Fund Selection for first timer

xyy123

Would personally go for a UK index ETF if you want equities, probably FTSE 100. Maybe drip feed it in.

Low charges, high liquidity, low volatility product (relative to equities) and you will beat 80% of active fund managers. You will also get global exposure - 80% of company revenues in FTSE 100 come from overseas. I use iShares but there's a few providers of such funds.

echelon101

Hi

I went

First State Global Resources £1.0k
Jupiter Financial Opp £1.0k
Jupiter Absolute Return £1.6k

I am looking for long term gains, ie I do not forsee liquifing my funds until at least 2020, I hope.

For long term, resources to my mind are always going to be finite and so mining companies should do well in the long term, notoriously volatile in the short term. 1st state has about 80% exposure to resources.

Financial Opps got a good review at Morning Star* as well as in H&L. Its top three holdings are HSBC, JP Morgan and Barclays (about a third of the total fund) all three "missed" the credit crisis with good management. The fund has always done well relative to the market in the long term, so a good sell for me.

Absolute Return, as a core, for safety run by the same guy dealing with F Opps. Only recently been issued, but I think it could be a nice little earner. All Absolute Return funds I have looked at have 15% penalty, ie if the gain is greater than 15% the manager gets an extra cut.








*http://www.morningstar.co.uk/uk/snapshot/snapshot.aspx?lang=en-GB&id=F0GBR04C43

Aegis

xyy123 wrote: »

Would personally go for a UK index ETF if you want equities, probably FTSE 100. Maybe drip feed it in.

Low charges, high liquidity, low volatility product (relative to equities) and you will beat 80% of active fund managers.

Sorry, but this is outright false. Over the past 5 years (i.e. including a market crash and one of the best years for equities of all time, trackers appear roughly in the middle of the performance table for the UK All Companies sector based on compound returns. FTSE100 and AllShare trackers generated about 30% total return over that time frame, while the first top quartile managed fund returned 36% and one of the top managed funds that was recommended quite commonly by IFAs and held in high regard by people here, Fidelity's Special Situations fund, returned 49.8%. Over 10 years the story is even worse for the FTSE trackers: rougly 2.5% return compared with over 25% returns from the top quartile funds in that sector, again including many funds that are held in high regard.

The idea that trackers, especially FTSE trackers, will beat 80% of managed funds is (a) meaningless without a time constraint on that figure, and (b) usually demonstrably false across any given time scale. FTSE trackers, as a general rule, sit mid-table or slightly below over any given time scale. Managed funds run by banks tend towards the bottom half of the table, and managed funds run by investment houses tend towards the top, so even assuming that you pick a fund at random from the various investment houses, your odds of beating a tracker become quite good. Take into account the long term strategies and investment styles of the managers, and you can increase your performance at a cost of extra volatility, or sacrifice some of your performance to achieve more stability. Couple this with the fact that most retail investment fund performances are still inclusive of all charges, and you can add roughly an extra 5% to the total return of any managed fund due to the initial discount (trackers usually don't have this), plus up to an additional 0.5% compounded each year due to the trail rebate (trackers usually don't have this), and the relative performance of managed funds compared to trackers becomes much better.

You will also get global exposure - 80% of company revenues in FTSE 100 come from overseas. I use iShares but there's a few providers of such funds.

With the FTSE100 you get access to limited geography and limited sectors. The FTSE100 is still heavily dominated by miners and financials, two areas that most people would have to be considered high risk to focus on, especially after seeing what can happen to the financials in a crisis.

You aren't supposed to advise people on specific investments here, and even if you were allowed, investing solely into a FTSE100 tracker is not suitable advice for someone with the attitude to risk of:

"Don't want to lose money but so long as a minimum it's worth about what I put in I can accept that if that is what happens."

andyroberts_2

xyy123 wrote: »

Would personally go for a UK index ETF if you want equities, probably FTSE 100. Maybe drip feed it in.

Low charges, high liquidity, low volatility product (relative to equities) and you will beat 80% of active fund managers. You will also get global exposure - 80% of company revenues in FTSE 100 come from overseas. I use iShares but there's a few providers of such funds.

From reading on here I thought EFTs were for the more experienced investor?


Also out of interest when people say the multi-managed ones are not great can someone define how so with some examples?

Aegis

andyroberts wrote: »

From reading on here I thought EFTs were for the more experienced investor?


Also out of interest when people say the multi-managed ones are not great can someone define how so with some examples?

There's nothing wrong with ETFs at all, regardless of who buys them. However, they aren't a "one size fits all" solution for everyone's financial matters. They're good for people who want to get access to a wide range of investments with minimal annual costs, they're not so good for people looking for a fairly wide range of investments from a small holding, as dealing costs will build up to a large proportion of the initial investment. For example, if you're looking for 3 investments and pay, say, £12.50 for each purchase and sale, the total transactional costs for buying into and selling the holding will come to £75, or 2.1% of the initial investment. Through a discount IFA, the charges will usually be fully discounted, with nothing to pay on disposal, on the majority of unit trusts and OEICs.

In short, ETFs are fine as long as you know what you're looking for with them and use them for a good reason.


As to why multi-manager funds aren't necessarily any good, compare the Hargreaves Lansdown Income & Growth fund to the FTSE AllShare and see what you get for your additional fees... Nothing. The fund performed no better than the AllShare during the downturn and hasn't significantly outperformed during the growth periods.

Compare it to the Jupiter Merlin range, and you'll see that the Jupiter funder generally outperform their benchmark indices by a noticeable margin. However, with the good managed funds, the margin increases due to reduced costs and a more flexible investment mandate. That said, the margin increases in the wrong direction for the bad ones!

andyroberts_2

All,

Thanks for the replies with info and links in. I've spent quite a while reading each post and the links, and then the links from the links and found it all interesting with some helpful parts for me.

