Active VS Passive

Yielding? As in how are they performing to date?

Since that post I have dumped a number of the active funds and added 1 new active Aus equities fund. I added the new active fund in December only for the reason that my Hyperion Aus equities holding was getting to large for my liking and I wanted to avoid single active manager concentration risk. But in the last month I have decided to pause all future contributions into active funds and move further towards majority holding in index funds. The new active fund I went into is the Bennelong Aus equities fund.

So lets have a look at how the holdings I have are performing compared to the index option. I will use only the Aus and international index for comparison as those are the two I hold and only two I have interest in holding. I will compare the two infrastructure funds to the comparable infrastructure index even though I don't hold that.

Lets start with Aus as of 31st December 2020.
ASX200 1M 1.21% 3M 13.7% 6M 13.2% 1Y 1.4% 3Y 6.73% 5Y 8.73% and 10Y 7.84%

Hyperion Aus Growth 1M 2.95% 3M 17.23% 6M 26.72% 1Y 33.3% 3Y 20.4% 5Y 14% and 10Y 13.31%

Bennelong ex 20 1M 1.77% 3M 14.4% 6M 26.09% 1Y 24.14% 3Y 13.1% 5Y 12.46% and 10Y 12.88%

Bennelong Aus Equities 1M 2.04% 3M 13.16% 6M 26.21% 1Y 23.17% 3Y 16.67% 5Y 14.14% and 10Y 12.45%

Looks like overall the Aus actives have held up well during 2020.

International index: 1M -.05% 3M 5.68% 6M 9.68% 1Y 5.73% 3Y 11.16% 5Y 10.94% and 10Y 13.2%

IFP Global: 1M .59% 3M 3.73% 6M 4.83% 1Y 2.59% 3Y 10.35% 5Y 9.5% and 10Y 14.66%

Walter Scott Global 1M .53% 3M 6.07% 6M 10.43% 1Y 8.38% 3Y 14.84% 5Y 12.98% and 10Y 13.72%

Magellan Global 1M -3.14% 3M -3.95% 6M -.045% 1Y .02% 3Y 11.93 5Y 10.79% and 10Y 15.56%

International has been a mixed bag. Walter scott had a good 2020 while Magellan struggled.

And in infrastructure working of the Vanguard website Global infrastructure index fund.
1Y -9.58% 3Y 7.56% 5Y 8.39% and 10Y 10.21%

Lazard Global Infrastructure: 1Y -8.39% 3Y 2.87% 5Y 8.43% and 10Y 12.94%

Magellan Global Infrastructure: 1Y -11.68% 3Y 3.33% 5Y 6.69% and 10Y 10.94%

Overall it looks like the active infrastructure funds are struggling against the index. It doesn't make sense to sell the down the infrastructure funds after a tough run, but once they have recovered some what I might consider dropping them all together. For the sake of simplicity I really don't see the need for them.

All in all it looks like a mixed result. Aus actives are having their time in the sun and International not so much. Having realized now that at any one time one or another some will have good years while others bad years, eventually the odds are against any particular one manager to have continued outperformance. The good managers will have years in which they will fall below the mark and other years in which they will lift above the average. But I believe that at any one point all will come back to the middle at best before continuing back on the rollercoaster of above average and below average results.

This is why I am now a firm believer of just sitting in the middle and continue to ride in the middle via index investing. That way I avoid the motion sickness of going up above and down below. I will keep a small allocation in active. I don't intend on selling down to rebalance but will allocate all future to index until I reach something like 75% index and 25% active.

 

I judge my active dabbles against the equivalent Vanguard Diversified fund rather than individual indexes. In my case it is VDGR.

By far the biggest chunk is in VDHG, up 15% since I reallocated 80% of my loot into it.

Over the same time period my Hyperion Oz Growth is up 38%, my Hyperion Global Growth is also up 38%, my Perpetual Global Innovation is up 24%. MFF continues to perform abysmally and is down 6%.

In fixed interest both MIM04 and PMF03 are performing well above the fixed baseline (VAF).

