Fund Selection for first timer

Aegis

xyy123 wrote: »

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.

Speaking before you know what you're talking about generates stupid comments. In this case, yours. I work for an IFA, however I work for a fully fee-based IFA which can happily recommend anything from cash accounts to VCTs, so no, I don't have to "peddle active fund management".

All I want to do is sort out truth from fiction, and in this case the fiction is that trackers beat 80% of fund managers. Performance data clearly shows this to be false, but if you want to actually show the data that contradicts it, go right ahead. Performance tables are available from Citywire, it's where I got all my information from earlier today.

Good luck with that, though, because over the long term the trackers just don't stand up to scrutiny in that sector particularly.

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]

Well, done, you've conflated the US tax system with the US one. Key difference: active managed funds are taxed on all internal capital gains under the US system, while trackers aren't. This doesn't apply to UK domiciled funds, which is why taking studies done in the US on US funds is completely irrelevant when looking at UK funds.

Maybe you weren't aware of that one?

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."

From a blog.

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!"

From a blog.

So, we have a wikipedia entry on the wrong country's financial system and two blogs. Great sources when compared to the actual performance tables...

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.

Do you have statistics on how many funds in the UK sector are closed down each year? For your survivorship bias to explain the difference in data between active and passive funds, about 10-15% of active funds would have to be closed each year. Somehow I don't think you'll find that this is the case, especially not for the active funds from long-established investment houses.

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...

My point is that those would be considered high risk sectors in their own right. If someone asked me if investing in the JPM Natural Resources fund and the Jupiter Financial opportunities fund was a good idea for a cautious investor, I'd say no. Active vs passive has little bearing here, the sectors themselves are very volatile and therefore offer a higher risk than most cautious investors might want to stomach.

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:

You recommended a medium-high risk product without full understanding of the situation. You took a person that was clearly looking for a fairly low risk balanced portfolio and encouraged them to effectively stick it all into equities, and into a very limited fund.

Plus you went after me as someone interested only in commission paying products when I've never taken a commission in my life. Again, great research there.

Aegis

andyroberts wrote: »

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.

I'm not very familiar with the Newton Global Higher Income or the M&G Optimal Income funds, but they look to fit in with what was mentioned above regarding sector allocation of your money. I'm afraid they're not currently on the watch list at work, and therefore don't have detailed descriptions that I can look into (for that matter, neither is the Jupiter Merlin, but that's largely because we manage asset allocation for our clients and don't outsource to third parties).

So in summary, the set up looks more in line with a cautious/balanced attitude to risk than the original plan, and it's certainly a point you can start out from to research more and learn more about what suits you best.

C_Mababejive

Andy..i can tell you that i am no expert on these matters and there are people on here who know far much more than i do about such things so i shall just give you instead,the benefit of lifes experience ,free of charge,from someone who is maybe close to twice your age.

1) Those selling financial products such as funds,always ramp up how much you could/would/should have made. The reality can be so much more different and it is very easy to loose big time o such funds. But then there is always the small print in such advertising so thats the fund managers off the hook. If you want to lose money, you can do it equally well yourself without paying management fees to others who may well lose it on your behalf!

2) Make sure that you take the time to enjoy your life and your youth becuase believe it or not,your only going to get one chance. At your age,money in the bank/invested is worth less than money spent maximising your quality of life.

3) Do all you can to secure ownership of a property

4) Make pension arrangements

Do 3 and 4 before you even think about the Funds market casino,,,because thats all it is.

Maybe you should consider buying some shares that are good solid companies but which arent too pricey and have good divis? Buy these within your ISA?

dunstonh

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

And how much will that cost on a monthly purchase compared to a unit trust version at 0.2% amc?

If someone actually really wants a FTSE100 based investment then a tracker is the way to do it. However, mixing up myths, US taxation and websites/blogs based on the US system is not an accurate way to come by your conclusions.