And thanks for the comparisons to the multi-managed. It does seem the easy option but not a good one at that.


Would anyone say the ammended choices below suit my risk profile?

Jupiter Merlin Balanced Portfolio Accumulation Units - £1600
Newton Global Higher Income Income - £1000
M & G Optimal Income Class X Income - £1000

The idea being to leave these until April then come April start doing monthly investments and widening my choices.

Again I look forward to hearing from you all.
Andy.

Rollinghome

Balanced funds like the Merlin range can make a lot of sense especially when you're starting off. You can always change your mind later at minimal cost. One small disadvantage that seems not to have been mentioned is that although that fund will have corporate bond investments you won't be able to reclaim tax within an ISA against the dividends as you could against the interest payments from a bond fund.

dunstonh

And thanks for the comparisons to the multi-managed. It does seem the easy option but not a good one at that.

Multi-manager funds are not often a great idea but a fund of funds (like the Jupiter Merlin) can be. They give you diversification which is often not possible with small amounts and they are self balancing from a risk point of view. You are paying for someone to do that for you so they are more expensive. However, you are not really able to go wrong with those funds.

They are ideal for an inexperienced investor with small amounts who isnt quite sure yet what they are doing.

Remember that the fund decisions are not cast in stone. As you get more used to investing and learn more you can switch funds around.

then come April start doing monthly investments and widening my choices.

monthly payments need a longer period than single payments. For example, if your timescale is 5 years, then money paid in monthly 3 years from now will only be in there for 2 years.

Financial crisis occur on average every 7 years. So, there is a pretty strong chance with short terms, especially with monthly payments, that you could get hit hard if you need the money at the wrong time.

Say you pay £100pm and suffer a 30% stockmarket crash as the end of year one. You lose around £360. However, if you suffer a 30% stockmarket crash at the end of year 5, then its going to be around £2000 that you lose. If you are still paying monthly and dont need the money then drops can be a good thing for the long term. You get to buy more units for your money. However, you have to wait long enough for them to get back up again and that could be another 1-3 years with a typical crash or much longer if a more extreme crash or if we happen to follow the example of Japan, you may not catch it up for a lifetime.

xyy123

Ah Aegis, its always nice to see you on here peddling active fund management. Of course, as an IFA, you have to. After all, people can buy ETFs on their own and wouldn't need a financial advisor to inform them of the best and worst performing funds.

However, the facts, as they say, do not lie. A simple search on google tells you all you need to know.

1. http://en.wikipedia.org/wiki/Mutual_fund

"Certain empirical evidence seems to illustrate that mutual funds do not beat the market and actively managed mutual funds under-perform other broad-based portfolios with similar characteristics. One study found that nearly 1,500 U.S. mutual funds under-performed the market in approximately half of the years between 1962 and 1992.[9] Moreover, funds that performed well in the past are not able to beat the market again in the future (shown by Jensen, 1968; Grimblatt and Sheridan Titman, 1989).[10]

2. http://www.citywire.co.uk/personal/-/blogs/money-blog/content.aspx?ID=341863

"Statistics appear to support the passive approach and it is easy to become very cynical if you take the time to look at past performance. Firstly it is important to note that there are a few managers (10-15%) that do outperform their index."

3. http://financialtip.blogspot.com/2009/05/index-vs-active-fund-management.html

"Every year, Standard and Poors publishes a scorecard that declares the "winner" of the Index vs. Active Management "battle" ...
The winner? If you've done any reading in this area, you already know the answer. The winner this time around is consistently the winner [and not who most people would assume] ... PASSIVE MANAGEMENT!"

You've been informed in previous threads that your 'evidence' does not account for survivorship bias - the funds that perform badly and close down and mean the average performance of funds will increase - yet you still seem to not have taken this into account.

Aegis wrote: »

With the FTSE100 you get access to limited geography and limited sectors. The FTSE100 is still heavily dominated by miners and financials, two areas that most people would have to be considered high risk to focus on, especially after seeing what can happen to the financials in a crisis.

Financials and Mining are two of the biggest sectors in the MSCI World. What's your point? As I said its not geographically limited since 80% of revenues come from overseas...

You aren't supposed to advise people on specific investments here, and even if you were allowed, investing solely into a FTSE100 tracker is not suitable advice for someone with the attitude to risk of:

Its good to see how an IFA considers:

"Don't want to lose money but so long as a minimum it's worth about what I put in I can accept that if that is what happens."

...adequate enough to consider his risk profile. There is risk in everything. Gilts. Cash. Under the mattress. Everything. He indicated he wanted to get involved in equities, so its reasonable to assume that he wants equity based investments. Apart from this, I actually said:

Would personally go for a UK index ETF if you want equities, probably FTSE 100.

andyroberts_2

Rollinghome wrote: »

Balanced funds like the Merlin range can make a lot of sense especially when you're starting off. You can always change your mind later at minimal cost. One small disadvantage that seems not to have been mentioned is that although that fund will have corporate bond investments you won't be able to reclaim tax within an ISA against the dividends as you could against the interest payments from a bond fund.

Thanks - can you clarify a bit with an example as I did not quite follow?

Does it mean whatever % within the fund that is Corporal bond investments that mades any money then it will get taxed? (I presume automatically without me doing anything).


So my current choice looks like this:
Jupiter Merlin Balanced Portfolio Accumulation Units - £1600
Newton Global Higher Income Income - £1000
M & G Optimal Income Class X Income - £1000

What do people think of the other 2 choices alongside the balanced fund which people seem to suggest would fit suit me as a new investor and my risk profile. Do the other two slot in with this?

And again thanks for replies.