Performance of active funds vs ETFs

It really depends what people are looking for in an investment. Personally, I have no interest in researching a fund manager who may or may not outperform the index over time.

All I am looking for from a listed security is a reliable income without the ongoing costs and hassles of a rental property. I do not need spectacular growth or for a listed security to outperform the index.

I am trying to set up a third income stream in retirement, so I don't even need a spectacular return. Just a basic, low effort investment that I can buy and hold for the next 40 years that will return a very modest income stream for my lack of effort

My interests lie elsewhere. This is play money for me, so an index ETF like VAS is precisely what I am looking for.

 

So you're saying ETFs are a bad investment because you doubled/tripled your money with properties?

Past performance is not a good indicator of future returns.



At the end of the day you cannot get higher expected returns without a corresponding increase in risk, and a greater range of possible outcomes.

 

(I enjoy the arguments by the way, good to be challenged!)

I agree that you can weed out some dodgy investment managers. That point is granted. There is also ones who buy/sell businesses and the like - quite different set of opportunities that they can find too.

However, the value of ETFs is not any 6 year period. Someone with a 6 year timeframe should not be 100% in ETF's anyway. Not investment managers. Volatility can end you up below (like now) but over much longer time frame you're guaranteed not to lose your capital, in fact you'll do nicely. So you can't compare over 6 year period.

Yours is a higher risk strategy than ETFs. That means you could you do worse but also much better. If the 7.7% long term return is not good enough for you, then you have a different investment strategy and have done well. This time.

 

That’s a myth I think they teach at unis called CAPM model. I’m sure we can all come up with many high risk, low return propositions. Edit: And even along the CAPM you’d want to be along the efficient frontier only anyway, suggesting there’s only a basket of opportunities that has the commensurate amount of risk for any given return. How do you know this ETF or any investment is on the efficient frontier and not say random flat point or sloped point on the CAPM curve...

By the way no I wasn’t saying that, although it’s probably true (ie the property tripling is a lower risk proposition than most things we’re talking about here). Why is that possible? Because I did my DD to lower the risk and maintain the return, obviously. Anyway I was more explaining why I don’t go around posting quarterly statements to substantiate my numbers.

 

Oh me too don’t worry I enjoy it.

Btw I’m not so sure about the risk/return scenario people keep talking about. The ETF is 100% beta risk, to get technical. If a fund/strategy falls less in down times, but rises more in up times, then that’s reduced beta risk and higher alpha. Which is what people want I would’ve thought.

 

Vanguard Index Volatility Charts

This will help to understand start and end dates. Play with the sliders. Data 1970 to end February.

 

You are on the right track. Worth applying a bag of salt to any claims made around here spouting numbers. Without substantiation the type of performance being claimed looks like a levered long-short fund like L1 Capital for those that may wish to join the party. No warranty.

 

Yeah but I'm still bemused an article about the increase of units in ETFs (which is not the result of mere retail investors buying on the secondary market) was apparently the trigger for the debate.

 

If luck is required for outperformance then the risk taken is higher than my risk appetite. Anyone can outperform an index ETF by choosing the correct number on the roulette wheel. However, it is not correct to call someone a good investor after winning at roulette because they chose the right number.

The other danger in believing that you are a good investor is you are more likely to stick with the same strategy. Two games of roulette betting on a single number and you have about a 1/1000 chance of not losing all your money.

It is possible to outperform with active investing, however, I suggest it requires a significant amount of effort and skill, or insider trading. Even some with effort and skill do not outperform for the same reason that the index is the best approach - uncertainty. Read about Heidinger to start from first principles.

 

Our term deposits mature shortly. Could be a good alternative. The retail version of the fund looks like a standout:



https://investmentcentre.moneymanagement.com.au/factsheets/mi/ni3h/l1-capital-long-short-retail

 

From their site.

Bloody hell things really got derailed around here

 

Isn’t that normal except it’s not coffee or grog for a change?

 

Geez their listed vehicle has gone like a busted arse.
https://www.asx.com.au/asxpdf/20200409/pdf/44gvd6cqmx6y3z.pdf

For the uninitiated, a bracketed sum is a loss.

I see these hedgie masters of the universe are buying back stock...surely they have better opportunities with their sophisticated black box of tricks? Nope.

 

or

maybe.

 

Firstly out of curiosity I did a quick selective search of @Omnidragon ‘s historical posts and noted L1 Long Short Fund was recommended a few times.

I tend to be untrusting of performance stats on any mgr’s website. So I did a fund compare using Vanguard ASX 300 unlisted fund (VAS unlisted basically) Vs L1 Long Short “wholesale” fund.

Over 5 years L1 outperformed but unsurprising given a combination of much smaller FUM early on and luck. Even so I’m not seeing these 10 - 20% returns which are being suggested as easy to achieve simply but selecting gun fund Mgrs. However it seems L1 has gone downhill from there.

Here’s the performance stats (further data in attached PDF):



So the same old story playing out as detailed in long term SPIVA reports of active vs passive funds. Good luck picking an active fund that can “consistently” beat the index over the long term.

 

@The Falcon @SatayKing @Nodrog love your work gentlemen. Very glad to see you put this last couple of pages in perspective. Now is not a time for people to change their plans. Sticking with the plan will still see them do well in the future

 

The bolded text is very important in my mind. A number of us are not saying one shouldn’t invest in active fund Mgrs. The debate becomes more vigorous when someone puts forward the argument that “active outperforms passive” and it’s simply a matter of picking the best fund Mgrs. The sheer weight of evidence and simple maths strongly discredits this.

However if one knowingly invests in an actively managed fund for non performance reasons such as: LICs for income smoothing, dividend focus, franking; an absolute return fund hoping to achieve less volatile total returns; or because he / she gains pleasure from it etc then no one can criticise this.

So it comes back to (drum roll) - “it’s all about me” factor. The main thing is to understand exactly why a particular fund, active or passive, is in the portfolio. Unfortunately it seems some are holding certain funds based on mistaken beliefs!

 

That's what I like. It's all about me.

 

And in case some aren’t aware of SPIVA (active vs index) Scorecard reports here’s the most recent one (EOY 2019 not available yet). Small cap Mgrs are an anomaly compared to a number of other countries likely due to the high amount of speculative mining crap in the local small end of the market.



PDF attached.

 

Oh I suggested it not because I’ve invested in it (in fact I never have), but almost as an example of longer term performance that’s public available, albeit not 20 years.

I mean, come on, on the one hand we say we need to look past the ETF’s short term performance. Then we nit pick the last two years in L1...

Perhaps run a IRR on the ETF over the same period and see which one’s higher. In fact doesn’t the chart at the bottom prove it? If you invested in L1 in last 5 years you would’ve made 8.4% returns pa. I’m sure if you put the same money into ETF in question at same time, you’re around -1-2%%? Art of compounding your money.