The facts are clear. All anyone needs to do is look at the UK All Companies Sector which is where all the UK growth funds and FTSE trackers sit and see where the FTSE trackers are placed in the performance tables.

1) Those selling financial products such as funds,always ramp up how much you could/would/should have made.

Really? Have you spoken to the 40,000 odd advisers and tens of thousands of brokers?
Have you read the comments on this thread (and others similar) where those in financial services are making the point about risk and making sure you dont invest above your profile?

4) Make pension arrangements
Do 3 and 4 before you even think about the Funds market casino,,,because thats all it is.

And what do most people put inside of their pensions? The very things you are telling the OP to avoid.... funds.

Rollinghome

Aegis wrote: »

Do you have statistics on how many funds in the UK sector are closed down each year? For your survivorship bias to explain the difference in data between active and passive funds, about 10-15% of active funds would have to be closed each year.

I'd be interested in the stats if anyone has them.

The best indicator I can see is the number of new funds created each year as shown on Trustnet. For example in the Global Growth sector of the 208 funds listed only 160 have figures for more than one year and just 135 for more than 3 years.

I can't extrapolate a firm number from that but as we don't have an ever increasing number of funds it suggests that as they create new funds the old underperforming funds are quietly buried.

Jake'sGran

If you are fed up of reading all these posts you probably won't get to this but I was less informed than you are when I first invested in equities. My first one was Fidelity Special Situations which I chose because I believed everything they said about it in their ad. Turned out to be an excellent investment despite dropping in 2009 like most funds. It is climbing back up now. If you are interested in income funds perhaps with a view to retirement Invesco Perpetual had money piling in and was mentioned on most investment sites but the 2009 losses have not recovered in the way others have. The point I should be making is that my interest in funds has paid off. I am rather surprised at some of the gains made. Of course, I have made losses too. The ones I have bought recently include

Blackrock Gold & General, First State Asia Pacific Leaders
First State Greater China Growth, Fidelity European and
quite a few others. The second one listed has gained 25% in a few months.
Jupiter Income (not great but I have been taking the income ) - I have had this a long time. It is a popular fund but I think there are better income funds. I have never invested in a Tracker.

Good luck with your investments.

Rollinghome

dunstonh wrote: »

The facts are clear. All anyone needs to do is look at the UK All Companies Sector which is where all the UK growth funds and FTSE trackers sit and see where the FTSE trackers are placed in the performance tables.

I think what you are missing is that whereas the trackers will consistently be in the top half, the managed funds that appear in the top half will constantly change. That's not to say that a very small percentage of managed funds won't also consistently be in the top half just like trackers. The difficulty is in knowing today which managed funds will do that over the next 5 or 10 years. Clearly a lot of advisers got it very wrong when they sold all those terrible New Star funds before they had to be taken over.

One of the interesting differences between trackers and managed fund is the big difference in commission IFAs can earn by selling those managed funds rather than trackers.

Now if IFAs could be honestly relied upon to sell the best performing funds regardless of the commision they receive, why we must ask do the fund management companies pay them so much more for selling managed funds? Wouldn't the honest IFAs still sell those products even if it only paid them as much as tracker funds? Why do they need extra commission to persuade them? Does that mean the fund managers understand the only way to get their more expensive products sold by "unbiased" advisers?

xyy123

Aegis wrote: »

Speaking before you know what you're talking about generates stupid comments. In this case, yours. I work for an IFA, however I work for a fully fee-based IFA which can happily recommend anything from cash accounts to VCTs, so no, I don't have to "peddle active fund management".

Well, it would mean you'd have to peddle it less, but if an IFA told his clients, "don't invest in OEICs/UTs or whatever, use ETFs because you'll do better", then they wouldn't use them to 'manage' the portfolio. Sooner or later the client would just buy the ETF(s) on their own accord.

All I want to do is sort out truth from fiction, and in this case the fiction is that trackers beat 80% of fund managers. Performance data clearly shows this to be false, but if you want to actually show the data that contradicts it, go right ahead.

