Is every active fund bad?

Question

My father (who actually is in banking) recommended me an active fond (https://www.finanzen.net/fonds/deka-globalchampions) in which I invest since some quite some time monthly as long-term investment. Currently I just invest a very small amount (200 €/month) but I also plan to increase and spread my investment over different passive funds/ETFs later in my life.

My question is, can an active be worth the additional costs (even so many of them are not) on the long run (of course they can if you are lucky and sell at the right point in time but also as a save investment (averaged over the year, or what ever you call it))?

Answer 1

Actually the link you provided in your question, gives you all the information you need.

The fund has an load fee "Ausgabeaufschlag" of 3,75% and a TER (Total Expense Ratio) of 1,43% per annum.

A somewhat similiar ETF, to compare your fund with, is iShares Dow Jones Global Titans 50 UCITS ETF (ISIN DE0006289382), which has a TER of 0,51% and no load fee.

In the end this means, your fund has to first outperform the ETF to offset the initial load of 3,75% of your investment once and additionally has to outperform the ETF by another 0,92% (1,43% − 0,51% TER) every year.

We have to keep in mind that past performance is no indicator of future performance, but if we look at the last 5 years this hasn't happened. Again using the fund comparison function of your link, we get the following returns:

        Deka-GlobalChampions    iShares Global Titans 50
1 year  11,91%                  14,60% 
3 year  39,60%                  39,27% 
5 year  71,95%                  76,65% 

You would have been slightly better off with the ETF given this 5 year timespan.

So will this specific ETF outperform your fund in the future?

We don't know, but given the load fee and higher TER, it is likely, that the ETF will outperform the active fund slightly every year and given a long investment horizont, this small difference in performance, may compound to a meaningfull difference over an investment life of 25 years or longer.

Does this mean that every active fund is bad?

No, there will always be some managed funds that outperform their ETF counterpart, but general wisdom in the moment is that managed funds (especially those with a high TER and a high load fee) have a hard time to match the performance of low cost ETFs.

And as you have no way to know which active fund will be one of the few who outperform their ETF counterpart, you'll in most cases be better off choosing the ETF from the start, instead of trying to pick the right active fund (which is akin to trying to guess the right numbers in tomorrows lottery).

Answer 2

After the fact, you can point to a few active managers who have done very well (see Buffett, W.). But you don't know in advance who they will be. So, you have to think in terms of the expected performance of an active fund.

Then, you realize that the market is made of traders constantly buying and selling from each other (and extracting fees) trying to get an edge. The biggest institutions can make a living at this, but the retail investors who give them capital to manage (and who pay those fees) represent the triumph of hope over experience.

It's like asking, "Is every lottery ticket a bad deal?" In a negative-expectation lottery, we can say yes, even though some (after the fact) will be winners.

With a passive fund, you own "the market" (the total of all the active manager assets) but avoid most of the management costs. You can be a free rider on the efficient market that the active managers (and those willing to throw money at them) create. Statistically, if you buy one active fund you might as well buy all of them (you don't know a priori which one is better), and then it's clear that you're paying extra fees for no reason, because you've recreated an index fund.

An interesting article summarizes the point that active managers can't beat the market on average because they are the market (Charles Ellis's concept of "The Loser's Game"). It goes on to suggest that there may still be other ways to beat the market, but these are not implemented because of perverse incentives faced by active managers.

Answer 3

(This is more of a philosophical answer to the nature of your question.)

Is every active fund bad?

"Every" is a very big and absolute word. All it takes is one good active fund to prove that statement wrong.

can an active be worth the additional costs... ?

Ditto above. All it takes is one fund to be worth the additional costs to make the answer "yes".

Answer 4

Most active funds are so diversified that they are just trying to match the market average. But the index funds have an automatic re-balancing in that they increase positions in stocks that are going up and decrease positions in stocks that are going down. The index funds are a type of momentum fund and not very diversified when considering position sizes.

Now an active fund that holds a small number of positions is a fund that is putting itself on the line and is truly active.

Or a fund that has significant capital-gain distributions while not having net redemptions that would be a very active fund.

Furthermore, closed-end-funds, that never face redemptions, use more leverage and hedging and are truly active.

Basically, an active fund is worth the cost and risk if it interests the investor.

Or you can be your own active manager by selecting which sector to invest-in at particular times and then just investing in diversified or index sector funds.