So all good so far.

I'm not planning to allocate any more to the active equity funds, although I may transfer some of the large wad of cash I have sitting on the sidelines into fixed interest that returns something.

So far the juice from the active plays has given returns of 15% versus 8% from VDGR with the same asset allocation (according to Sharesight)

I suspect Sharesight is downplaying VDGR results, but so far I'm satisfied.

Most important, these little active dabble stop me fiddling with the core.

 

Another 6 months has gone by and the battle between active and index (Using the term passive for an index fund no longer makes sense to me. But that's for another discussion.) continues. Not much of a battle though, as the more time goes the more evident it is that long term index investing is the simplest and better performing strategy.

At the start of the covid downturn a number of the active players did well and outperformed. But now that the dust has settled and we have had the downturn followed by the upturn the results are much clearer. Strangely enough it looks like the Aus active managers have done better over all during this period than the international managers. This is in contrast to the prior few years in which the international mangers regularly outperformed compared to the Aus funds.

This all comes back to exactly what John Bogle preaches in his books. Revision to the mean. While one active manager may outperform over certain periods they are likely to then go on and underperform. I have now seen this first hand over the last 5.5 years across something like 15 different active funds. While reading such stats from the likes of John Bogle are eye opening, nothing convinces one to the degree that experiencing those exact stats in real life for yourself will.

Since I became WOKE ( is that the cool term that the young ones use these days ) and saw the active management game for what it is early this year, I have only been allocating capital to the 2 index holdings Aus & International. I still hold 8 active managed funds that I decided to keep rather than sell down, this was to avoid selling and the costs associated and at the same time I am not against having some small exposure to active in the long term.

But since I am doing some restructuring in the entities that I hold the investments in, I figured I might as well dump a few more active players and switch that capital to the index's. The 2 to go will be the infrastructure funds. While holding funds that increased my exposure to infrastructure made sense to me when my adviser proposed it 5+ years ago, I have no idea why I am holding them today. They have not performed any better than If I had just placed that capital into the index funds. I compare everything to what my other option for that capital is, and that is the 2 index funds. If it isn't going to deliver superior results to the simple index then why hold it.

So off they go. 6 actives will remain for now. The hard part of letting go of some of these actives has been the fact that I feel its not ideal to sell out of an active after its had a bad run. Makes much more sense to dump after a few good months or year. Problem is after a good run you start to believe that this particular manager is doing something special and just maybe they might be the one that can do the impossible and beat the magical index over the long term. One must resist such thoughts as its the work of the active devil messing with your mind.

In times of mental weakness I shall go back and re read Common sense on mutual funds. This book should be every investors go to in times of weakness and it shall lead you back towards the righteous path.

 

What often happens is they start funds just after a big fall or downturn like the GFC. Then slowly close and dissolve the standard funds.
This skews the returns for a few years, then their bad returns start to show.
So many funds started after 2009, and a few in 2020 advertising 30% returns.
The US are experts in marketing funds, and it's more about being connected than performance. It's very difficult for even the good performers to get a look in, you won't ever hear about them.

This is a standard human trait. It's very difficult to hit the close button when there's a loss. Casinos business model relies on it.

Not impossible, just very difficult.
Sometimes it market inefficiencies that last a long time, others it technical advantage, others just seem to have an eye for such things. The rest of us plod along as best we can.

"Their ain't no devil, it's just God when he's drunk"

 

VAS vs AFI: Which is right for your portfolio?
Good article in Morningstar today spelling it out.

 

Interesting read, thanks Monk.

 

Former active managers still kicking....

All-in on passive investing? You’re losing out, says Peter Lynch

Peter Lynch has a word for people who have gone all-in on passive investing: You’re losing out.

“The move to passive is a mistake,” the former Fidelity Magellan fund manager said in an interview with Bloomberg Radio’s Baystate Business. “Our active guys have beat the market for 10, 20, 30 years, and I think they’ll keep on doing it.

