Performance of active funds vs ETFs

Exact figure is 6.46% and 'includes' reinvestment of income. (excluded impact of franking)

I’m surprised you find it surprisingly low. (actually I'm not really)

Inflation over same period was 2.48%, yielding a “real” return of 4%. That's reasonably consistent with history.

Return is more impressive when you consider it is measured over a non-optimised time period that includes the dot.com crash, the GFC and finishes with current Covid decline.

If you favour active funds the figure should be even less surprising to you because simple maths dictates that the average active return must underperform the passive market return by the costs of active management. Say their costs industry wide run to 1% (being generous) their real return on average would be 6.5% market return - 1% expenses - 2.5% inflation = 3% Real Return.


Even over this 23 year time period the difference on an initial 10K invested at 3% real as opposed to 4% real is pushing $5,000 of real purchasing power foregone. Stretch it out to an investment lifetime of 50 Years and it becomes $50,000 of real purchasing power forgone.

Of course I know the “majority” on forums are “above average” (cough, cough) in their stock/active manager picking, so such tiny numbers will seem incomprehensibly low and boring to those that think a quick doubling of your money by picking red or black (normally with a small part of their wealth) is the way to swagger. So Be it ………But not in this thread please, there needs to be at least one oasis of sanity and realism to discuss long term wealth creation that is robust.

 

Hard to outperform when you are buying the benchmark....

 

I’m not here to convince people to invest in something else, so no need to do that. I’m happy with my returns, but when someone tries to a pot shot then I just say it as it is, that’s all. But I can tell you it’s no leverage.

It’s bizarre some people get so defensive about their investment strategy when you’d think their end goal is just to make money

 

I just found it low because the common saying is the sharemarket and property over the long term averages 10% IRR (not that I’ve gone and tested it), so I expected that would be the number when you ran the numbers. Basically 10% is the same result as property doubles every 7 years which we know is not true for all properties. But perhaps the answer is we’ve taken the end of the curve and if you measured at Jan 20 you might be at 10%.

 

Let us know:

a) what fund?
b) how you "knew" ahead of time it would outperform?
c) its 10 year performance to the benchmark? and
d) how many under performing funds you also hold

Thanks, go

 

As mentioned above
a) no intention to share, just commenting when someone takes a swing
b) I didn’t know of course, but I back the portfolio managers that’s all, know them all well and worked with them
c) this group’s been managing money around 4 years or so only
d) just this one

 

a) Why not?
b) Too true you couldn't have known
c) Thats fine
d) So in other words you took a swing at the 25% chance of picking the right fund and got lucky

 

a) no reason. Not here to promote. Just commenting about ETFs
b) of course not, everything’s a risk
c)
d) As I said in other posts, I’m been involved with these guys (in real estate etc) and have been involved with them in this fund, and been (sometimes hugely) profitable every time. That’s the DD. Of course everyone has the right pedigree for this space as well but that’s beside the point. Didn’t just waltz into a random fund. I’m not sure I’d put that down to getting lucky

 

Australian stocks have returned ~10% p.a. since 1900 (source). Over roughly the same period the rate of inflation was 3.8% p.a. (source). Let's assume the real return was around 6.2% p.a. - this is similar to the Australian real returns for the 1900-2015 period (source).

Real world returns over a similar period were 5.2% p.a. on average (source).

A real return of ~4% that covers the Dot Com bubble, the GFC and the recent bear market, that is a good result in my view.

 

20 Jan finish point would be about 7.7% return.

Do you find it fascinating your reaction when presented with data that doesn’t fit your pre-conceived idea? I certainly do!

You say that you haven’t tested your belief of 10%. Yet when presented with data that contradicts your belief what do you do? Modify your belief to fit the reality………..Nup. Instead you suggest cherry picking a date and assume (without checking) that it will maintain your belief.

Very telling……. Now what is it again that you are trying to have us believe? Show us the data, so we can make up our minds based on solid evidence. That’s how we roll.

 

I don’t see why you’re so defensive. Numbers don’t lie as I always say. There is a general notion the stock market delivers 10% pa. Yet after dividends you’re suggesting these ETFs only delivers 7.7%, even making allowance for the recent crash. If we didn’t, it’s 6.5%.

In the past I thought if my fund did greater than 10% pa I’m ahead of the market. But now I know I just need to do 7.7% to be ahead... that’s all I’m interested in finding out to be honest. So thanks for doing the analysis and confirming that. No need for me to convince anyone of anything here so nothing to show nor does it matter what other people’s minds are. If you’re happy with 7.7%, great, as I said.

 

Well apparently it’s 7.7% but anyway same same

 

Usually I stay out of these sorts of things but....

You have made a number of posts suggesting investing in ETFs is not as good as whatever it is you are investing in. The tone of your posts certainly seem to be a mix of bragging with a hint of suggesting investing in ETFs is, lets be charitable, somewhat dumb.

Yet when pressed for details and engaged with real numbers, you decline the invite to provide actual details, accuse others of being defensive, and then claim you are only interested in finding out what the market return is so you can assure yourself your chosen investment is doing better.

So I have to ask, why all the comments and why not simply ask what the market return is for your chosen period? I'm sure you would have been given a quick and simple response. I'd also say for someone who seems so cocksure of their investing prowess, and who claims to have worked in the industry, the fact you don't even know what the market return is over your own chosen time period seems rather odd.

 

Another one of your great posts mate.

