* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Investment Insight - December 2016
Survey
Document related concepts
Private equity in the 1980s wikipedia , lookup
Early history of private equity wikipedia , lookup
Investor-state dispute settlement wikipedia , lookup
Mark-to-market accounting wikipedia , lookup
International investment agreement wikipedia , lookup
Private equity in the 2000s wikipedia , lookup
Investment banking wikipedia , lookup
Interbank lending market wikipedia , lookup
Market (economics) wikipedia , lookup
History of investment banking in the United States wikipedia , lookup
Private equity secondary market wikipedia , lookup
Environmental, social and corporate governance wikipedia , lookup
Stock trader wikipedia , lookup
Private money investing wikipedia , lookup
Transcript
investment insight PASSIVE MANAGER The theory of indexing and why low-cost investing matters M ore and more institutional investors are seeing the benefits of holding a portfolio that represents the market rather than a portfolio that attempts – more often than not unsuccessfully – to beat the market. The theory behind indexing as an investment strategy focuses on the zero-sum game: before costs, for every pound that outperforms the index of a particular market, there has to be another one that underperforms. Once costs are taken into account, it means that low-cost index funds will have a greater probability of outperforming higher-cost actively managed funds. Although some investments, after costs, continue to lie to the right of the market return, in the darker shaded region, a much larger portion is now to the left of the market benchmark line. This means that, after costs, more than half of the performance of investors falls short of the market return. So the smaller these additional costs are, the less this aggregate underperformance will be. This simple theoretical result is powerful because it is just as relevant in all markets, even those often thought to be less efficient, such as small-cap or emerging market equities. Steven Charlton, DC Proposition Manager, Europe Vanguard Investment success The zero-sum game The concept of a zero-sum game starts with the understanding that, at any given point in time, the holdings of all investors in a particular market aggregate to form that market. Because all holdings are represented, if one investor’s position outperforms the aggregate market over a particular time period, another investor’s position must underperform. The aggregation of all investors’ returns can be thought of as a bell curve (see figure 1 below), with the market benchmark return as the mean at zero. In the figure, the specific market is represented by the black curve, with the market return as the vertical line. We explore this concept further in our recently updated paper ‘The case for low-cost index-fund investing’. The data analysis shows that, in practice, few active managers consistently outperform or beat the market, even before costs are taken into consideration. Once costs are included, investment returns are of course reduced further. By keeping costs low, more of a portfolio’s assets can grow and compound over time, increasing returns for investors over the long term. So when considering which strategies and funds are right for your pension schemes plans, a focus on indexing and on low cost can help improve your members’ chance of investment success. [n] Counting the cost In reality, investors are exposed to costs such as management fees, bid-offer spreads, administrative costs and, where applicable, taxes – all of which reduce their realised returns over time. If these costs were to affect all investment funds equally, then the result of these costs would be to shift the investors’ curve to the left but to leave the shape of the bell curve unchanged. Figure 1: Market participant returns after adjusting for costs Source: Vanguard This document is directed at professional investors and should not be distributed to, or relied upon by, retail investors. It is designed for use by, and is directed only at persons resident in the UK. The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority. © 2016 Vanguard Asset Management, Limited. All rights reserved. WWW.PENSIONS-PMI.ORG.UK PMI NEWS DEC 2016 35