Buffet did famously make a bet in 2008 that an index fund would beat a fund-of-hedge-funds over a 10-year period. (And with only four years remaining on the bet, the S&P 500 tracker is up 44 per cent against 12.5 per cent for the hedge fund of funds.)
On the other hand, an article in the FT in August, showed that almost 90 per cent of UK active managers beat the stock market over a three and five-year time period. It does show that one has to be careful to make sweeping generalisations that apply to all markets.
The ETF industry is currently debating the validity of using rules-based indices to track rather than using committee created ones such as the S&P 500. Also, whether a market capitalisation weighted bond ETF investing in, for example, corporate bonds is useful to investors, since this type of fund invests in those companies with the biggest debt.
One has to wonder at which point the size of funds in passive will outweigh the benefits, thereby allowing active managers to outperform on average. Passive funds also have their limits for working in illiquid or opaque assets, hence their efficacy in emerging markets and alternative assets is not nearly so clear as that of mature markets or where information asymmetry is weak.
Investment style: Return-focused versus risk-targeted versus risk-focused
In the article in December 2013 we spoke about the investment style of risk-targeted versus return-focused.
The key difference between these two types is that risk-targeted is offered as a family, with each member in the family being targeted to a certain level of risk via volatility limits. Return-focused on the other hand, is comprised of individual funds who explicitly aim for a level of return, whether it be in the form of income, or both capital and income return (total return).
However, given the inflow of funds into the multi-asset sector, there has now developed a third type which sits between the two. We’ve called this type ‘risk-focused’.
In essence, these type of funds form families where individually the funds are return-focused, but together there is some acknowledgement towards risk. Unlike risk-targeted, there won’t be any formal ‘hard’ limits on volatility in place, but overall the fund family will have low to high risk fund options.
Each fund within a risk-focused family has its own return objective, the family will have the same fund manager or team, and each fund sorted in order of riskiness, usually as set by its asset allocation.
Asset types: Traditional versus alternatives
