than Einstein 🙂 ?

    I guess the reason why it is extremely difficult for the same active manager to consistently outperform is that the market is extremely efficient, especially in the US and UK. Inefficiencies and mispricing quickly get arbitraged away, since information is almost instantly available. But there is one hedge fund (Renaissance Technologies run my mathematician James Simmons ), a quant fund doing HFT etc, which has consistently provided 35+% annual returns since inception. How do these guys get it right all the time ? But I do realize that that fund is not available to the average joe like me.

    I suppose Berkshire Hathaway would be another pick as it is kind of like a diversified mutual fund in itself run by arguably the greatest capital allocator on the planet. And as a bonus, the stock does not pay any dividends, so no taxes to pay until you sell.

    Lastly my friends back in India keep telling me that no one ever goes for an index fund in India since a few well known active funds (run by Reliance, Franklin Templeton etc) handsomely beat the NIFTY index even after expenses every year. I dont know what to make of this, but does the author have any opinion on active vs passive debate in emerging markets ? It may also be that the market is not very transparent and efficient in such markets so a few powerful folks could be privy to special information. Sounds borderline illegal to me (and I am Indian myself), but I guess this is how it is.

  • 30 Steve October 30, 2017, 7:55 pm

    — “Factor October 30, 2017, 12:25 pm
    Off topic but possibly of help – an online message from IWeb this morning asked for confirmation of my full name. Feeling sure that the message was genuine but erring on the side of caution, I phoned to check and yes, it is genuine, and is prompted by “changes in the regulatory requirements”. — ”

    Yes, I got exactly the same message from Halifax (i.e. iweb). I wasn’t worried since it was just confirmation of what they already know.
    What worries me more is this false sense of security that banks are leading us into, by pretending to be hot on security, while making very few changes in their own behaviour.

    It brings to mind the old joke, after the Crisis, when John gets a call from his bank informing him that they cannot honour his cheque due to insufficient funds in the account. John pauses and asks: “Er…Yours or mine?”

  • 31 Grislybear October 30, 2017, 8:21 pm

    @Mathmo, Good point you make about your bond holding choice of domestic or global currency. My initial thoughts would be to hold the bonds you are likely to spend in sterling and the bonds you are likely to invest in a global unhedged bond fund. This is a suggestion I haven’t come across before, have you done any research if this method has worked in the past and the likely % you would need in unhedged bond funds.

  • 32 Mathmo October 30, 2017, 11:01 pm

    @grisly — sorry no facts to support my opinion, I’m afraid!

    The view that you hold the wealth you’ll use to invest in global equities in sglo and that to spend in vgov is challenged by the idea that you’ll sell the global equities to spend in £ in the end anyway.

    More fundamentally, do you want your wealth pool to be exposed to currency movements? I figure not. If vwrl is getting cheap because the dollar is crashing, I’d like to buy it with vgov. Vmid never looks cheap to my sterling eyes if sterling crashes, but its losses are hedged by vgov holdings. Given the vwrl is correlated with usd. I want my counterweight to be uncorrelated.

    I suppose the test is sglo and vgov correlations with vwrl. No idea where to source that just now…

  • 33 Kraggash October 31, 2017, 10:17 am

    “….unlike other fields, investing is probably the only field, where doing the opposite of trusting in experts is the right thing to do.”

    I think you are trusting the experts who tell you this. (e.g. TI etc)


  • 34 PC October 31, 2017, 2:26 pm

    @Kraggash Good point – choose your expert very carefully, demand evidence and avoid those on commission.

  • 35 Malcolm Beaton October 31, 2017, 9:54 pm

    Hi Grisleybear/Mathmo
    Just my penny’s worth
    I use Vanguards Global Bond Index Fund(VIGBBD) Hedged to GBP for the Bond part of my Portfolio-one Fund only!
    Allows exposure to US Bonds etc as well as UK Gilts
    I think it has a very few Corporate Bonds too
    Simple and cheap!

  • 36 The Borderer November 1, 2017, 2:31 am

    @ Mathmo

    “do you want your wealth pool to be exposed to currency movements”.?

    Actually, Yes! Particularly GBP vs USD or Euro.

  • 37 The Rhino November 1, 2017, 4:41 pm

    On a tangent. If one’s aim were to replicate or improve upon a BTL rental yield after costs but before tax of 3% with a hypothetical 200k portfolio – how would one go about it?

  • 38 Simon November 1, 2017, 6:26 pm

    A ,lot of commentators feel that it is likely that equity indices will now move broadly sideways for a period of years but that within those aggregates there will be sharp differentiation among individual stock gains or losses. You may wish to say that it will all come out in the wash one day for passive investors but in real terms surely that is a good case for actively managed funds.

  • 39 Kraggash November 1, 2017, 6:35 pm

    “… within those aggregates there will be sharp differentiation among individual stock gains or losses” – as always.
    “…surely that is a good case for actively managed funds.” – if they knew which stocks would see gains or losses. Which they dont.

  • 40 Steve November 1, 2017, 7:04 pm

    I have to say I have never knowingly actually come upon a true passive investor – there are many who pretend to such an approach and some who defend it as if we were debating Catholicism versus Protestantism. Yet, when you dig around a bit, you normally find an active element in their approach eg in how much they allocate to bonds versus equities or home bias and so forth. I view the matter without fervour and have a mix of both depending on sector.

  • 41 Hospitaller November 1, 2017, 7:23 pm

    I have spent a lot of time looking at active bond fund managers and have come down to a very short list of those whom I think I can trust to construct portfolios with both some
    yield and some conservatism. These are Fidelity Strategic Bond, Invesco Perpetual Tactical Bond, Twenty Four Dynamic Bond, M&G Strategic Corporate Bond. I hold these alongside some boiler-plate passive funds such as Vanguard GBP-Hedged US Treasuries.

  • 42 Grislybear November 1, 2017, 7:34 pm

    @Mathmo This research by Vanguard should help you to nail down your opinion of whether to hold unhedged global bonds or not https://institutional.vanguard.com/iam/pdf/Currencyhedging_ISGpaper_FINAL.pdf
    @Malcolm Beaton I agree its an excellent fund

  • 43 Grislybear November 1, 2017, 7:49 pm

    @Hospitalier I never had much success with active bond funds and don’t hold any at the moment. However I don’t shun active funds therefore I need to give your selection a good looking at. Interesting choice of GB hedged US treasuries.

  • 44 eagle November 24, 2017, 11:04 am


    Please ask your friends about the Mallya . The times have gone when certain brokers used to have an edge .Now a days , SEBI(indian regulator) fines you heavily if you purchase a set of shares and they immediately rise following the news of merger (insider trading).
    Passive doesn’t means that it will beat all but again in long term you will be better off as it has some defined strategy.If some fund manager is investing heavily in reliance (recent defence deals), adani group then this is a big gamble in long term. The companies /deals which depend heavily on politicians doesn’t last long. Morningstar India is a not a bad tool to look at the performance ( maximum 10 years) . All is explained by the monevator author very well on gimmicks of active investing for example soft close, short term performance,etc.

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