Fund Selection for first timer

andyroberts_2

Rollinghome wrote: »

In the context you mean, an Inc fund pays out the dividends and the Acc version rolls it 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.

Ahh you see that was part of my confusion!

I chose to auto reinvest so guess whatever i choose it's pretty much acc.

Aegis

xyy123 wrote: »

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.

It would mean nothing of the sort. We charge for advice and time spent on a client's behalf. We recommend NS&I products, fixed term accounts, gilts, EISs, VCTs, unit trusts, oeics, investment trusts, etc, all of which the client could look into on their own and apply for on their own. They still choose to come to us for advice because we consider their entire financial circumstances and offer advice that they can implement through us for an hourly rate, do for themselves, or ignore altogether. Our goal is therefore to offer quality advice that makes clients want to come back to us year on year for further advice.

As such, if we thought ETFs were right for a client, we'd recommend them. Currently we don't.

So really, you're totally wrong here. You started with a bad assumption and continued to make mistakes based on that false assumption.

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."

US tax vs UK tax. I can't believe I need to say this again, but US tracker funds have preferential tax treatment to US managed funds, so there's a performance bias towards trackers because they get taxed less. In the UK, managed and tracker funds are taxed the same, so comparing our funds to US funds is just inappropriate.

"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."

The fact that this is a US study renders the survivorship bias correction for US funds irrelevant when looking at UK funds. The markets are completely different to operate in, so it's not like for like.

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.

I do. It's totally unreasonable to assume that ignoring the differences in internal taxation makes it a fair comparison.

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?

Perhaps you're not familiar with the general risk scales used for retail investments then?

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.

It would do no such thing. IFAs charge for advice, one way or another. The advice is what people take, anything else they pay for, like the transactional side of the service, is incidental.


I note that you've declined to show the actual figures supporting your argument for the UK All Companies sector. Why is that?

xyy123

Aegis wrote: »

Our goal is therefore to offer quality advice that makes clients want to come back to us year on year for further advice.

If they were aware of and understood the facts and the efficient-market hypothesis, they wouldn't need to.

US tax vs UK tax. I can't believe I need to say this again, but US tracker funds have preferential tax treatment to US managed funds, so there's a performance bias towards trackers because they get taxed less. In the UK, managed and tracker funds are taxed the same, so comparing our funds to US funds is just inappropriate.

In what way? Do you mean just because index funds trade less frequently? (Arguably a key reason that actively managed funds underperform their benchmark).

Perhaps you're not familiar with the general risk scales used for retail investments then?

I am aware of the thoughtless risk scales attributed to retail investments, yes.

But in the real world, the 'risk' of an investment is only really understood when taken in the context of its application and the form of risk you are referring to. (Inflation risk, capital risk, default risk etc.)

By the way, Morningstar refers to iShares FTSE 100 as being "Above Average" performance with "Below Average" risk compared to its category of UK large cap equity blend.

Also:

news.morningstar.com/pdfs/MorningstarBoxScoreReport.pdf


"After accounting for risk, size, and style, only 37% of active funds beat the respective Morningstar Style Index over the past three years"

Not quite my assertion in my original post, but over longer time periods, the performance disparity is accentuated.

It would do no such thing. IFAs charge for advice, one way or another. The advice is what people take, anything else they pay for, like the transactional side of the service, is incidental.

Yes, but people would eventually start to realise they didn't need the advice and there would be less repeat business... IFAs, or anyone in the actively managed fund industry, would essentially be pi$$ing on their own chips.

ozzage

Rollinghome wrote: »

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.

Only one thing to add to this. H-L will hold the dividends in cash until they are worth £50, and reinvest them then. If you have a small holding then this could be quite a while...

So while it doesn't make any massive difference, I would go for ACC unless you need to take the income.

ses6jwg

I was in the same situation and went:

Blackrock UK Absolute Alpha ACC
Jupiter Financial Opps ACC
M&G Index-Linked Gilt Fund

I wanted to invest in the banks, but figured a fund would be a less risky way and cheaper way than buying a handful of shares in Lloyds, RBS, Barc.

ozzage

andyroberts wrote: »

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.

I like the M&G Optimal Income fund. It's a good way to get fixed interest exposure without having to know too much, as the fund manager is free to move between gilts, corporate bonds, high-yield etc as he sees fit. It's not the only "strategic" bond fund of course, but I personally think it's a pretty good one.

