FIRE and the Indexing Illusion


Before I came to Thailand, I believed everything about index and low-cost investing almost every FIRE follower believes. The FIRE mantra of keeping costs as low as possible while not trying to beat the market was always the center of my investing strategy. Index investing articles can be found everywhere in the FIRE community, and almost all of them emphasize how the high fees of active management reduce your long-term returns, leaving you with a much smaller portfolio than if you had invested in low-cost index funds. My experience and research have shown that’s not always the case.

Thai Mutual Funds vs. The SET50 Index

I started investing in LTF’s and RMF’s (funds that invest in equities on the Thai stock exchange) for tax savings about 10 years ago. The only funds that are eligible for tax savings are high-fee mutual funds, but I decided to invest in them anyway since I could save on my tax bill.

After a few years, I realized those high-fee mutual funds were dramatically out-performing the SET50 Index, even after their high fees were taken off returns! The SET50 Index is the primary index used for benchmarking funds on the Stock Exchange of Thailand.

Let’s take a look at a couple examples. UOB’s Good Corporate Governance Fund is the first actively managed fund I invested in:


While it hasn’t outperformed the SET50 Index every year, its cumulative 10-year performance is more than double the index! I’ll gladly pay the annual 1.61% management fee for an extra 100% return after fees!

Here’s another fund I hold, this time from Krungrsi Asset Management:


Again, close to double the return of the index over a 10-year period!

I was eager to find out what was going on. After some research, I realized that Thailand is a relatively small and illiquid market, and there’s inefficiencies, back-hand deals, etc., that are typically not found in the US market. This really rattled my brain because it required a complete paradigm shift from everything I had read and was taught about investing.

Closed-End Funds (Investment Trusts) vs. Index ETF’s (Exchange Traded Funds)

I did some more research and I was shocked at what I found. Active management regularly outperforms local indexes, even after their high fees are taken off returns. I found high quality, closed-end funds on the London Stock Exchange that have outperformed the equivalent low-cost iShares or Vanguard index funds in almost every time period available. Closed-end funds are companies that invest in other companies.

Many of the top closed-end funds have been around for decades, and some have even more than 100 years of history. Many great active managers fizzle out, but I found some of the highest quality funds in the world with decades of out-performance.

As a result of seeing Thai mutual funds dramatically outperform their index benchmark and finding closed-end funds that regularly out-perform, I decided to look into active management for the bulk of my portfolio. Of course, past returns do not guarantee future returns, but that’s a risk I’m willing to take.

Let’s take a look at how some closed-end funds compare with iShares and Vanguard low-cost index ETF’s in different markets, starting with Asia ex-Japan:


As you can see, the Schroder Asian Total Return and Pacific Assets Trust closed-end funds outperformed the equivalent iShares and Vanguard index funds in almost every time period.

Next, let’s look at emerging markets:


The JP Morgan Emerging Markets closed-end fund outperformed the equivalent index funds in every time period greater than 3 months.

Here’s a comparison of Europe ex-UK funds:


You can see the European small-cap closed-end funds out-performed the equivalent small-cap ETF’s in almost every time period. The BlackRock Greater Europe fund also out-performed the equivalent European ETF’s.

Here’s a comparison of global funds:


Again, you can see dramatic out-performance in every time period.

Let’s try Japan funds:

Again, all of the closed-end funds out-performed the equivalent ETF’s in almost every time period.

Here are some UK funds:

Again, all the closed-end funds are at the top and the low-cost ETF index funds at the bottom.

If there’s any chance of active management outperforming index funds, you wouldn’t expect it to happen in US markets. After all, that’s where most of the research criticizing active management comes from.


But, that’s not the case. The JP Morgan US Smaller Companies closed-end fund outperforms the equivalent iShares and Vanguard small-cap index funds in the long-term. There’s almost no comparison between the active funds and the Vanguard Small-Cap and Russell 2000 index funds.

The JP Morgan American closed-end fund out-performs the iShares S&P 500 index fund dramatically at 10 years, and it beats the Vanguard Total Stock Market ETF in almost all time periods as well.

You can say I’m cherry-picking the active funds, but I would turn that statement around and say the Vanguard studies that show active management under-performs have cherry-picked the worst US mutual funds, rather than using the highest quality closed-end funds in the world. I have most of the closed-end funds in the above comparisons in my own portfolio and feel free to do your own comparisons.

The closed-end fund market on the London Stock Exchange is very different from the mutual fund world in the US. Many mutual funds in the US seem more like fly-by-night operations with new ones popping up and disappearing overnight.

I think that’s where people in the US go wrong when looking at the research – mutual funds often pop-up specialized in the latest hottest sector or fad more like a con game than anything else, and then quickly disappear after they take their investor’s money in high fees. There’s so much garbage in the US that yes, the average fund underperforms. But if you only look at the top funds in the world with decades of out-performance, the picture looks very different.

To be fair, there are closed-end funds that underperform, but the above comparisons are enough to at least question the theory that low-cost indexing is always better. The average US active fund manager will most likely underperform the index, so don’t buy the average fund then. Buy the best active funds in the world managed by the best managers in the world that have a long history of out-performance.

I completely agree with the experts when they say if the average person buys index funds using dollar cost averaging, they will be light-years ahead of most people. But if you want to spend years putting together a portfolio of the top funds in the world, you can beat index investing over the long-term. I think a lot of people in the FIRE community fall into that extra-effort category, and they may want to open their minds.

The discrete performance of each fund also needs to be compared to the equivalent ETF’s for each time period, but that’s beyond the scope of this article. The cumulative time-frames overlap and it’s possible for a fund to outperform at the beginning, which can give 5 or 10-year cumulative out-performance even though it underperformed in other years. The research says the top performing funds in one period don’t perform better than average in the following non-overlapping period, but the above cumulative comparisons are enough to take another look at active management.¬†For a lot of people, the active vs. passive debate gets reduced to active is always expensive and underperforms and passive is always better, without ever realizing active management can outperform, even with high fees.

Downsides of Closed-End Funds

It’s important to talk about the disadvantages and risks of closed-end funds. Closed-end funds are inherently riskier than index funds because they often use gearing (margin loans) and can trade away from NAV. They can also be riskier because they typically hold fewer assets than index funds and trade more often.

I know gearing also increases losses, but I’m in it long term. To me, that’s preferable to buying an index fund myself on margin because I would pay more in interest than they would, and I don’t want to spend the time to manage margin properly.

The premium/discount to NAV is important to be aware of before investing in closed-end funds. Unlike mutual funds, they don’t create or redeem shares to meet investor demand, so they often trade above or below NAV.

Liquidity can be a problem sometimes. The funds in the global section that I’ve listed above are well traded and don’t have any issues, but the smaller, more specialized funds do have lower volumes.

Is anyone convinced high fee, actively managed funds can regularly out-perform low-cost index ETF’s? At least enough to do some more research?


Thailand data is from Morningstar Thailand and closed-end fund data is from Trustnet.


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Interesting. I know you can find good managers that out perform the market on a consistent basis. I have never looked at close end funds. I should take a look at that,