Active VS Passive

Thanks to @Big A for sharing his investment performance which generates insightful discussion for us less experienced/skilled to understand both investing approaches.

 

Agreed great discussion here guys thanks!

 

So you have an active section of your portfolio, which you admit has successfully worked last 15 years? You no longer pursue active investing, because you have found the process daunting and I respect that, each to their own.

It's a bit interesting then to continue to point out the obvious known con's of active investing - key person risk, underperformance etc - which many agree with but forget that some active funds actually outperform - which I note being explained away in various forms.

When I look at the SPIVA reports - I focus on the 10% funds that actually outperform.

My biggest personal holding is with the Magellan Global Fund. (I added more funds last few months, and looking at adding a few with the consolidation of MGF, MGG and MGE for the 7.5% discount - without dilution - and bonus options). The fund has done well last 15 years - and most importantly has a target payout of 4% in the international space, if you are keen on income and international exposure. Hamish Douglas is one the best fund managers of his generation - he admits he doesn't always get it right but truth is he has made lots of investors money. I have attended most unitholders meetings and have found them insightful - I don't think they are out to gouge investors money through excessive fees, but understand they have a business to run and need to charge fees.

It's impossible for me to listen to advice that tells me - 'sillydad stop what you are doing in the long run you can't win' - while I can look back and separate through active investing what I have achieved. If it's working don't break it.

You almost can't have this discusion without (after a few paragrahs) someone droping Buffet's name (like I point out, he actually pursues a very active concentrated portfolio), or some thinly veiled comments you are stupid/average can't outperform the market. Not specifically you but it's a theme that runs around the discussion.

Before listening to people's advice I always want to know the process of how they achieved their wealth - not just the end game - because that context is very important.

 

This thread has probably run its course.

We can spend time picking apart arguments and for what purpose? It won't change anyone's views. It's up to each of us per our self education, experience, interests and means to plot our own course with our own money.

Personally, what the rest of you do I DGAF

 

Thanks for the explanation @blob2004. To be honest I would have no idea what the tax drag would be or how to even work that out. But you make a good point.

Hopefully I don’t sound silly saying this but I never even realised that Hyperion growth fund only invests in growth stocks even though its got growth in its name. LOL. I just thought it invests across the board. So if I invest in a general active fund that buys across the asx 200 and not mandated across any one segment does that make them better assuming they outperform the index? Does that eliminate the risk that they will underperform if value makes a comeback?

Glad some are getting something from this thread. I am one of the less experienced / skilled you mention trying to understand and make sense of it all.

Maybe we went a little of track. I was more trying to share my experience and results with the active funds vs index funds I hold rather than argue which approach is necessarily better. I started with only active funds because that’s what my first advisor put me in. I did not know what an index fund was. I learnt about index funds right here. In theory active fund management makes sense. But obviously in reality the odds have proven to be against active managers.

I have now moved from all active to half active half index. Actually i lie. The international half of my portfolio is still mostly active, I haven’t finished rebalancing towards international index. Im struggling mentally to add much more to VGS right now with the US market being at a new high considering what going on around the world. And I think the US active players such as Magellan look to be holding up well right now.

Actually I realise the back and forth posts have been about Hyperion vs index and the growth factor of that fund being a risk factor. How about the international active managers I have mentioned. They have outperformed VGS consistently. Is that a fair comparison, considering we are arguing that Hyperion growth fund vs VAS is not a fair comparison?

 

My simple question is: does the return meet your need? If so I think you are doing great

 

Agreed. It's up to you to make decisions on your investments, people like the thornhills and merrimans of the world have done very, very well by choosing a style and sticking to it through over and underperformance.

