DanH wrote:Is it fair to assume that the 'gamble' is the active manager? Is total return all that matters? What about risk-adjusted return (i.e. Sharpe)? How about downside risk exposure? What about forgetting about individual fund characteristics and focusing only on portfolio characteristics? Don't these things matter? Funny how index proponents rarely (if ever?) address these more practical issues in the active vs. passive debate.
If you look at history, you'll (almost) always be able to find some actively-managed fund that beat its benchmark with less risk, etc. For me, the most important question though is will that fund/manager continue to outperform? Even if I concede that some people, including you, can identify superior managers, there's no way that anyone can foresee which ones will be around in 5, 10, 15 years or longer. That's a very significant risk. I don't see how that applies to an index fund.
It's not as if indexes are risk free. Isn't there a risk that indexes are poorly constructed? The free float issue comes to mind and the big change that happened with MSCI indexes (and funds tracking the same) 5 years ago.
The MSCI free float issue was resolved by MSCI without major pain to index fund investors. Even the "poorly constructed" TSX, when NT comprised 35% of market cap, has done well over time. Yes there are risks with some indexes, especially ones that track narrow slices. That's one reason why I prefer the broad, total market indexes. They may not be immune to construction problems, but their broad base protects them from all but the most serious earthquakes.
Barclays' change to more expensive currency neutral U.S. and EAFE indexes come to mind. So if you're a wealthy individual (enough to be afraid of U.S. estate taxes) who relied on those for exposure, you now have a choice between paying more (for other Canadian index funds), keeping the same iShares (and having your exposure change substantially), or roll the dice and buy U.S. ETFs and taking your chances with the IRS.
Because of their structure those BGI funds were mostly held in RRSPs so those who didn't approve of the mandate change could switch without tax consequence. If you have enough to worry about US estate tax you also qualify for CIBC's MER rebate. If you decide to switch to US ETFs then, again inside an RRSP, you have no US estate tax issues. So, at least with the example you gave, this is a non-issue
Of course there's a risk with any index fund that its mandate could change materially or that it could be wound up, etc. Those risks, however, are extremely low for large US ETFs like VTI and EFA. I can't see how they can be comparable to active manager risk.
These sound like very material risks to me.
There are always risks. IMO the risk that a manager won't continue to run a fund and/or that a fund won't survive, etc. are far greater. Yes, even index funds and ETFs can die. TD's did, but there were warning signs from day one. One has to do some homework before buying blindly into any fund even those that track an index. When have I said otherwise?
Depends. Sometimes none. Back in 1998, we were placing Cundill Value in most of our portfolios. At that time, it was a chronic underperformer. Did the same with some Trimark products. Was it a risk? Sure.
Would you place the AGF European fund in that category? Would you use that fund as a proxy for the European equities part of a portfolio (i.e. without any other European equity exposure "tilt")? Would you even recommend that most investors slice and dice their overseas investments in this way? (Yes, I appreciate that there can be special situations when this might be appropriate for some small number of investors, but as a general strategy?)
I may have the fund confused, but wasn't it AGF's International Value an outperformer when Brandeis managed it? How's it doing now?
But so is walking out your door every day.
Sedulously eschew obfuscatory hyperverbosity and prolixity.