# Passively managed index funds - what are your picks?



## nonspeculator (21 April 2011)

Many people smarter than I thoroughly recommend passively managed index funds for new investors with minimal capital.

The gist is that the fund manager essential mimics the index with minimal fees to the investor.

Why this is +ev is because indexes, in the long term, have proven to outperform the majority of funds under management (do you agree?).  The way I see it - the people (i.e. Standard and Poors), put in the hard yards diversifying a portfolio for the fund manager.

I don't have the capital to justify the transaction costs of trying to mimic an index myself, nor the time (thanks to full time work + masters!), so I'm looking to a passively management index funds.

Some questions:

1. What are my options in terms of passively managed index funds, their past performance, and a comparison of feeds.  My searches have come up unsuccessful in finding a list.
2. What are the key australian index's, and sources of past performance?
3. As an Australian full time worker, are there implications in investing in Australian funds as opposed to O/S funds?

Any help would be greatly appreciated.

Dave


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## warennie (21 April 2011)

Hey Dave,

You might like to look into some ETF (Exchange Traded Fund) if you already have an established trading account (commsec, etrade etc). There are a large amount of different funds that are listed just like any other equity.

iShares for example have 4 Australians funds (200, 20, High Dividends and Small Ords)
http://au.ishares.com/fund/performance.do
They also have 19 international funds traded over the ASX.
There are other ETF's that mimic different indexes out there, wouldn't be hard to find some.


This can be simpler than investing in a managed fund as they are traded over the ASX just like anything else.

If you wanted to go down the Managed Fund path it can be a bit more tricky and amounts that can be invested have minimums that vary depending on the fund. ETF are easy to buy and sell, and the only costs is brokerage.


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## So_Cynical (21 April 2011)

nonspeculator said:


> Many people smarter than I thoroughly recommend passively managed index funds for new investors with minimal capital.
> 
> The gist is that the fund manager essential mimics the index with minimal fees to the investor.
> 
> ...




ETF stands for Exchange Traded Fund...the sort of funds your talking about are called tracking funds, the fund managers go to alot of trouble to make the SP of the fund directly reflect movements in the index the fund is tracking...yep highly trained and educated financial professionals deliberately sell down the share price of the fund to track the index when the index is falling ...deliberately loose you money.

STW is the oldest and most liquid (biggest) ASX200 index tracking fund. 

http://www.spdrs.com.au/etf/fund/fund_detail_STW.html

VAS is one of the newest and tracks the slightly more diverse ASX300 index.

http://www.vanguard.com.au/vanguardaus/fms/PDFs/etfs/VAU_profile.pdf

There are others.

----------------------------------

Now just for something to think about and consider...ill throw up a comparison chart i recently came across, the chart compares the Accumulated performance of the ASX200 accumulation index (dividends reinvested) and the accumulated Share price of one of Australia's biggest Cement company's....the chart covers the last 11 years and shows an index return of roughly 120% and a return for ABC (Adelaide Brighton Cement) of around 1000%

A simple mid sized, conservatively managed company that you have probably never heard of has beaten the index by a very very wide margin....they didn't do anything spectacular to do this, just went about there very low risk, simple business.
~


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## doctorj (22 April 2011)

Anyone investing in ETFs should read last week's Global Financial Stability Report published by the IMF.

http://www.imf.org/external/pubs/ft/gfsr/index.htm

Obviously the IMF is most concerned about the potential systemic impact of large scale, ETF trading, particularly from the derivatives they use to replicate returns from illiquid markets or to magnify returns.  However, they also cover some pieces that might be of concern for investors - 



> While these enhancements have reduced costs, they add a layer of complexity and increase counterparty and liquidity risks.




For what it's worht, BIS also published a paper on the same topic (oddly, on the same day...) - http://www.bis.org/publ/work343.pdf


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## skc (22 April 2011)

So_Cynical said:


> Now just for something to think about and consider...ill throw up a comparison chart i recently came across, the chart compares the Accumulated performance of the ASX200 accumulation index (dividends reinvested) and the accumulated Share price of one of Australia's biggest Cement company's....the chart covers the last 11 years and shows an index return of roughly 120% and a return for ABC (Adelaide Brighton Cement) of around 1000%
> 
> A simple mid sized, conservatively managed company that you have probably never heard of has beaten the index by a very very wide margin....they didn't do anything spectacular to do this, just went about there very low risk, simple business.
> ~




Be careful with long term charts like this. It says what it says - ABC has outperformed the index for _over the last 11 years_. But a lot of the out performance was achieved in the early years. The way the chart is constructed, you will not see how it has underperformed the index since their peaks in 2007. So buying ABC now is no guarantee that it will outform the index for the next 11 years, or next 3, 5, 7 etc.


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## So_Cynical (22 April 2011)

skc said:


> Be careful with long term charts like this. It says what it says - ABC has outperformed the index for _over the last 11 years_. But a lot of the out performance was achieved in the early years. The way the chart is constructed, you will not see how it has underperformed the index since their peaks in 2007. So buying ABC now is no guarantee that it will outform the index for the next 11 years, or next 3, 5, 7 etc.




The chart is (as you said) exactly what it is...i did not suggest that ABC will continue to outperform the ASX200 index nor was i suggesting ABC was anything special (ramping) was simply suggesting that index investing isn't all its cracked up to be.

