Fund Selection for first timer

xyy123

fg22 wrote: »

In a totally unscientific study I've looked at how 6 IFA's UK choices have performed over the last few years. Selections taken from http://www.thisismoney.co.uk/ifafunds as at March 2006.
I've then put a + or - by them if I think they've out or underperformed a FTSE all-share tracker, however this might be wrong as I've just looked at rough graphs of total returns.

UK Growth - Rensburg UK Select Growth -
UK Income - Invesco Perpetual Income +

UK Growth - Artemis Capital -
UK Income - Rathbone Income -

UK Growth - Standard Life Growth & Income (think this is now uk equity high alpha)+
UK Income - Invesco Pertepual Income +

UK Growth - New Star UK Select Growth -
UK Income - Invesco Perpetual UK Higher Income +

UK Growth - Liontrust First Growth -
UK Income - Jupiter Income -

UK Growth - M&G UK Select +
UK Income - Legal & General Fixed Interest - err this is a corporate bond fund

So it looks like only 5/11 beat the tracker - not the best of results. Both of H-L's Mark Dampier's choices seem to have done pretty poorly.

Anecdotally its interesting, but obviously 6 IFA choices cannot be seen as representative of all choices in the private client market by indepedent advisors (including stockbrokers, wealth managers etc.)

Also, I am not sure whether comparing a FTSE All-Share tracker is fair to growth AND income funds. Its more representative as a blend of the two, or growth if necessary. In the last few years, income funds will likely have done better than growth funds (which is supported by this), taking into consideration the stage of the market cycle we are currently in. Obviously great if you have only had income fund(s) in your portfolio, but not many do/have. And then of course, they (you) have to know when its right to move from income funds to growth funds so you do not lag over the next time period.

As I have mentioned in other threads, having both together in the same portfolio significantly increases the likelihood that one will lag (since 2 different styles cannot both be the market leader). That's why the only funds I can see any sense in owning are those with truly free reign, so that at least they can attempt to be in or overweight in the leading style/sector at any given point.

jamesd

When did those IFAs advise their clients to switch to a different fund and what effect did that have on the result for their clients?

This part of the FSA commissioned analysis is interesting, given that Aegis suggested avoiding the consistently poor performers: "6.15. All this evidence indicates that the largest gains from past performance information are likely to arise from inducing investors to avoid underperforming funds."

You should also consider that the CRA studies didn't include trackers in their list of funds, so their definition of second quartile would have included many funds that remained in the first quartile and their third quartile would include many funds that were really fourth quartile and rejectable on that basis. This would also increase the percentage of funds that remained in the first quartile.

Also the FSA notes that "6.5. When a fund dies, the CRA study assumes that the residual fund value is reinvested according to one of three rules: equally across all surviving funds, equally across all surviving funds in the same quartile, or in surviving funds in the same fund management group. Investments in new funds are associated with a new initial charge."

I don't know about you but I would not be inclined to follow any of those three rules, certainly not reinvesting in the fourth quartile just because a failing fund ended up in the fourth quartile before being closed. A new initial charge is now a pretty outdated item, at least at the levels back when this report was produced, suggesting that the CRA study would have underestimated performance by overstating current charges.

"It is far better for the FSA to publish past performance data on a risk-adjusted basis for all funds and to give a ‘health warning’ along the lines that the mass of existing empirical research shows that ‘losers generally repeat, while winners do not necessarily repeat’."

That's an interesting recommendation.

jamesd

Why wouldn't you have chosen say a managed recovery fund in 2009 instead of a pure FTSE tracker fund or tracker ETF? If you believe that the cycle is predictable (throw lots of liquidity at them, so markets rise) surely you should want to select a fund that will not simply track but will be overweight in the areas expected to benefit?

Not sure also why you would only want those with a free reign, since you as investor may want to constrain a fund away from certain parts of an index or into or away from certain markets or types of investment.

You seem to expect yourself to be able to select based on market cycles but are you not willing to be overweight via managed funds with appropriate styles?

xyy123

jamesd wrote: »

Why wouldn't you have chosen say a managed recovery fund in 2009 instead of a pure FTSE tracker fund or tracker ETF? If you believe that the cycle is predictable (throw lots of liquidity at them, so markets rise) surely you should want to select a fund that will not simply track but will be overweight in the areas expected to benefit?

Its predictable, but not easy to predict. The recovery is the same and a manager may choose the wrong sector to recover and therefore lag the benchmark.

Not sure also why you would only want those with a free reign, since you as investor may want to constrain a fund away from certain parts of an index or into or away from certain markets or types of investment.

Managed funds are on the whole designed for non-sophisticated investors. People who do not have the time or expertise to do their own analysis. I do not have the time (nor do I believe the extra time is worth it, even if I did) or the expertise to decide what sectors I want to constrain. I only do this on a very broad basis i.e. I have about 20% in emerging markets ETF.

You seem to expect yourself to be able to select based on market cycles but are you not willing to be overweight via managed funds with appropriate styles?

That's not what I expect at all. The opposite in fact. I don't think I, nor the vast majority of fund managers can do it - so I take a broad brush approach with UK and Emerging Markets ETFs. But managers with free reign don't leave it up to me to decide/know when its right to switch from small cap to large cap, from equities to cash, UK to foreign etc. They do more and are are at least better value for investors.

dunstonh

40% in 23 years means fewer than 2% of funds shut a year. That's really not all that many, especially when you consider how much investment rules, taxation, etc, changed over the period of study.

