Performance of active funds vs ETFs

LOL . Your energy would be better spent on beer discussion in the Liquor Ingested Copiously thread. Copious quantities being appropriate after what you’ve been through in this thread.

 

You both miss the point. No need to compare with an active fund, as it’s an evaluation in and of itself.

 

On your point about cost of equity, everyone has a cost of equity. You seem to think a company’s equity only come from raising shareholder capital, but a company’s equity can also be saved over time from earnings. Business 101 stuff really. And that’s why the hurdle rate is the long-run equity risk premium plus the risk free rate...

Your point on returns and risk is really the same - ie you can’t guesstimate then market. Well let’s just say expected out/underperformance is a function of you doing homework and forming a judgment, than blindly investing, such as some strategies suggest which I know you’re a fan of. It comes down to something very simple... if you don’t do your homework of course you’re not likely to beat the hurdle rate

 

You seem very confused

You asked if there is a mathematical (ie an objective) way to look at this so I gave you one. You then say you don’t care about it...

Also the point in that calc was not about comparing one ETF vs another fund. Nor is it about “higher” returns

 

There is no way to evaluate a "good" or "bad" investment without considering the risk involved.

Isn't that in Econ 101 or something?

 

Sounds like a bit of point scoring going on over pedantic issues. What is the point in mentioning the cost of equity anyway?

The market has a return above the risk free rate because it has risk. Obvious, yes. But a lot of the risk is the volatility. The longer you are in the index, the lower the risk and you get lower (average) reward. 6 years in a single investment or in a market etf will necessarily provide you higher risk and return will be above or below average. Yours apparently was up, index etf down.
If you now switch your fund to a different find for 6 years you are going to have the high risk reward trade off again. You could go back to where you started if unfortunate, or you could smash it again. However the index investor will be reducing their risk by staying invested another 6 years and heading closer to market average returns over the 12 years.
Point is, you will have wins and losses over a long period. Even ppl you know well will fail you a few times eventually. With larger downside risk, will you end up ahead or below over the long term? Research says below, but you may be one on the right side of the bell curve.

 

As mentioned ad nauseam, I have no doubt active management can beat the index.

But that requires said manager to be skilful and/or lucky enough to choose the right stocks from, say, the 200 in the XJO, and also you to be skilful and/or lucky enough to choose said active manager from the 500 or so operating in Australia.

I find those odds too intimidating.

For example, according to this study: https://www.investors.asn.au/assets...d-Managed-Investment-Products-Report-2014.pdf

in 2014 (to choose a date referred to earlier), the top performing blended fund over the previous five years was actually the semi-passive Vanguard High Yield Fund with a sterling 14.2%. Since then, -6% growth.

The runner up was Pengana Equity Fund. Since then it too has underperformed the index.

The leading growth fund was the Smallco Broadcap showing a mighty 29%. Since then its capital growth is a less mighty -5%.

The leading global fund was the Advance International Fund. Since swallowed by BT and tracking the index.

Runner up was the retrospective star of the bunch, the Magellan Global Fund. It has outperformed the index, although not the ETF equivalent (IOO). And you would have been much better off (552% CAGR vs 25%) chucking everything into Magellan the company.

So you could have done well or even brilliantly. But the odds are you would not have done as well as the index, and quite possibly much worse.

For me, the market is risky enough without adding another layer to it.

 

That’s what the NPV does

 

The relevance of the cost of equity is whether you made an NPV-positive investment, that's all. It has nothing to do with what other funds did. Anyway I only brought this up because someone was trying to be smart and ask about the maths.

Everyone has a cost of equity because there is opportunity cost and risk for making any investment. The other guy is an idiot for suggesting people with savings don't.

 

The issue I have with a lot of the discussion here about risk and returns is the assumption that over the long term things will be fine.

That may be true if you are twenty and DCAing into an equity only fund. For that callow youth the risk is low. Your job is your bond component.

For a grizzled almost-geezer with a chunky lump sum the same investment would be terrifically risky.

This where active funds fail for me. It is easy to make hay in a bull market. But research that has skidded through my inbox lately indicates that the active funds have done no better and often worse during the current ruptions.

More important than the individual fund is the allocation.

For example Magellan is the golden child of active global funds. But chucking your money into QUAL and tracking the quality index would have given you almost identical returns.

 

No it really doesn't.

 

When you discount it, the risk is accounted for, otherwise you wouldn't be discounting it

 

not to revive this thread but this seemed the best place to put this one.. WOW

Montgomery Alpha Plus Fund » Montgomery Investment Management

 

I assume it's Roger. Has it done well so they've decided to get out while the going is good?

 

Define well

I.e has performed above expectations, or a deep hole in the ground?

 

The index has given them a good ol' rogering.

 

I've outperformed Roger Montgomery!