{"id":14298,"date":"2016-10-09T20:51:51","date_gmt":"2016-10-10T00:51:51","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=14298"},"modified":"2016-10-09T20:51:51","modified_gmt":"2016-10-10T00:51:51","slug":"active-managers-and-index-funds-how-to-avoid-the-pitfalls-and-get-the-best-of-both-worlds","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2016\/10\/09\/active-managers-and-index-funds-how-to-avoid-the-pitfalls-and-get-the-best-of-both-worlds\/","title":{"rendered":"Active managers and Index funds: How to avoid the pitfalls and get the best of both worlds"},"content":{"rendered":"<p>From James Kirby at <a href=\"http:\/\/www.theaustralian.com.au\/business\/wealth\/fund-managers-fight-for-life-as-index-huggers-beat-them\/news-story\/5f0c4c435ad5080858de7c98326e4715\">The Australian<\/a>:<\/p>\n<blockquote><p>Australia\u2019s big fund managers are now openly bagging index funds and exchange traded funds (ETFs)&#8230;.Keep away from index funds and ETFs, they cry, the market is too tough for investors to blindly follow an index-style fund when returns are as modest as we have seen in recent times&#8230;.<\/p>\n<p>But rather than flinging mud back at the active managers&#8230;. the passive brigade has instead made two killer moves.<\/p>\n<p>The first move is to reveal quite plainly how the active managers are performing \u2014 and they are performing dismally.<\/p>\n<p>The second move is to continually cut prices \u2014 or fees \u2014 to the point that active managers look very expensive indeed.<\/p><\/blockquote>\n<blockquote><p>Dow Jones\u2019 Indices versus Active Australia Scorecard:<\/p>\n<p><strong>Australian General Equity (Large-Cap) Funds<\/strong><\/p>\n<p>59.7% underperformed the S&amp;P\/ASX 200 Index over one year<\/p>\n<p>69.2% underperformed the benchmark in a five-year period<\/p>\n<p><strong>International Equity General<\/strong><\/p>\n<p>80.7% underperformed the S&amp;P Developed ex-Australia Large Cap Index in a one-year period<\/p>\n<p>91.9% underperformed the benchmark in a five-year period<\/p><\/blockquote>\n<p>I have two major concerns with index funds:<\/p>\n<p>First, index funds reward size, not performance. The bigger a corporation grows, and the bigger its weighting in the index, the more stock an index fund will buy. Over time the index is likely to grow increasingly dominated by a herd of dinosaurs &mdash; earning low returns on a large asset pool and unable\/unlikely to adapt to change &mdash; headed for extinction.<\/p>\n<p>Second, active fund managers perform a valuable role for the entire market, conducting in-depth research of industries, visiting companies and evaluating prospects and performance. Their resulting purchases and sales inform the entire market as to prospective value and under-pin long-term market value. Increasing dominance of passive index funds erodes this capability and will hasten the growth of my first concern.<\/p>\n<p>An easy way to counter the first concern is to invest in equal-weighted index funds. These do not reward size, instead investing an equal amount in each stock in the index instead of weighting by market capitalization. <\/p>\n<p>Apart from eliminating the size bias, the equal-weighted index has another major advantage. It out-performs cap-weighted indices by a sizable margin. The graph below shows the S&amp;P 500 Equal-Weighted Index achieved an annual performance of 8.53% compared to 7.03% for the regular S&amp;P 500 Index, over the last 10 years. <\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" title=\"Performance Comparison: S&amp;P 500 (TR) Index v. S&amp;P 500 EWI (TR) Index\" src=\"https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2016\/10\/2016-10-10-spx-ewi.png?w=525&#038;ssl=1\" alt=\"Performance Comparison: S&amp;P 500 (TR) Index v. S&amp;P 500 EWI (TR) Index\" \/><\/p>\n<p>The only way to address the second concern is to keep a sizable part of your portfolio with active managers. Don&#8217;t blindly follow performance &mdash; last year&#8217;s winners are often this year&#8217;s losers &mdash; but follow managers with reasonable fees and proven long-term ability to outperform the index.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>From James Kirby at The Australian: Australia\u2019s big fund managers are now openly bagging index funds and exchange traded funds (ETFs)&#8230;.Keep away from index funds and ETFs, they cry, the market is too tough for investors to blindly follow an index-style fund when returns are as modest as we have seen in recent times&#8230;. But &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/thepatientinvestor.com\/index.php\/2016\/10\/09\/active-managers-and-index-funds-how-to-avoid-the-pitfalls-and-get-the-best-of-both-worlds\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Active managers and Index funds: How to avoid the pitfalls and get the best of both worlds&#8221;<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[40,52],"tags":[1262,1808,3013],"class_list":["post-14298","post","type-post","status-publish","format-standard","hentry","category-australia-nz-countries-regions","category-index-funds","tag-equal-weighted-indexes","tag-index-funds-2","tag-sp-500-equal-weighted-index"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Active managers and Index funds: How to avoid the pitfalls and get the best of both worlds - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Active managers and Index funds: How to avoid the pitfalls and get the best of both worlds - the patient investor\" \/>\n<meta property=\"og:description\" content=\"From James Kirby at The Australian: Australia\u2019s big fund managers are now openly bagging index funds and exchange traded funds (ETFs)&#8230;.Keep away from index funds and ETFs, they cry, the market is too tough for investors to blindly follow an index-style fund when returns are as modest as we have seen in recent times&#8230;. 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But index funds and comparable exchange-traded portfolios now account for 28% of total fund assets, up from 9% in 2000. And no wonder. Over the past one, three, five and 10 years, only one-fourth to\u2026","rel":"","context":"In &quot;Index Funds&quot;","block_context":{"text":"Index Funds","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/index-funds\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":15446,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/06\/12\/the-dangers-of-passive-investing\/","url_meta":{"origin":14298,"position":1},"title":"The dangers of passive investing","author":"ColinTwiggs","date":"June 12, 2017","format":false,"excerpt":"There is a lot to be said for passive investing. Key Takeaways from Morningstar's Active\/Passive Barometer Report: Actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons. 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