Clearly you ignored the referenced Standard & Poor study on active vs. fund management in #3. Let me highlight the key findings from their study, who I trust more than you:

"Over the five year market cycle from 2004 to 2008, S&P 500 outperformed 71.9% of actively managed large cap funds, S&P MidCap 400 outperformed 79.1% of mid cap funds and S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003."

"Survivorship bias correction: Many funds might be liquidated or merged during a period of study. However, for someone making an investment decision at the beginning of the period, these funds are part of the opportunity set. Unlike commonly available comparison reports, SPIVA removes this survivorship bias."

Do you have statistics on how many funds in the UK sector are closed down each year? For your survivorship bias to explain the difference in data between active and passive funds, about 10-15% of active funds would have to be closed each year. Somehow I don't think you'll find that this is the case, especially not for the active funds from long-established investment houses.

See pages 5 and 6 for the survivorship results. You will see that over a five year period, the survivorship rate for all US domestic funds is about 73%, or a 27% closure rate. Now ask yourself - would a fund comfortably outperforming its benchmark close down? No.

I do not think its unreasonable to assume that the UK, as a similar market to the US would have substantially different results.

You recommended a medium-high risk product without full understanding of the situation. You took a person that was clearly looking for a fairly low risk balanced portfolio and encouraged them to effectively stick it all into equities, and into a very limited fund.

You cannot classify a product as medium-high risk without an understanding of the application. Is a 20x short geared investment in copper high risk? What if I use it to hedge out the long risk in my physically backed copper ETC?

My point is that those would be considered high risk sectors in their own right. If someone asked me if investing in the JPM Natural Resources fund and the Jupiter Financial opportunities fund was a good idea for a cautious investor, I'd say no. Active vs passive has little bearing here, the sectors themselves are very volatile and therefore offer a higher risk than most cautious investors might want to stomach.

Yes... but the FTSE 100 does not include just those sectors... it includes consumer goods, technology, pharmaceuticals, media, tobacco, travel and leisure, utilities, construction, telecommunications etc. I didn't suggest he only invests in financials/mining.

But irregardless, financials for example comprise about 21% of MSCI World Index and about 18% of the FTSE 100. How is that high risk? Being invested in equities and having 0% financials is higher risk.

Plus you went after me as someone interested only in commission paying products when I've never taken a commission in my life. Again, great research there.

No I didn't... I simply said that IFAs would rarely recommend ETFs, or at least solely ETFs, as it would make them largely redundant.

andyroberts_2

Well. I feel like I've just walked into a bar and accidently started an argument and then taken my seat but it's all interesting anyway.

I'm going to ask a bit of a newbie question here but wanted a straight answer as I read something earlier which confused me on it. I'd rather ask on here and reassure myself than be to embarassed to say as people on here will generally help out without making you feel silly:)

What is the difference between an Income fund and an Accumulation fund and what should you be choosing within your portfolio?

Again - thanks for the replies to the thread.
Andy.

Rollinghome

andyroberts wrote: »

Well. I feel like I've just walked into a bar and accidently started an argument and then taken my seat but it's all interesting anyway.

I'm going to ask a bit of a newbie question here but wanted a straight answer as I read something earlier which confused me on it. I'd rather ask on here and reassure myself than be to embarassed to say as people on here will generally help out without making you feel silly:)

What is the difference between an Income fund and an Accumulation fund and what should you be choosing within your portfolio?

Again - thanks for the replies to the thread.
Andy.

In the context you mean, an Inc fund pays out the dividends and the Acc version reinvests them up. So you'd probably want the Acc fund unless you wanted to take income but you can ask H-L to automatically reinvest your dividends anyway so makes not a lot of difference.

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).

You might find this explanation of the different tax treatment of equity funds and bond funds within an ISA useful: http://www.candidmoney.com/investment/isas.aspx . If a fund has some bonds but mostly equities it will be treated as an equity fund.