Starting a pension - advice please!

Which planet have you been on these last few years? There's been a huge debate about the advantages of index funds compared to actively managed funds. A huge wall of money goes into index funds. As long as other people are prepared to spend money on research, it keeps the market fairly efficient.

Of course the managers aren't picking stocks at random. The problem is that they are not necessarily right in what they are doing, and they are trading mostly against other professionals with the same aims of outperformance as themselves. It's what mathematicians call a negative sum game, as the total of all transactions less costs leaves investors worse off.

The funds do provide some diversification and a convenient means for people to invest. So, some charges are justifiable.

Well, you have cut out the next section of my post, which explained how this random process can give the illusion of successful management. What I should also have said is that there may be truly insightful managers out there, but it is impossible to sort them out from the merely lucky ones. I remember my lecturer at London Business School saying that you would need to watch a manager for over 40 years to find out whether he was truly insightful or merely lucky. By the end of 40 years, it would of course be far too late to do anything with that information.

Oh, that's easy. On average, actively managed unitised funds underperform their sector. Indeed, even index funds underperform slightly, because of their charges.

You said:

'Its a mistake to make charges a priority. You should look at performance after charges have been deducted and then decide.'

And, I said:

'Hmm. Can you explain your reasoning, please?'

So, if past performance is not a guide to the future, why are you recommending looking at it before deciding how to invest? Perhaps I'm misunderstanding your point, but you are not really explaining it either.

"John Boyle" wrote

But if you agree that it is no guide to the future, then why consider it?

Yes, but although a lot of money invested is invested via these tracker funds, it is widely accepted that they don't do very well, isn't it?. If they really were the bee's knees, then nobody would touch actively managed funds. No?

So what's the answer?

Agreed, with the emphasis on "some", which I'd like to interpret as "much less than in fact they are". It's also much too cushy an arrangement for fund managers to have their remuneration based on capital invested. They should jolly well be paid by results, and should get a percentage of gains *and losses*. That'll flush out the duffers pdq.

Very amusing, and it may even be the case that truly insightful folk become evident in 5 years or less, but by then they're burned out. Another complicating factor may be that the real whizz-kids get head-hunted, so that they don't stay with the same funds, leaving the punters with little to go on.

So I ask again: What's the answer? Diversification is obviously a good thing, but you don't need to hire a manager to achieve that, investors can form investment clubs to pool their resources (both of money and of effort), all they need to agree on is what strategies to use for picking which stocks to buy and sell and how often, bearing in mind that *any* trade will incur commission overheads. Do you think investment clubs might do well if they used a high dose of randomness in their selection procedures?

In message , GB writes

I am not (in this part of the debate). You keep inserting the word 'past' before the word 'performance'. I havent said 'past performance'.

you are.

On the contrary, you are reading what you want to read, not what I have written.

In making an investment decision when choosing collective funds you will look at the objects of the fund and what their investment philosophy will be. You will make a judgment relating to the likely investment risk and may even perform some calcs to see what the declared asset selection will likely need to do in order to obtain the level of performance you desire. There are plenty of ways of doing this, which ones you use is a matter for you. You will also look at whether charges are taken from capital or income, etc., . You then factor in the charges and you can make a judgement as to whether the expected net performance is likely to reach your expectations.

I dont think I can make it much simpler apart form putting the word 'expected' before the word 'performance'.

In message , Tim writes

where did I agree to that?

You seem to be referring to 'past' performance. I havent used the word 'past'.

In message , GB writes

Around this group I reckon.

Thats right, but I suspect two things :

1) You aren't up to date & 2) you are making some elementary mistakes, S(see below)

Thats past performance isn?t it? :-)

As you say elsewhere there are over 2000 actively managed Unit Trust/ OEIC funds and many thousand similar 'life' funds.

The vast majority of funds are run by sales led companies, i.e.banks/building societies and Insurance Companies. None of these are good at managing dosh (with one or two exceptions).

There are a few fund managers who consistently outperform. and only a few. To some extent, past performance is helpful here, not so much as a measure of absolute performance, but in relation to measures such correlation, beta, information ratio, r^2, sharpe etc., etc.,.

A decent adviser will usually only be dealing with a handful of fund managers. It is against this few that judgement should be passed. If you can find it (I can't!) you will find me quoting Perpetual Income and Jupiter Income (for example) ten years ago as being the place to be, and that is proven today.