If I may weigh in even though I don't think this thread is a debate about Passive vs active funds. I have a thread that I started about this exact topic and thought I could provide a balanced view as I hold a fairly even split in both.

I have dumped a majority of active funds and moved towards passive VAS and VGS. But I kept hold of a few active players and so far its working out well. I am happy to share the names and examples.

Hyperion Australian growth companies. Been holding for 4 years now. As of 31st of March Hyperion VS ASX200
1 month -9.49 VS -20.65
3 month -11.35 VS -23.1
6 month -5.48 VS -22.57
1 year 5.69 VS -14.42
2 year 8.79 VS -2.07
3 year 8.26 VS -0.56
5 year 6.41 VS 1.39
10 year 8.25 VS 4.92

So there are some out there that can do it and do it convincingly. To keep this in context though I originally had something like 14 active funds and dumped half to only hold 7 actives. This was a year ago now and I can happily say the 7 I held are still outperforming for now.

But I am well aware that at some point even the active winners I hold can turn into losers for a period of time. That's why I have gone down the middle and split the portfolio 50/50 active passive.

 

geezus...start and end dates. Arbitrary start date was chosen due to that being the date when the index fund was investable in Oz. Start dates change everything. This is 1st level stuff.

 

I hope its not perceived as a passive vs active. Its not a competition. I have a foot in each camp.

If I remember right I first responded to a statement by Omnidragon that was along the lines of its not smart to invest in ETF's because of recent returns. Not sure if he suggested then or later that active and in particular his (unsubstantiated) active was a better proposition.

The point is what ever passive returns over any given time frame sets the gravity for active because they on average will return the same less all the expenses incurred by those pursuing active approach. The market return, high or low at any point in time is not a logical justification for active being superior. There may be other justifications but market performance is not one of them unless your active argument is for dynamic asset allocation.

Any rate, Its not lost on me that I am interpreting and responding to OmniDragon posts as high on how to sux eggs and low on substance - which is my queue to stop responding and take a break.

 

Well to be honest my view was they’re not good investments and my view has not changed, in fact it’s reinforced after seeing these numbers. I thought they were bad enough when most people are under water after 6 years. And now someone tells me the 23 year average return is 6.4%. A good investment? Who we kidding here. But each to their own.

And on that, I think you guys are defensive as you keep asking me what this fund is, like it’s a forensic investigation. If I comment in a property thread that apartments are bad investments, do I need to tell people the addresses of the property investments I’ve been buying? If you want to make more money go investigate what funds there are - I’ve made a suggestion these ETFs are low return (and honestly some of them sound pretty horrible if it’s at 6-7% long term return) and there’s lots of other opportunities now after a dip (even accounting for this rebound).

If people are happy with 6.5% annual returns, or 7%, then great. Stick to it. But I can tell you this sort of CAGR as dunno calls it is pretty sub-standard, would be below the WACC in every industry, and if one ran a DCF on say a 8-10% WACC the investment is negative value. And on that point, for those comparing it against inflation, that does not take into account the risk hence you’d use a WACC not a risk-free real rate to adjust it.

 

Yes and yes. And it’s unsubstantiated because there’s no need to substantiate it. When I talk about my properties doubling or tripling (or losing money, lucky there hasn’t been any) I don’t upload my land tax or independent valuations either.

 

The main issue is, you have chosen 1 fund and a 6 year time period. When comparing to ETF's:
1. That is 1 fund you were fortunate to find, how have the other 500+ in our country fared?
2. Arbitrary start and end dates. Your fund has short history. Will you stay with them for the next 20 years? There's lots of studies that show they have a lotteries chance of keeping it up for that time period (all sources quoted throughout these threads over many years).
So really your view point is just that. A short term view of your success. But in no way can actually be compared to long term investors in index funds.
The argument is a nonsense.

 

Perhaps the skill is in picking the fund, not sure how that is nonsense... you try to make it sound like pot luck and I’m just as likely to be in the other 499 funds you talk about. Same as buying property. Some properties triple in value in a few years. Some (like apartments) as I said barely go up. Surely you DD a property before you buy it? You’re not just throwing darts at a set of property opportunities and am as likely to end up with an apartment as a development site.

Anyway I may not stick with them, as the opportunity may very well be picking the next fund - who knows, early days as you say. I agree it’s not a passive vs active thing, but I have to say the long term returns I’m shown are pretty bad, to be blunt. And the short term returns are (talking 5-6 years) for these ETFs are somewhat non-existent now on a nominal basis.

On studies. A lot show that drinking coffee is bad for you. A lot show it’s good for you too. Meaningless stuff really. Probably published by the same institutions. And there can be a host of reasons why funds close down and it probably has less to do with bad long term returns than you think.... I’ll paint one possible scenario for your entertainment:

Let’s say I buy a fund, and it goes up 4x over 8 years. I’ve made 400%. That’s roughly a 20% CAGR. A huge investor comes in. The fund then falls 20% in the 9th year for whatever reason. The huge guy pulls funds, and fund closes shop because it’s forced to liquidate at a loss. So by the end of 9th year I would’ve made 320%, a 14% IRR. Yet the fund still closes shop.

Edit: a few other scenarios... Others close down because they’re rolling all the capital into the next fund because it’s a closed fund. Sometimes the managers go home and trade and return capital to investors. Thus, talk about pointless studies. I’m not sure what they really show, apart from probably not much.