Note that it's also available as an ACC which is what I hold.

jamesd

andyroberts, ETFs aren't for the more experienced investor but the dealing costs make them uncompetitive for regular monthly investments of amounts that are usual in the UK. ETFs and tracker funds are in general more suited to investors who don't want to spend time looking after their investments or those who read US studies and expect them to apply to the UK. They are also useful for more active people who use them for larger amounts of money as a convenient way to simply track a market in an area that interests them, adjusting which area they hold based on their view of economic and market conditions. For example, a fair number of funds and ETFs buy ETFs to get exposures in areas where their size doesn't merit buying individual shares directly.

ETFs are also a good choice for people who believe US studies with US tax treatment and investment rules applies to the rest of the world that isn't subject to US tax laws and which isn't as well studied as the major US markets.

Personally I use a mixture of tracker funds, with charges lower than typical ETFs, and actively managed funds, depending on the market and whether I want to simply follow a market or have someone try to beat it.

xyy123, those studies and others mentioning mutual funds are fine for a US investor buying in the US market. Aegis has explained part of why the UK situation is different: less unfavourable tax treatment here for actively managed funds than in the US.

For people making regular investments and paying UK charges ETFs are usually going to be the wrong choice because they have higher costs than unit trusts and OEICs. A competitive place might offer trades here at £9.95 a deal or unit trust buying at 0.25% initial charge. That makes the ETF hopelessly uncompetitive for say £100 a month investments compared to the tracker fund at a fairly typical 1% annual management charge. Switching lump sums to the ETF periodically might make sense, though.

A sensible UK investor would be looking at the market and discarding options that consistently do worse than average. That would rule out the worst parts of the managed fund market as well as the worst trackers. Once you do that it becomes a lot easier to find funds that do better on average than the market. That's also not a surprising result because the money lost by the losers has to be ending up somewhere. I suppose efficient markets theorists could argue that it's a symptom of one group of inefficient investment managers exploiting another group.

jamesd

xyy123 wrote: »

If they were aware of and understood the facts and the efficient-market hypothesis, they wouldn't need to.

Lets assume for the moment that a consumer accepts this hypothesis and wants to act on it. Where does a UK investor find a free service that will tell them which blend of UK and international investments they should buy to end up at the appropriate spot on the efficient frontier for their personal risk tolerance and preferences?

That seems to offer opportunities for personal advice. So do incidental services like future planning for allocation of resources between life today and providing for the future in a prudent way. People can do this themselves, at least some of them, but for many it's a service that they might prefer to pay for as a way of saving time.

Aegis

xyy123 wrote: »

If they were aware of and understood the facts and the efficient-market hypothesis, they wouldn't need to.

Load of rubbish. The accepted form of the efficient market hypothesis (i.e. the weak form) rules out the possibility of using past performance to guarantee future performance, but it in no way rules out the requirement for good asset allocation, investments into funds which have stock picking based on strong fundamentals (something not ruled out by the EMH unless you accept the strong form in the face of all evidence), or proper utilisation of all tax efficient wrappers.

In general, people are terrified of finance, even if they're fairly astute in all other areas of their life. There will always be a requirement for people to advise others about how and where to invest, what sort of pension provisions to make, how much financial protection they need, etc. Claiming that IFAs are useless, which is what you seem to be implying, is just plain silly.

In what way? Do you mean just because index funds trade less frequently? (Arguably a key reason that actively managed funds underperform their benchmark).

You really aren't getting this pretty simple issue, are you? In the US, index trackers are taxed MORE FAVOURABLY than managed funds. It's not because they trade less, it's because they actually are not taxed on capital gains made within the fund when they trade.

Comparing trackers in the US to managed mutuals there and claiming that the same automatically applies here is like claiming that the net returns on a corporate bond fund here will be the same for a taxpayer whether they invest in the fund within an ISA or through direct holding. It's a ridiculous suggestion.


Maybe I'll reply to the rest of this later, work calls for now.

C_Mababejive

dunstonh wrote: »

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.



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?



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

When i was referring to ramping up,i was referring to the kind of literature,often confusing,put out by the actual fund providers rather than IFAs and similar.

My point about pensions was clouded a little as I have the luxury of a FSPS which has 30 years worth of payments in it so far. How long it will last is anyones guess. I may well find myself in a similar position as many others in having to start another pension arrangement based on funds etc. In the past the future was a lot more certain (FSPS) but now,you are at the mercy of world economies via funds and other investments which operate under different conditions rather than those operated by FSPS trustees,often backed up by major Blue Chip companies. I think its a lot more volatile and more risky.

Of course Fund providers and IFAs will talk about risk but in reality,everyone has an expectation that they will make money. Thats the very reason why they sign up !

Surely now is the very time that certain funds will show good gains made on the back of a stock market near crash. Its on the upslope so 1st year gains look good in many cases.

As i say,just a bystander..not an expert.