I am not sure of the relevance of your words 'underperform their sector', I dont understand the relevance of that comment because the sector in which a fund is placed is determined largely by the asset class rather than the objectives of the funds with which it is comprised, although different . Many funds that share sectors have quite different objectives and different risk. I also wonder were you get that data.

For example, IMA All Companies Sector average over 10 years would bring a £100 investment in at £170.38. 102 funds were equal or better and 30 worse.

For UK Equity Income the average was £212.80 with 43>= and 14 and 29

Yes, I see. I think that's clear now, thanks.

That would have helped.

"John Boyle" wrote

Ah, you are comparing "expected performance less known charges" rather than "past performance less known charges".

But - when comparing two funds with the *same* characteristics (objects of the fund, investment philosophy, investment risk etc) -- shouldn't you expect the *same* future performance? [Then your comparison above is the same as comparing just "known charges"...!]

If you were comparing two funds with *different* characteristics, then you should jolly well expect that the charges may be different.

"John Boyle" wrote

Did I say that you had agreed to it?

In message , Tim writes

Only if every aspect of your comparison is exactly the same. I dont know of such an exact comparison. But I accept your theory none the less.

True. Which is another reason for ensuring that your take both charges and (expected) performance into account.

Not quite - ISTR the FSA forces fund managers to state that PPINGTFP, despite what their ads imply.

[]

The FSA (paid for by fund managers) does *not* warn private investors about fund managers....

The FSA may claim that they are "helping retail consumers achieve a fair deal", but the realities of FSMA200 (i.e. they exist only to 'self-regulate' a very specific piece of legislation - q.v Farepack ) mean that is subservient to justifying their own existance.

Past charges *are* a good indicator of future charges

rgds, Alan

Fair enough, but that kinda amounts to the same thing.

That's rather what I was trying to imply, i.e. the warning isn't about fund managers so much as against the market, the substance of the warning being that, unlike with more orthodox savings, the value of ones investment can go down as well as up.

But what's all this about the FSA being paid for by fund managers? The FSA regulates all financial services, not just investment fund managers, and it is an authority set up by government. As such it is surely funded from general taxation.

I like the sound of that, but how true is it? Typically one gets told in the blurb something like "our charges may be up to X% but are currently only Y%". Often X can be as much as twice Y, which means that the fund managers could, at their whim, award themselves a pay rise of up to 100%.

inflation.

IMO, the FSA "Informed Consumer" stuff is 80% vested-interest bias - Hello IMA & IFAP!

but not Farepack...

"We do not receive any monies from government and are entirely funded by the organisations we regulate." Note the occurance of the FSA on: "The FSA is a company limited by guarantee set up under the Financial Services and Markets Act 2000. It has one share, owned by the Treasury, and its Board is appointed by the Treasury"

Perhaps the cynical may consider that regulated organisations pay the FSA kickbacks^Wfees in the hope that the FSMA2000 is not expanded to err, regulate further... ;->

True, but there are a couple of points to consider:

(a) Some 'bad' products, like LifeCo[0] bonds, endowments and W/P have such an opaque valuation & charging structure that it's impossible to work out what's going on.

(b) The *individuals* that manage the funds may get huge bonuses, but that tends to be related to the fund performance - OK, they all aim for (and are rewarded on) the relevent IMA index +/- 3%, so that's not much use in real terms, but they do risk getting canned if they are wrong.

(c) Cutting out the middle-men isn't /that/ hard, and can be profitable

- a 1% annual management charge on a FTSE100-tracking pension fund means that they get *25%* of your initial investement over 25 years - when one can trade for oneself (maybe in a SIPP) for 12 quid a pop, then the 'managers' aren't doing much...

(d) With Investment Trusts, OEICs & VCTs, the investors are the shareholders and appoint the board, who can (& sometimes do) replace the fund managers.

(e) If yields/annual returns fall to 5%, then an AMC[1] of 1.5% means that

30% of the return is lost *forever* and *cannot* contribute to the Magic Of Compound Interest.

rgds, Alan [0] Farewell Mutuals! :-( [1] If one *does* want funds for hard-to-reach-for-the-private-investor things, then the fund supermarkets will discount much of any initial charge