FTSE 100 and other trackers

switch76 wrote: »

I understand that you want to reduce uncertainty if you have a fixed target.

The goal is to maximise the return I can get at a level of risk I am comfortable with. If one investment is 0-2% and the other is 1-13%, I'd rather go for the second one.

OK sure, you want the likelihood of bigger returns so the second is better than the first.

But is there genuinely no preference between going for 6-8% and 1-13? The latter just seems to be accepting a lot more variability for no overall advantage. You might outperform but you might just hit the 1s for several years in a row which is way lower than you want and surely to be avoided.

If higher risk higher reward is the desire, then specialist sectors like venture capital, frontier and emerging markets, high-tech /biotech might float your boat rather than messing around with this "mainstream" broad largecap tracker stuff. A massive company which has cornered half the market doesn't have space to quadruple its market share unless the market doubles in size and it takes over the entire market. Smaller companies or developing markets can potentially supply that sort of growth in spades (if you are the type of person who's happy to ride out large ups and downs.

The assumption in your example is that there is a symmetrical spread around the 7% mark. It's my opinion that there is a currency risk around foreign trackers so a FTSE 100 tracker would skew the odds in my favour. I could get a range of 2-14%.

Well, currency risk always goes both ways. Certainly this year it has been best not to be in sterling as the indexes denominated in foreign currencies converted back to GBP are up significantly YTD while this is diluted in a UK index which only has part of its income flows denominated in foreign currencies. The FTSE100 does not have some natural advantage over foreign indices which is guaranteed to give greater returns over the next decade. Your 2-14 could easily be 0-12 or -3 to 9.

The pound is falling because forex markets believe that the UK will become a slower growth economy. This conforms to the widespread (though not universal) view among forecasters before the referendum that leaving EU would reduce UK growth in long term. The UK's attractiveness to foreign investors pre referendum had led to big demand for UK assets on the world stage and had pushed sterling pre-referendum (in opinion of some Nobel laureate economist last week) to 20-25% above its equilibrium level.

As such, just because pounds are worth rather fewer dollars today than they were at Christmas, it doesn't mean they should flip back the other way during your investment time horizon. The forex market is not saying they should flip back, and many commentators are seeing $1-1.10 as being a level the pound could go to without much trouble. Few are suggesting 1.40-1.50 as realistic.

There are also slightly lower fees for the FTSE 100 and US trackers which would skew the odds in my favour.

As mentioned earlier the difference from one sector to the next can be 30%+. Linton's examples showed hundreds of percent difference over the longer term. So, a token extra 0.2% "edge" from fees by only going into two markets is nice, but it's a couple of percent after a decade, not a couple of hundred percent.

Imagine if you had got a Japanese tracker because of some clever new software making the management fee tiny so it was the cheapest at 0.01% instead of 0.10%, and you bought on grounds of price - but then over 20 years it gave you 40% instead of 400%. An "edge" of a small fraction of a percent is nice mathematically but next to useless in the real world if it skews you to an imbalanced portfolio.

switch76 wrote: »

If you have some tracker funds in those categories to recommend, I'll have a look into them.

The point of tracker funds is that they should all do the same job so you don't need a recommendation, you can largely buy on price and tracking error and reviewing the prospectus and manager credibility for whatever risks you normally screen for when selecting your funds.

Personally if I was getting an ETF for emerging markets I would lean towards, say, an iShares Core MSCI one instead of the db x-trackers one, because the former uses optimised physical replication of the index constituents and is $4bn in size, while the latter uses synthetic replication and is under $2bn. Liquidity and counterparty risk can make a difference when you are a small DIY investor. However in this case the iShares one is also cheaper too. Vanguard likewise have an EM ETF at the same 0.25% but theirs follows FTSE Emerging instead of MSCI Emerging, and the constituents will be different, for better or worse.

If you wanted an OEIC rather than ETF for emerging markets, Vanguard do an MSCI tracker at 0.27% OCF or an active managed one at 0.80% (lots of other choices if you went active of course).

For frontier markets there is an iShares index tracker product but has not been going many years and seems to have significant tracking error from a couple of charts I saw. Personally I prefer active to passive for that sector, you could do worse than checking out Aberdeen Frontier Markets Investment Company Limited or Blackrock Frontiers Investment Trust. They have two different approaches to portfolio construction with the former having a more concentrated portfolio.

A far cry from a FTSE100 tracker in terms of potential range of returns, however. Like other specialist funds they are designed to be held as part of a broader portfolio.