Managed Funds Pipe dream?

Is anyone aware of any funds, LICs etc which offer a guaranteed return equal to a particular accumulation index returns, with the upside of possible outperformance of the Index. Obviously outperformance would be shared between the fund manager and the investor.

Pricing structure would be a flat MER % which matched the MER % for the equivalent Index Fund or ETF Index (ie in the 0.3% - 0.7% range). Outperformance could be shared 30:70 between investor and fund manager.

This seems to me to be a very fair and potentially lucrative proposal for any manager who is confident of their ability to outperform the index over any 5-10 year period.

If such funds existed covering the major Int'l indexes it would be a no brainer for anyone who would otherise be implementing a diversified portfolio of Index ETFs or funds - myself included.

 

NO......
PS - Do you believe in Santa Clause???

 

Lol...

Hi TAO,

There is a few structural issues around this...
No one will offer index returns with the possibility of outperformance.

First, to have index returns you have to invest in the index (Personal Investors | Home | Vanguard)

Secondly, if your mandate is to invest in the index why would you invest outside of the index?

You might want to look up AXA North. They'll guarantee the funds you invest (5, 7, 10, 15 and 20 years) and for the 10, 15 and 20 year option also lock-in any upside on the policy anniversary date. They do let you invest in Vanguard Index funds...

Cheers,

Dan

PS This is general information. Before making an investment decision speak to your FPA registered Financial Planner.

 

Tropo - hang on - weren't you the person who just a few days ago was telling me how EASY it was for experienced traders to consistently outperform the index

Surely you or one of your brethren would be game to put your money where your mouth is? Not?

 

Dan

thanks for the reply.

I don't see the structural disconnect. I could understand the "no mandate" argument if I was asking an absolute return manager to link his performance to the ASX 200 - agreed it just isn't a relevent yardstick.

But I would have thought the whole point of paying a manager of (for example) an Australian Equity managed fund, is that they are implying they are able to select a portfolio of Australian Equities which will perform better than the index. So their mandate isn't "invest in the index" as you suggest, but "invest in a superior subset of the index and in doing do at least match the index performance"

 

Hi TAO,

All fund managers will have a mandate around what they are expected to invest (and sometimes not to invest) in on behalf of unitholders.

Let's look at the second part first...

"with upside of possible outperformance of the index"

An "active" fund manager will try to out-perform the index to which they are benchmarked. They will try to do this by analysing stocks and then buying stocks they think will out-perform (and for some fund who can, they will sell the stocks they think will under-perform, this is also known as short-selling, which can also be done by using derivatives). This out-peformance or "skill" at stock picking is also call "alpha".

The majority of fund managers are active/alpha fund managers...

Now the first part...

"guaranteed return equal to a particular accumulation index returns"

There are two ways of "guaranteeing returns equal to a particular accumulation index"...replicate the index by buying shares in equal proportion as per the particular index you want to have returns matched to...replicate the index by buying derivatives in the particular index you want to match returns with. These methods would have little or no "alpha"...

To be able to guarantee returns equal to a particular accumulation index buy shares in equal proportion to that particular index. If I was trying to replicate the Australian 300 index, I first buy BHP as it is the largest stock in the index in the same % proportion as it matches the index which I am trying to replicate (weightings). Then I buy CBA as it is the second largest Australian stock in the index, etc...

So, in the end I have spent 100% of my investors fund in about 300 stocks in various $ amounts in line with their % weightings and turn over the portfolio as in-frequently as possible as this costs brokerage. Using this method, I have no funds left over as I have invested in line with the index I am trying to replicate...How can I outperform if I have already invested all my funds?

Alternatively, buy derivatives on the index, by buying a derivative you are paying for time/interest. This will potentially cost more with time-decay and have sub-standard returns to the index as you are paying for interest.

There are only a handful of passive/low alpha fund managers in Australia...

So the first way of indexing is the easiest to "guaranteed return equal to a particular accumulation index returns" though when this is done, as we have invested all our funds, we cannot have any "upside of possible outperformance of the index". Hence the previously mentioned structural disconnect, probably a better phrase would be "mandate disconnect"...You can do this (outperform the index) or this (guarantee the index returns) but not both together.

Hence, why there is no fund manager offering such an investment...

You can read more about indexing investing here http://www.vanguard.com.au/library/...&siteID=1&str_title=UnderstandingIndexWeb.pdf

Cheers,

Dan

 

It seems to me that your luck of basic knowledge makes you very much confused, therefore you still do not understand what I said.
Nobody said (including me) that consistently outperforming the index is an easy job. But there are few (as I said) who are able to do it.
AGAIN – There is a BIG difference between Fund managers in terms of responsibility, and/or risk involved with dealing with OPM etc....and private traders (that is why private traders put own money where their mouth is, included me).
There is a lot of people who are looking for a ‘Holy Grail’ (well performed Fund, perfect system, perfect wife & girlfriend etc...).
If you are one of them.....I would say, that you are simply wasting your time...

 

Tropo

Oh yes I remember now... that $30 book on trading (which describes how to consistently beat the market), that no fund manager earning $100m/year has bothered to buy/read.... It's not that I don't understand what you say, its just that it defies all logic.

 

Not to worry... Your logic rests the case.

 

Ah yes, but the whole funds management industry is largely a scam .... as your proposal so elegantly demonstrates.

 

Can the dividend reinvestment of a indexed fund like Vanguard generate the Alpha that Dan mentions if you are able to use the franking credits?

 

Hi Sacko,

Alpha is out-performance of the market. By investing in the market index you will receive the same return as the market so the alpha would be close to zero and the beta should be very close to 1. The Vanguard Australian Index has a tiny out-performance of the market of about 0.2% pa. As they only buy the top 270, the bottom 10% of the ASX 300 has high turnover which increases costs, hence to reduce turnover/brokerage they don't invest in the bottom 10%.

You can read more Alpha (investment - Wikipedia, the free encyclopedia) and Beta (finance) - Wikipedia, the free encyclopedia

Cheers,

Dan

PS This is general information. Before making an investment decision speak to your FPA registered Financial Planner.

 

Dan

Surely if I were to spend 90% of my available funds on an index ETF and the remaining 10% on a handful of shares within the index (which I believe will do better than the index), then I will have achieved Index return plus some alpha?

Isn't that what we pay fund managers for? To identify those critical few outperformers and go overweight on them so as to outperform the index?

My original proposal for fee structure was simply recognising this goal and only paying for this outperformance.

 

Hi TAO,

As you pointed out, if you buy 90% of an index you'll have 90% of index returns and with the other 10% your betting on whether you can outperform the index (or not). Your tilts to stocks which you believe will outperform will either add or detract (alpha) from your overall performance compared to the index's performance.

Fund managers are paid to invest on unitholders behalf. I do not know of a fund manager who purely charges on out-performance of an index. Not to say that it may exist but the larger fund managers don't do it on a pure out-performance fee.

It is extremely difficult to outperform day in, day out.

Cheers,

Dan