FTSE 100 and other trackers

bowlhead99 wrote: »

US trackers outperformed global trackers because when you line up the historic performance of 6 major world regions in a league table for a decade and one region happens to get in the top 3 more than it appears in the bottom 3, it will 'seem to outperform the average'. This doesn't mean it will do that in the next decade. The next decade will still be a coin toss whether it outperforms the average or not.

If you only pick one region you are tossing a dice whether your returns will be well above, above, same, worse, a lot worse than the average returns of the world stock markets. It seems irrational to put your eggs in one basket and buy just one market, when you could buy all the markets in one fund.

You might feel you want some 'home bias' because you live in the UK and therefore want to invest in UK listed companies, some of which are very multinational and some aren't. However, your portfolio of individual shares is probably already all or mostly UK listed as I doubt you can be bothered to research and buy many shares on the European or US exchanges let alone the Canadian, Korean, Indian, Japanese stockmarkets.

So that would logically lead you to go somewhat more global with your fund exposure, because you can make your own proxy for the UK index by simply holding a bunch of diversified UK shares as you are already doing. But trying to 'go global' and then instead just going to the US because the US went up more than other countries when you look at charts for a limited time period in the past, seems flawed.

The reason why you shouldn't invest in a FTSE100 tracker as mentioned in earlier posts is because its method of allocating most money to the biggest companies leaves it heavily weighted to certain industry sectors and largely missing others. Linked here (http://www.sectorspdr.com/sectorspdr/Pdf/All%20Funds%20Documents/Document%20Resources/10%20Year%20Sector%20Returns) is a chart from a US-based tracker provider showing the performance of different industry sectors over the last decade. Generally the difference between the top-performing sector and the bottom performing sector is 30%+.

For example
- in 2008, "financials" fell by 55% while "consumer staples" only fell by 15% and an equally weighted sector basket fell 35%
-then in 2009, "technology" was up over 50% while "consumer staples" (which had done relatively well the year before) was down at the bottom of the chart next to "utilities" at below 15%.
- financials had a good year in 2012, growing 29% while "energy" only did 5%. A stark contrast to 2007 when energy had been +36% and financials -19%.

So, from this demonstration that all the sectors outperform at different times, you can conclude that an index missing some of them is going to be more volatile and potentially perform worse than a more balanced basket of assets.

The second page of the link showed the worst sector performers over the decade under review were financials and energy, both under 5% annualised while technology was almost 10%. If you look at the FTSE100 composition, it was packed full of energy and financials (Shell and HSBC in the top two spots) and devoid of technology (no Microsoft or IBM or Apple or Google or Facebook or Yahoo). So, that explains neatly why the UK 100 did not do so well as the world average. Next year if tech stocks crash and car manufacturers take the top spot, the UK index is still not going to be up there because unlike US, Germany and Japan, we don't have any of those in our index.

UK100 will only be the top index in certain conditions and it is a poor one to have as your only fund. However if the markets favour our sectors it is perfectly possible for a UK index to outperform the US index, particularly if the pound recovers making dollars less valuable, because only half the revenues of the UK100 come from dollars. Or the US has a domestic slump while Europe and Asia and the emerging markets do better on average, the US will be the wrong place to be, and Global would have been better. So if, as you say, you are only going to buy one or two funds, it does not make any kind of sense for those to be specialist single-region funds, because you don't know what single region will be the best place over the coming decades.

The same analysis of tracker performance by sector in the link can easily be done instead for geographic regions and asset classes (largecap equity, smallcap equity, corporate bonds, government bonds, real estate etc as well as all the different parts of the world). The message will be the same - in any given year the top sector will be tens of percent better than the bottom sector.

So, as you don't know which countries and sectors are the best, because you don't have a crystal ball, if you only want one fund, it makes no sense to put your eggs in one basket (we acknowledge that this is only 10% of your assets and you do have other things going on your total wealth, but the point is the same).

dunstonh wrote: »

10 years is too short and is mostly a growth period. Especially the last 10.

dunstonh wrote: »

There are 10 main sectors. There are multiple sub sectors which larger portfolios may consider. However, the 10 is fine for most.

If you do not include sectors then you are starting to bring in management decisions ehihv you would only do if you think you can beat the market. So, what is it that believe makes your research and analysis better?

bowlhead99 wrote: »

FTSE All-World is 52% American (end of last month, $38 trillion tracked by the index of which under $20tn is US). The US ratio is higher if you are using a global index which excludes emerging markets or an index which is ex-UK.

But sure, the global index is about half US so will have a bad year if US has a bad year. The obvious reason to buy it is for the half that is not US and doesn't have as bad a year.

It's like saying, would you prefer to bet on throwing a 6 in a dice game, or throwing a number greater than 3 in a dice game, if the payout was about the same. Most of us would select 'greater than 3'. Your logic seems to be that if 6 never comes up, then 'greater than 3' will have a hard time, so you might as well just go for throwing a 6, because you know the number 6 and have not really heard of 'greater than 3' as a concept.

bowlhead99 wrote: »

By deliberately selecting to structure your portfolio of investments using tracker(s) which don't include all the sectors, that can't be anything other than a 'management decision'.

Maybe the manager in your head is telling you not to invest in US or Global funds because sterling is going to strengthen and you'll lose money. That might lead you to invest in UK listed investments for greater sterling exposure (though the FTSE100 as mentioned has lots of dollar and euro exposure anyway which is how it has gone up so significantly recently, and is missing sectors as previously noted). For broader UK content you would be better with the FTSE UK All-Share (which is only 80% FTSE100) or a mix of 100, 250 and Smallcap.

But you are free to take the management decisions to invest in whatever markets you wish. You mention that you are more familiar with the US markets so that's why a US tracker appeals, because you get news on it. But you are not looking at selecting individual US stocks affected by the news, you are looking at getting a tracker and following the market for better or worse. So, why would that not work to follow all the other main global markets too?

I mean, you will still hear if Samsung in Korea is having a bad time just like you will hear that Apple in USA is having a bad time. The general financial press covers world markets. The difference is that if you buy a US tracker, Apple is 3% of the fund portfolio whereas if you by a Global one, it is only 1.5% of the fund portfolio. To make Apple 3% of your portfolio when there are a lot more than 30 companies on the planet, seems like you are putting your eggs in too few baskets.