I thought that comparison chart was a bit of an eye opener considering that a simple, mid sized, non mining/commodity, conservatively run company could out perform so spectacularly....a bit like how DJS has, remember that thread from a few weeks back?


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## nonspeculator (22 April 2011)

So_Cynical said:


> ETF stands for Exchange Traded Fund...the sort of funds your talking about are called tracking funds, the fund managers go to alot of trouble to make the SP of the fund directly reflect movements in the index the fund is tracking...yep highly trained and educated financial professionals deliberately sell down the share price of the fund to track the index when the index is falling ...deliberately loose you money.
> 
> STW is the oldest and most liquid (biggest) ASX200 index tracking fund.
> 
> ...




Thanks for your response.  I have a few questions however:

1. You mention that fund managers "go to a lot of trouble".. it can't be that much trouble if the fees associated with a tracking fund can be around the .25% mark, as apposed to ~2% for an actively managed fund.  Can't electronic algorithms be set up to mimic the index? 

2.  On your "Highly trained finance professionals" point - what do you mean by they sell down the share price of the fund?  I realise that they buy/sell according the index, but that's what I want.  I don't care about the fund managers (who, from the data I've seen, on avg fail to beat indexes after fees) opinions on whether the market is going up or down.

3.  ETFs - I've done a small amount of research on these.. what I don't understand is the hidden fees involved, i.e. how much are we losing on the buy/sell spread to market makers? what other middle men are there?  Also - after a quick analysis of a few products, I found for a 5k investment the index fund is cheaper than the ETF.  I realise that ETFs are more liquid, but I am a long term investor and don't really care bout that.  What are the other benefits with ETFs?

4. On your company beating the index point... yeah I'm sure it's not hard to find companies that have consistently beat the market.  There will be the same number who have consistently not beat the market.  Also, for me to try and build up a diversified portfolio of shares with minimal risk would take a lot of time, and after the ~20 odd assets I'm sure the transactional fees would make any investment under a large sum (100k? anyone done the analysis?) unworthwhile.  Is this a fair statement to make?


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## Bill M (22 April 2011)

nonspeculator said:


> .  ETFs - I've done a small amount of research on these.. what I don't understand is the hidden fees involved, i.e. how much are we losing on the buy/sell spread to market makers? what other middle men are there?  Also - after a quick analysis of a few products, I found for a 5k investment the index fund is cheaper than the ETF.  I realise that ETFs are more liquid, but I am a long term investor and don't really care bout that.  What are the other benefits with ETFs??



There are no hidden fees, they tell you what they charge in the PDS. To buy an ETF it will cost you normal brokerage from your broker to buy and sell. Then there is the management fee which is somewhere around .25% to .35% depending on the fund. The "middle men" are the market makers you might be thinking about. Some of these ETF's are not all that liquid. To remedy this the Fund Manager has a bank to act as a market maker. They make a market and the spread is 5c or 10c (*check* depends on fund) between the buy and sell. It is far better to have a market maker with reasonable spreads than have no market at all, can you imagine that? If there is no market and you are desperate to sell you may have to sell well under it's real value. If there wasn't a market maker I wouldn't touch that ETF.

Something else you need to get your head around is "ETF" and "Index Fund". Both are index funds, the "ETF" is traded at an instant and on market. With the "Index Fund" you have to fill out a form and send it in to get your money back. The 5 days it takes to process could cost you hundreds of $$$ if the markets crash. ETF's generally have cheaper management costs, something worth considering.




> Also, for me to try and build up a diversified portfolio of shares with minimal risk would take a lot of time, and after the ~20 odd assets I'm sure the transactional fees would make any investment under a large sum (100k? anyone done the analysis?) unworthwhile.  Is this a fair statement to make?




OK, lets use Comsec for this example. It costs $20 per trade under 10K. Putting 5k into 20 stocks will cost you $400. You bought them, you picked them and you sell them for $400 when you want. There are no ongoing management fees when you pick your own, it wouldn't take that long to get your brokerage back.

I am an investor of ETF's and have also been of Managed Index Funds, I no longer hold those. ETF's are easy to get in and out of quickly just like any stock. They are a core part of my portfolio. Yes as So_Cynical pointed out sometimes they sell companies off when they fall and are no longer in the index but I think that's good, sometimes. Who wants losing companies in their portfolio? I certainly don't.


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## nonspeculator (22 April 2011)

Bill M, thanks a lot for your reply. Clears a lot up for me.  

I'm studying Applied Finance at the moment so I have the added benefit of learning more about the market if I choose my own stocks and increase my employment chances in the industry.

Rgrds

Dave


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## davede (11 June 2011)

Hi,

Personally I've used STW for a few years. I believe they're the oldest however I think the iShares ASX200 Index Fund has a lower MER. 

I recall being at uni and fed the 'index funds will outperform managed funds on average' line. However as soon as I got into the industry I realized that while it may be true (depending on the figures you're using) it is the funds that do outperform the market that you should be concerned with. funds that are run by professionals with decades of experience with billions of dollars in FUM like Kerr Nielsen at Platinum.

While you may not wish to invest your money in the funds there is so much to be learned from the pros. 

If you are wanting to further your chances of success in the finance / funds management industry understanding *how *fund managers make decisions and *why *will be just as important as choosing your own shares.


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