From: Ronald Raygun 
Subject: Re: Starting a pension - advice please!
Newsgroups: uk.finance
Date: Wed, 20 Dec 2006 13:54:26 GMT

GB wrote:

> "Ronald Raygun"  wrote in message
> news:Au8ih.19155$k74.17200@text.news.blueyonder.co.uk...
> 
>> "Playing" the stockmarket isn't a pure gamble, though, and if what you're
>> implying were true, then the whole idea of managed funds would be
>> inherently
>> daft, and the levying of charges inherently fraudulent, since it doesn't
>> take highly-paid managers to pick shares at random (which according to
>> you would be a strategy which on average (there's that let-out again)
>> does no better nor worse than "actively"managed funds).
> 
> Which planet have you been on these last few years? There's been a huge
> debate about the advantages of index funds compared to actively managed
> funds. A huge wall of money goes into index funds.

Yes, but although a lot of money invested is invested via these tracker
funds, it is widely accepted that they don't do very well, isn't it?.
If they really were the bee's knees, then nobody would touch actively
managed funds.  No?

> Of course the managers aren't picking stocks at random. The problem is
> that they are not necessarily right in what they are doing, and they are
> trading mostly against other professionals with the same aims of
> outperformance as themselves. It's what mathematicians call a negative sum
> game, as the total of all transactions less costs leaves investors worse
> off.

So what's the answer?

> The funds do provide some diversification and a convenient means for
> people to invest. So, some charges are justifiable.

Agreed, with the emphasis on "some", which I'd like to interpret as "much
less than in fact they are".  It's also much too cushy an arrangement for
fund managers to have their remuneration based on capital invested.  They
should jolly well be paid by results, and should get a percentage of
gains *and losses*.  That'll flush out the duffers pdq.

> Well, you have cut out the next section of my post, which explained how
> this random process can give the illusion of successful management. What I
> should also have said is that there may be truly insightful managers out
> there, but it is impossible to sort them out from the merely lucky ones. I
> remember my lecturer at London Business School saying that you would need
> to watch a manager for over 40 years to find out whether he was truly
> insightful or merely lucky. By the end of 40 years, it would of course be
> far too late to do anything with that information.

Very amusing, and it may even be the case that truly insightful folk
become evident in 5 years or less, but by then they're burned out.  Another
complicating factor may be that the real whizz-kids get head-hunted, so
that they don't stay with the same funds, leaving the punters with little
to go on.

>> The question is how
>> the average unitised fund compares with the raw average of non-unitised
>> performance in the same sector.
> 
> Oh, that's easy. On average, actively managed unitised funds underperform
> their sector. Indeed, even index funds underperform slightly, because of
> their charges.

So I ask again:  What's the answer?  Diversification is obviously a good
thing, but you don't need to hire a manager to achieve that, investors can
form investment clubs to pool their resources (both of money and of effort),
all they need to agree on is what strategies to use for picking which stocks
to buy and sell and how often, bearing in mind that *any* trade will incur
commission overheads.  Do you think investment clubs might do well if they
used a high dose of randomness in their selection procedures?