As proof, he cited three current Fidelity managers: Steve Wymer of the Growth Company fund, Will Danoff of the Contrafund and Joel Tillinghast, who’s planning to retire from the Low-Priced Stock fund.

Those mutual funds are among Fidelity’s most popular thanks to the stock-picking prowess of the three men – a skill that made Lynch, 77, famous and his investors rich. In his 13 years at Magellan, he produced an annualised return of 29 per cent.

 

Did see this article. Thing I found a little strange is there was no figures on how much they outperformed the index funds by. I would imagine not much or else they would have quoted it.
Either way even if this mob have managed to outperform over the last 10,20 and 30 years that information is only useful if I had it 30 years ago so I could have invested with them. What’s the odds of them outperforming for the next 30 years? If I had to guess I would say less than even odds.

With this in mind if I had to pick which active manager will outperform over the next 30 years what would my odds of picking one that does just that? Don’t quote me on my numbers but from the reading I have done on the research out there it would be less than 10% of active managers that could probably achieve long term outperformance. That gives me 10% chance of picking an out performer and 90% chance of picking an underperforming fund. I don’t like those odds so I’ll stick to passive and accept the market average.

Also remember reading something about getting your piece of the pie. Be happy with your piece of the pie and don’t be greedy or you could end up with very little piece of pie.

Mmmm pie.

 

Statistical outliers. I easy t

Yes, easy to cherry pick successes and in hindsight.

 

And just as easy to justify mediocrity

There was a group of outliers that live at Graham and Doddsville
Don't expect others to do your work for you do a bit for yourself.
Honestly you'd think it was rocket science.

 

Ben and Cameron (from the rational reminder) mentioned this media in their latest podcast. Amongst some other interesting analysis on the performance record of fidelity Magellan fund that Lynch managed their knock out punch is how is it that Lynch wasn't able to pick a successor to mange the fund to continue the out performance?

 

There are many people beating the market for decades, they just ain't connected into the Wall St social and political circles to be mentioned in the media.

Looking at his website you'd think David Druz has been inactive since 1996, but the links show up to dat performance
Tactical Investment Management--CTA/CPO since 1981
Tactical Investment Management--CTA/CPO since 1981

 

Not sure if you have come across this Article but appears to be the Blackest Box of Funds that appears to have made some serious returns.

"The fabled fund, known for its intense secrecy, has produced about $55 billion in profit over the last 28 years, according to data compiled by Bloomberg, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. The fund almost never loses money. Its biggest drawdown in one five-year period was half a percent.

How Renaissance’s Medallion Fund Became Finance’s Blackest Box

 

Finally seen the light last couple of months and transitioning to a passive portfolio, fair to give my thought process and experience (or inexperience).

Currently run two funds - personal portfolio (this was mostly managed funds and few ETF's). SMSF was direct holdings and managed Funds. Funds under management for both ~ $700,000 (not a lot by the standards here - but important for context of fees in active).

The managed funds I held did well over time (Hyperion, Loftus, Magellan etc) - but mostly for the original investors - those who joined later chasing past performance (this includes me) - still did well, but not so well over the long term. Magellan's recent woe's explain this very well. Anyone who bought last 5 or 10 years would have been better off with VGS/NDQ/IOO.

The fees - when funds got to $0.5m - 1.5% annual fee (perhaps more - the actual fees of the Hyperion Global Fund are more than 2%) - means at least $8k in fees - with no guarantee of outperformance. Or, like the case with Magellan, paying 1.35% for underperformance.

Quality of distributions. I think it's @Falcon who mentioned this - but didn't understand then. Hyperion Australia Growth Fund paid around 16% distributions - but Calendar 2021 is at par with VAS - but means we are actually behind - being at top bracket tax we are worse versus the 4% distributions of VAS.

With Managed Funds - its mostly the selection of the Fund Manager and strategy that determines outcome - probability of making the wrong choice is >80% looking at SPIV reports.

