Re: QE and index funds have deformed the stock market as predicted by Goodhart’s Law.
Posted: July 4th, 2022, 2:15 pm
If most active funds don't beat the index what is their advantage?
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Entertainment.CliffEdge wrote:If most active funds don't beat the index what is their advantage?
CliffEdge wrote:If most active funds don't beat the index what is their advantage?
Do we have any fund managers posting on here?Boots wrote:CliffEdge wrote:If most active funds don't beat the index what is their advantage?
Massive fees to the fund managers
I still wonder why people ask a question like this. To me it just seems not to make any sense, indeed, how could it ever make sense?CliffEdge wrote:If most active funds don't beat the index what is their advantage?
OhNoNotThatQuestionAgain...CliffEdge wrote:Do we have any fund managers posting on here?Boots wrote: Massive fees to the fund managers
Let's focus on the interesting question that your question implies.... Why do the vast majority of active funds underperform before fees over a reasonable period like five or ten years?XFool wrote:I still wonder why people ask a question like this. To me it just seems not to make any sense, indeed, how could it ever make sense?CliffEdge wrote:If most active funds don't beat the index what is their advantage?
Expecting most active funds to "beat the index" would seem to me as reasonable as expecting most people to be above average height.
(Please! No long explanations based on skewed, small populations of how it could be possible for 'most' people to be above 'average' height, or how the 'average' human has less than two legs...)
AWOL wrote: Let's focus on the interesting question that your question implies.... Why do the vast majority of active funds underperform before fees over a reasonable period like five or ten years?
Index weights change every dayscrumpyjack wrote:I haven't seen any convincing argument that index funds distort share prices. If anything they dampen movements. The price of individual shares rises or falls as it becomes in favour or out of favour with investors, but index funds keep the same percentage of a share whether the price rises or falls not dealing at all except when investors put extra money into the fund or withdraw it, and then the ETF buys or sells shares in ALL the constituents, not just one or two as an active manager might. In effect market prices are made by the money that is not in index funds and index funds are passive bystanders. Certainly this is the case with ETFs that track large indices because the market cap of the large indices is so enormous.
No these claims about index funds distorting the market sound more like the bleating of active managers who don't like their lunch being eaten by the likes of Vanguard and Ishares.
So surely active fund managers are unlikely to promote passive funds: more likely to find ways to criticize them? Was this thread started by an active fund manager?Boots wrote:CliffEdge wrote:If most active funds don't beat the index what is their advantage?
Massive fees to the fund managers
What seems to be missing from your argument is any suggestion of the size of the figures for "vast" or for the quantum by which they "underperform".AWOL wrote:Let's focus on the interesting question that your question implies.... Why do the vast majority of active funds underperform before fees over a reasonable period like five or ten years?XFool wrote:Expecting most active funds to "beat the index" would seem to me as reasonable as expecting most people to be above average height.
If you can answer this correctly you can understand the flaws in your "average" argument.
Indeed. Just as people whose business is in index trackers are unlikely to promote active funds and more likely to find ways to criticise them.CliffEdge wrote:So surely active fund managers are unlikely to promote passive funds: more likely to find ways to criticize them?Boots wrote: Massive fees to the fund managers
I couldn't possibly comment.CliffEdge wrote:Was this thread started by an active fund manager?
They provide you with something close to market returns if the fund is diversified enough, and offer you the chance of getting a bit more than that if you pick the fund(s) that do beat the market (by enough to cover some of their fees and costs). So, a lot of investing and a bit of gambling. What's not to like?CliffEdge wrote:If most active funds don't beat the index what is their advantage?
It varies by market and timescale but ignoring short time frames around 8 out of 10 underperform. It gets worse the longer the period. There are almost as many winners before fees as chance would expect. Outperformance doesn't persist.XFool wrote:What seems to be missing from your argument is any suggestion of the size of the figures for "vast" or for the quantum by which they "underperform".AWOL wrote: Let's focus on the interesting question that your question implies.... Why do the vast majority of active funds underperform before fees over a reasonable period like five or ten years?
If you can answer this correctly you can understand the flaws in your "average" argument.
Not enough to matter.OhNoNotimAgain wrote:Index weights change every dayscrumpyjack wrote:I haven't seen any convincing argument that index funds distort share prices. If anything they dampen movements. The price of individual shares rises or falls as it becomes in favour or out of favour with investors, but index funds keep the same percentage of a share whether the price rises or falls not dealing at all except when investors put extra money into the fund or withdraw it, and then the ETF buys or sells shares in ALL the constituents, not just one or two as an active manager might. In effect market prices are made by the money that is not in index funds and index funds are passive bystanders. Certainly this is the case with ETFs that track large indices because the market cap of the large indices is so enormous.
No these claims about index funds distorting the market sound more like the bleating of active managers who don't like their lunch being eaten by the likes of Vanguard and Ishares.
Actually, thinking about it more, the weights for most indexes are I think only changed quarterly or semi-annually. Only if some significant corporate action happen do weights change between scheduled rebalance dates. eg a takeover which immediately ejects a share from the index. That is why the turnover is so low for index funds.hiriskpaul wrote:Not enough to matter.OhNoNotimAgain wrote: Index weights change every day
Turnover is low because there is no need to trade as the market moves. They only trade on flows or corporate actions.hiriskpaul wrote:Actually, thinking about it more, the weights for most indexes are I think only changed quarterly or semi-annually. Only if some significant corporate action happen do weights change between scheduled rebalance dates. eg a takeover which immediately ejects a share from the index. That is why the turnover is so low for index funds.hiriskpaul wrote: Not enough to matter.