My last comment on this - as I tried to say it was pure luck. Had I put the money into something like Allco Finance Group or Babcock and Brown which were in the same sector and hot stocks then I would have lost it all. Then I would have been another person who was scared off the share market forever. So I wouldn't be here reading about it. Survivorship bias. Active being daunting isn't the problem, I've just seen no evidence that it will provide any benefits for me. I do believe though that active managed funds can be very good, far better than me picking individual shares. For me I want something that I can put money into consistently for the next 10+ years, then drawdown on consistently for the next hopefully 20+ years without any nasty surprises like a fund closure. Index funds from major providers with high funds under management are the only vehicle I'm confident can do that.

 

Thank you @Anne11 . I am fortunate enough to have a portfolio that provides more than I need. Now want is a different story. Always want more, but have to say happy with what its delivering so far.

Though some of the debate back and forth has given me something to think about. Still like the idea of a split active / passive portfolio but maybe need to consider the fact that my active Aus holding with Hyperion having a specific tilt towards growth and what additional risk that adds if trends change.

See all this arguing about which is better does sometimes bring out some useful points that help you look at things from a different angle.

 

The key here is that you have a history that worked and when it stops working you have the luxury of making a decision to exit or keep going.

Whatever luck/skill/insight that made you choose Magellan 15 years ago has held up until now and if it does bomb than you have +$x% over a passive fund to allow Magellan to come back to profit or choose to walk away. Effectively you have a significant amount of house money to play with before going into your own pockets.

Imagine a parallel universe where Billydad says 'I have been investing for 15 years and it has underperformed the market significantly'

It would be as easy for him to say 'im out' as it is for you to say 'im still in'

Unfortunately this isn't a board game to be played in an afternoon and we can look back at our decisions and laugh and see what we did right or wrong, the game we play goes on for decades and we will only know in the far future if we were right or wrong, whether we ran with the odds or defied them.

Overall as long as you are happy that is the main thing.

 

The sooner that I learned that I'm below average, the better my investing has been!

 

This has been the case for me with my share investment. I had 2-3 baggers that I didn’t wait till 10 baggers and I also had some that I held too long to lose 99%. Once I switched to passive ETFs, I was able to control myself more, and I don’t feel the need to check news every waking hrs.

 

Oi!

Solicitors at 20 paces.

 

Don't want to stoke the which is better fire again but for the purpose of continuing the documenting and reviewing of my active managers vs index holdings, Hyperions Aus growth funds results have come through for August. Again I am comparing to VAS as that would be the index fund I would put capital towards as my alternative to the Hyperion fund. 8.37% vs 2.83%. Very happy with that result from my hyperion holding.

Something else I noticed with the growth vs value argument that hyperion has outperformed due to growth being in favour over the last 10 years. Since inception being 2002, so 18 years now the fund has returned 11.9% vs Aus index 8.5%. I am sure that the gap once you factor in tax drag in active might not be as significant, but still they have managed to do well for 18 years with there strategy of focusing on growth. That's good enough for me to continue holding them.

 

For the sake of a balanced view I though last months results might be of interest in the context of this thread. It looks like the index holdings have had a strong November and have thumped my active holdings.

ASX 200 did 10.21% in November. Hyperion did 5.61% and Bennelong ex 20 did 7.39%. I also added another Aus active manager this month. Bennelong Australian Equities Fund. Still plan to hold a 50/50 split across index / active but was concerned that I was going to be to heavy in a single Aus active being Hyperion. Bennelong Aus Equities fund did 6.81% in November.

So fair to say the index funds had a big win over the actives in November.

On the International side the index did 7.43%. My actives did the following.
Magellan Global -1.24%. Ouch. IFP 6.56% and Walter Scott gave me a 7.11%.

Passive takes out the Gold medal in November. Some interesting results though especially with the international actives. Star performer Magellan copped a beating. Though I am aware that they are holding something like 15-20% in cash right now compared to Walter Scott who I believe is under 5% cash.

 

For what it's worth the one I'm in is up around 26% after fees this year, on top of 37% last year. But hey I've done my due in these discussions. Each to their own.

 

Like Big A, I also have a mix of passive and active, albeit likely more conservative overall.