Personal Funds have been transitioned to VAS/VGS/IOO/NDQ, 60% international and 40% Australia. A bit of overlap between VGS/IOO/NDQ. I liked the tech exposure of some of the managed funds I had and IOO/NDQ were the logical choices. Hopefully will get to VAS/VGS, at peace now with IOO/NDQ, lesser evil.

SMSF always had direct holdings and managed funds - but managed funds being converted to VAS/VGS. Active will only be direct holdings but transitioning to passive.

Its been an interesting ride but happy I have come to these conclusions when my horizon still has a long way to go. Thanks all.

 

A nice read @sillydad. Thank you for detailing your approach.

 

Apparently investors are doing it wrong and only measuring performance over 'a few years'.

Active investment management


I'll overlook the before fees aspect for now. I had a look for said "Mercer Australian Large Cap Share Performance Survey" but couldn't find it. I'm sure it would be a fascinating read... things on my bingo checklist will include, fund selection process for the survey, the composition and approach of each fund, survivership bias, fees.

I could find some info on Ausbil. They seem to have done well with a concentrated portfolio with a quality filter - for the sake of the investors in the fund hopefully they can keep it up.

Australian Fund Manager - Ausbil

Ausbil Australian Active Equity Fund is aims to outperform the S&P/ASX 300 Accumulation Index over the medium to long term, with moderate tax effective income. The strategy invests in a portfolio of listed Australian equities that are generally chosen from the S&P/ASX 300 Index. Key features of the strategy
• invest in 30-40 quality large and mid cap Australian companies
• the process favours companies with positive earnings and earnings revision profiles
• aims to provide investors with long-term capital growth and income ​

 

That excerpt is outrageous. Quoting performance vs benchmark gross of fees, and the way they frame it is willfully misleading. Typical bad faith behavior.

 

Just saw this @sillydad . Great post. Awesome to see you learning from experience and cutting through all the noise and BS.

 

Its been a while since I have looked closely at my active vs index holdings for comparison. In truth I don't need to look closely as I can tell from a distance that the actives are not doing so well. Makes me feel better if I don't look.

But for some reason I decided to do a comparison today of just 2 active funds I hold compared to the index.

I used share sight to punch in every buy I have made since I started buying that active fund in the last few years VS had I put the same amount on the same days into the Aus index.

Took some time but I did the comparison with my purchases of Bennelong Aus equities fund VS Vanguard Aus equities. The result. Drum roll please. Had I put those exact funds into the index my return would have been 300% the return I had achieved with Bennelong.
Hyperion Australian growth companies VS Vanguard Aus equities. Result. 43% higher return had I went the index.

Before anyone yells Hyperion's Growth fund is not a good comparison to VAS, I get that but for me it was either go into Hyperion at the time or go into the index.

I didn't even bother doing the international fund comparison to VGS as I already know I wont like the result.

Not that I needed any more convincing and I have not added a single dollar to an active fund in over a year now. But I was still of the mindset that I will just hold the active funds that I am in. Don't know if I even want to do that anymore.

My active international holding in IFP Global fund has done reasonably well compared to the index in this last down turn. So I have just sold it all down. I have decided that when each of the active funds I hold has their next strong run compared to the relevant index I will be dumping them and moving all over the the index's.

To think I could have just kept it simple by just buying 2 index funds over the last 6 years and be well ahead on returns than where I am today is extremely annoying.

Hundreds of thousands of dollars in underperformance in active funds with the added bonus of another $50k spent on advisors over the years to end up with a portfolio of VAS & VGS. Expensive lesson that can be learnt for free from the good folks here on Property Chat.

 

Just by way of observation. This is classic detrimental behaviour for active investing to the extent that a phrase has been coined. "pulling the flowers and watering the weeds" the risk of you capitulating in a deeper drawdown by an active manager and taking an even bigger loss is high.

Not looking, not having conviction, believing an alternative is superior. None of this is screaming that you will be a strong hand in a deep protected drawdown which could very easily proceed any future strong run.

Another active term you may want to concider whilst you decide how to deal with your active legacy is "it's not being wrong that matters but how long you stay wrong"

Just my $2 worth.