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Excellent investment management for only a quarter of a percent fee a year


patslatt

Well-known member
Joined
Apr 11, 2007
Messages
13,693
I read in The Telegraph last week that pension fund investors are belatedly finding out after many years that management fees of their investment managers have soaked up about half of the investment returns in their pension fund. That shows that even intelligent people with money to invest failed to pay attention to compound interest lessons in primary school and didn't understand their investment advisers' percentage take in fee systems.

About thirty years ago,the solution to high active manager fees was invented-index funds in the US,known as index tracker funds in the UK,that weigh investments to follow the same weighting of shares in popular indexes such as the Dow Jones or the Footsie. Oddly,they outperform managed funds for two reasons-their wide diversification across a broad index of shares picks up high returns available on small to middle size companies that most active fund managers haven't time to research;and their selection of shares through computerised software that tracks particular indexes is a very low cost business model that allows very low discounted management fees. The leader in low cost index funds and a more recent variation of them known as Exchange Traded Funds (ETFs) is Vanguard in the US. It happens to have Irish domiciled funds charging extremely low fees https://www.vanguard.co.uk/uk/mvc/investments/etf#fundstab
For all I know, there may be many other funds offering similarly low fees.

Index tracking works best in broadly diversified stock market indices,unlike the bank dominated Irish market in the past. The more that active managers influence prices,the less an index tracker fund loses from overpriced shares and it gets a free ride on investment research costs.In developing markets,there is evidence that managed funds do better than market indices when typical lack of research results in mispriced shares,giving an advantage to research-based share selection.
 
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Pissyknickers

Active member
Joined
Oct 1, 2012
Messages
232
Index tracking is like flying on auto pilot so instead of seasoned pilots you fly by computer it is a lot cheaper but only works to outperform human management in large stock parts of developed efficient markets where human investigation and reasoning is cancelled out by the sheer volume and quality of research on PLCs instantly available to all participants. Hence tracking the S&P 500 or or Govt Bonds makes oodles of sense.

But it becomes a distinct disadvantage for just about everything else, natural resources, small and mid cap stocks, emerging markets, corporate bonds, hedge funds, private equity, property, metal miners, etc.

Finally the type of stupid calculation promulgated by the poorly informed that reports the impact of management fees versus an entirely free system is a pure distraction. If you want to reduce costs, then simplify pensions. The market is a labyrinth of dumb rules that "experts" are needed to translate. Then with one simplified pension scheme for all, centralise admin functions and streamline advice on line giving punters the choice of mega funds with tiny fees managed by say the NTMA and higher cost boutique fund managers specialising in tranches of the market. But this idea that there is a silver bullet with "cheapest is best" written on it is wilfully dangerous BS that regularly appears in newspapers next to the article on how to save money on electricity by turning down the heat.

(Oops meant to add as a very recent and practical example of flying auto-pilot, the patently dangerous model promoted constantly by Burgess to invest in shares purely and exclusively by buying the ISEQ, despite it's 40% bank content at peak, highly concentrated nature and containing no stock big enough to make the Eurostoxx 50. Anyone following Burgess index tracking only mantra lost a fortune, as he did with a million in AIB shares).
 
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daveL

Well-known member
Joined
Oct 29, 2010
Messages
19,591
I read in The Telegraph last week that pension fund investors are belatedly finding out after many years that management fees of their investment managers have soaked up about half of the investment returns in their pension fund. That shows that even intelligent people with money to invest failed to pay attention to compound interest lessons in primary school and didn't understand their investment advisers' percentage take in fee systems.

About thirty years ago,the solution to high active manager fees was invented-index funds in the US,known as index tracker funds in the UK,that weigh investments to follow the same weighting of shares in popular indexes such as the Dow Jones or the Footsie. Oddly,they outperform managed funds for two reasons-their wide diversification across a broad index of shares picks up high returns available on small to middle size companies that most active fund managers haven't time to research;and their selection of shares through computerised software that tracks particular indexes is a very low cost business model that allows very low discounted management fees. The leader in low cost index funds and a more recent variation of them known as Exchange Traded Funds (ETFs) is Vanguard in the US. It happens to have Irish domiciled funds charging extremely low fees https://www.vanguard.co.uk/uk/mvc/investments/etf#fundstab
For all I know, there may be many other funds offering similarly low fees.
You have the oddest posting style... Is it a question? A statement? An essay? A commentary? ???
 

Howya

Well-known member
Joined
Feb 29, 2012
Messages
1,690

ffc

Well-known member
Joined
Nov 6, 2007
Messages
5,167
There are reports that suggest that approx 60% of actively managed funds under perform the market
Approx. 60% of Funds UNDER-PERFORM Broad Market Indices So Is Investing Success Just Luck? | munKNEE.com

So the real skill is either picking ETF's or picking one of the better fund managers (past performance is no guarantee of future performance).
Wasn,t there an experiment run some time ago whereby a monkey throwing darts at a board outperformed half of the so called investment experts, and, presumably the monkey didn't charge a fee, maybe a few bananas.
 

patslatt

Well-known member
Joined
Apr 11, 2007
Messages
13,693
Index tracking is like flying on auto pilot so instead of seasoned pilots you fly by computer it is a lot cheaper but only works to outperform human management in large stock parts of developed efficient markets where human investigation and reasoning is cancelled out by the sheer volume and quality of research on PLCs instantly available to all participants. Hence tracking the S&P 500 or or Govt Bonds makes oodles of sense.

But it becomes a distinct disadvantage for just about everything else, natural resources, small and mid cap stocks, emerging markets, corporate bonds, hedge funds, private equity, property, metal miners, etc.

Finally the type of stupid calculation promulgated by the poorly informed that reports the impact of management fees versus an entirely free system is a pure distraction. If you want to reduce costs, then simplify pensions. The market is a labyrinth of dumb rules that "experts" are needed to translate. Then with one simplified pension scheme for all, centralise admin functions and streamline advice on line giving punters the choice of mega funds with tiny fees managed by say the NTMA and higher cost boutique fund managers specialising in tranches of the market. But this idea that there is a silver bullet with "cheapest is best" written on it is wilfully dangerous BS that regularly appears in newspapers next to the article on how to save money on electricity by turning down the heat.

(Oops meant to add as a very recent and practical example of flying auto-pilot, the patently dangerous model promoted constantly by Burgess to invest in shares purely and exclusively by buying the ISEQ, despite it's 40% bank content at peak, highly concentrated nature and containing no stock big enough to make the Eurostoxx 50. Anyone following Burgess index tracking only mantra lost a fortune, as he did with a million in AIB shares).
Index tracking works best in broadly diversified stock market indices,unlike the bank dominated Irish market in the past as you point out. The more that active managers influence prices,the less an index tracker fund loses from overpriced shares and it gets a free ride on investment research costs.In developing markets,there is evidence that managed funds do better than market indices when typical lack of research results in mispriced shares,giving an advantage to research-based share selection.
 

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