Of my actively invested funds (as opposed to property, super and cash) about 30% is in actively managed bonds/fixed interest via the Macquarie Multi-Asset Fund and the Pimco Global bond fund.

This calendar year, both have outperformed their passive marks, although the Pimco was shakier than I'd like.

Importantly neither reamed investors by ramping up sell spreads during the March liquidity slump. The way Vanguard did.

Of the equity portion about 70% is in a core VDHG bucket. And I have active dabbles with the Hyperion Australian and Global funds, and the Perpetual Global Innovation Fund.

All of these have outperformed their passive alternative. The global funds by a lot.

The sole laggard is a smallish punt I took on MFF a few months back, thinking such a talented manager couldn't possibly go any lower. They've proved me wrong, but I admire their discipline and am in for the long term so not that fussed.

The short time-scale, of course, renders the numbers moot.

But so far, at least, all the active plays have done exactly what I hoped they would (Pimco bond blunders aside).

 

Headline numbers tell only part of the story. Distribution quality is important, with short term cap gain being undiscounted its worth half of what long term cap gain is to investors. Passive investments will almost always be more tax efficient than active strategies, which are often very high turnover (50%+ pa). something to consider. Keep an eye on your distribution statements.

 

As I have mentioned before I have gone down the middle between active and passive. But I have just started listen to the audio book of John bogles Common sense investing. I haven’t bothered reading such investing books as I figured I already know the basics that such books are preaching. But strangely enough even though that’s true I am finding it very insightful and it’s actually having a sway on my thinking.
I have listened up to chapter 5 so far and it pretty much keeps hammering away the same point. Keeping costs down will be the biggest factor that will affect your performance. Management fees might be able to be factored in when comparing performance as most managers now give after fee results. But it’s not so easy to work out the tax drag incurred by the manager turning over stocks within the fund.

This is not something I just learnt as I know it has been raised on this forum. As long as the active managers continue to outperform significantly, then I’m sure that it makes up for that tax drag. But if the active funds match the index or only slightly outperform then in real terms you could be behind.

Until now my thinking has been ill hold the active players that I believe are performing well. If in the future they start to underperform for a period I consider lengthy then i will dump them and move to increase passive allocation. But what if this happens in 10 years time and my holding in the active fund is significant. Even though it has underperformed the index it will most likely still have made a significant gain. Selling out would result in a capital gain. That would then have the affect of dragging down the result of that active holding even further over that 10 year period.

This has really got me thinking. My strategy is a very long term accumulation plan. Can the strong active players continue sustained periods of outperformance over 20 years? 30 years? 40 years? Am I just delaying the inevitable?
Maybe rather than a even split between active and passive I will move further towards passive and have the actives as satellite holdings rather than core. Maybe 75/25.

Who needs John Bogle when we have members on here who have been hammering home the exact message for years now.

 

Key man risk, survivorship and survivability, post tax returns, forced selling by investor are all crosses against active management and are things not often considered when looking at reported returns. Momentum can keep strategies working for quite a while and then it doesn’t. Success of manager often leads to increase in FUM that almost guarantees worse performance in mandates that don’t support large volumes of investment capital ; i.e. micro-cap strategies. Manager will still collect the fees and point to long term outperformance as why you should stick with them.

I have 3 active managers for AU small / micro-cap and this is something I struggle with.

 

All very good points. Since we agree and acknowledge the negatives of active and overall benefits of passive, why do we still hold active managers? With time will we slowly give up on the hope that we will have picked the active manager that will be able to give us that extra performance over our investment lifetime.
I believe that active managers can outperform for certain periods as I have seen this with a few of my holdings over the last 5 years. But can they continue to do it in real terms when we factor in all the non calculated drag for someone who is looking at a 50 plus year holding? That is where I start to think it is extremely unlikely.
I am asking these questions of myself as much as anyone else I guess.
Maybe just a split between VAS and VGS would be best.