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Hedge Clippings | Friday, 22 October 2021
Every so often the "Active vs. Passive" argument rolls around, which depending on which side of the debate one is on, allows you to prove - or at least argue the point - that active management is better in spite of the higher fees being charged, or conversely, that passive or index investing is as good or better, and cheaper.
As such, it might be safely assumed that Hedge Clippings leans towards the active side of the debate, given we list around 650 active funds for comparison on fundmonitors.com. However, as above, it's never quite that simple.
Firstly there's the data - and it's worth remembering the old adage "lies, damned lies, and statistics" simply because it is easy to find plenty of examples to prove either side of the argument. Equally, it's difficult not to win the argument that fees on passive funds are lower than their active cousins.
Statistics in this case generally revolve around either the average return of a certain type of fund, or the percentage which out, or underperform either the index, or their opposite numbers. And while quoting old adages, it's also worth remembering another one, namely "that when your feet are in the freezer, and your head is in the oven, overall your temperature is average."
Averages, although we frequently use or calculate them, can be useful (for instance when wanting to prove a point in an argument) or confusing. Maybe confusing is a little too strong, so let's just say they can be deceptive, or in the wrong hands can cloud the facts.
Taking the fundmonitors.com database of 134 actively managed equity funds investing in Australia with a five year track record to the end of September, again, depending on which side you're on, you can argue both sides as per the table below:
Assuming an index or passive ETF's returns are in line with the ASX 200 Total Return, you can get better performance with lower costs than many actively managed funds.
Or, wearing the active fund manager's hat, you can outperform the passive brigade by a factor of 2-3 times if you're in the best fund (which of course doesn't stay the same over each time period) but in round terms 50% of the active funds outperform. Sorry, other hat: 50% underperform. Take your pick!
Our point is this: Different strokes for different folks. Investing in passive funds is a suitable, low cost and simple way to gain exposure to the average return of the 200 companies which make up the ASX 200 index. Importantly, it requires limited knowledge or skill as such, and therefore may be suitable for small or early stage investors.
However, you're only going to get average performance.
Investing in active funds requires information and knowledge (your own, or that of a suitably qualified and knowledgeable advisor) among other attributes, which include time, and ongoing monitoring and attention. Above all, it requires the investor's understanding of their risk profile, and return objectives in selecting the correct funds.
Taking the time, and doing the research, can make a world of difference.
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