The biggest driver for closures over the years hasnt been underperformance but the massive consolidation of providers and fund houses and then removing duplications. Just look how many fund houses have gone over the years.

iShares FTSE 100 = Above Average. i.e. not mid-table.

The FTSE all share will be mid table. The FTSE100 will float either side of that depending on timescale. More recently the FTSE100 has done better but for most of the last 15 years it has done worse.

Managed funds are on the whole designed for non-sophisticated investors. People who do not have the time or expertise to do their own analysis. I do not have the time (nor do I believe the extra time is worth it, even if I did) or the expertise to decide what sectors I want to constrain. I only do this on a very broad basis i.e. I have about 20% in emerging markets ETF.

I would say the complete opposite if you are talking about targeted sectors. e.g. picking a UK recovery fund means you are focusing in a specific investment area. Not the sort of thing an inexperienced investor would be or even should be doing.

However, if you were talking about a generic balanced managed fund then you would be right as these are designed with the inexperienced investor in mind with their self balancing and diversification all done in one fund. Of course, they can often be jack of all trades funds, master of none. They are never likely to be at the top end but never likely to be at the bottom end either.

tommartin59

i would recommend that you buy 3 seperate ishares which are ETF's quoted on the London Stock Exchange. Be conservative in what you buy although with the markets down in the last 2 years it is probably a good time to buy especially if you have a time frame of 5-10 years. The reason to buy ishares is because the commission and yearly running charges is so low and for other investments the commissions and running charges can eat up a lot of your investment gain. They have a website so do a search for ishares on google. It is a much cheaper investment than mutual funds (6% charges min) and investment trusts (high discounts).

dunstonh

i would recommend that you buy 3 seperate ishares which are ETF's quoted on the London Stock Exchange.

For a monthly payment, wouldnt that work out more expensive than a unit trust with a 0.1% or 0.2% amc?

It is a much cheaper investment than mutual funds (6% charges min) and investment trusts (high discounts).

can you explain how much more expensive a unit trust tracker with no initial charge and a 0.1% or 0.2% amc is than the ETF?

Can you also provide evidence of a 6% minimum charge on mutual funds?

Rollinghome

The Financial Times quoted Prof. David Blake (professor of financial economics at Birkbeck College, London) comparing active fund management with the traditional share tip scams often used in the US.

The scammers write to say 10,000 people telling half that a certain stock will rise and the other half that it will fall. They then write to the 5000 who were given the correct prediction and tell half of them it will go up again and the other half it will go down.

This is repeated several times so that after a few weeks they have a group of people who have repeatly been given a 'winning tip'. They then write to that group offering further 'infallible' share tips at an inflated price that the impressed punter is happy to pay.

Prof. Blake suggests that the fund managment companies operate a similar scam by setting up large numbers of funds knowing that some will be better than average and others worse. They are then able to promote the few successful ones and disappear their failures. There are over 3,000 UTs available that come and go.

Averages are funny things. Surveys find the majority of drivers think they are above average in competence. But that wouldn't make sense. The average fund could be average and in line with the indexes if it wasn't for the charges and commissions paid. Similarly the average fund picker can't be above average however much he would like to believe othewise.

xyy123

Rollinghome wrote: »

The Financial Times quoted Prof. David Blake (professor of financial economics at Birkbeck College, London) comparing active fund management with the traditional share tip scams often used in the US.

The scammers write to say 10,000 people telling half that a certain stock will rise and the other half that it will fall. They then write to the 5000 who were given the correct prediction and tell half of them it will go up again and the other half it will go down.

This is repeated several times so that after a few weeks they have a group of people who have repeatly been given a 'winning tip'. They then write to that group offering further 'infallible' share tips at an inflated price that the impressed punter is happy to pay.

Prof. Blake suggests that the fund managment companies operate a similar scam by setting up large numbers of funds knowing that some will be better than average and others worse. They are then able to promote the few successful ones and disappear their failures. There are over 3,000 UTs available that come and go.

Averages are funny things. Surveys find the majority of drivers think they are above average in competence. But that wouldn't make sense. The average fund could be average and in line with the indexes if it wasn't for the charges and commissions paid. Similarly the average fund picker can't be above average however much he would like to believe othewise.

Much like Derren Brown's study of a similar nature on the horses.

In fund management its called creation bias, the opposite in a way of survivorship bias. An interesting related read is a book called Fooled by Randomness.

On a massive tangent, Goldman Sachs once did a random study of 100 of their employees and asked all of them to shut their eyes and put their hands up if they thought they were in the top 5% of the company. They opened their eyes and 95 people had their hand up. A cynic cannot help but appreciate the similarity in fund management.

giruzz

Below is my allocation, happy to hear feedback from anyone. (The fund has been open only for a few months....)

10.4% ABERDEEN UT MGRS EMERGING MARKETS A ACC NAV
12.5% ALLIANZ GBL INV UK ALLZ PIMCO GILT YLD A INC
10.4% FIRST STATE INV ASIA PACIFIC LEADERS B NAV
12.5% INVESCO MGRS PERP HIGH INCOME INC NAV
12.5% M&G SECURITIES LTD INDEX LINKED BD A ACC NAV
10.4% NEPTUNE INV MGMT NEPTUNE EUROPEAN OPPS A ACC
10.4% NEPTUNE INV MGMT US OPPORTUNITIES A NAV
10.4% RENSBURG FD MGMT UK MID CAP GROWTH TST
10.4% THREADNEEDLE INV LATIN AMER INST ACC 2

Thanks

giruzz