Want 5% on £300k

darkpool

mike88 wrote: »

Does this help? The figures in the link below show interesting comparisons between investing in Invesco Perpetual High Income as compared to a Building Society.

http://www.isa-ltd.co.uk/isaonline/pdfs/guide11.pdf

You will need to scroll to the Table on Page 10 of the document.

that's an interesting document. do you think the fact that the statistics are "bid to bid" might make an impact on the actual returns though? I see on page 11 that it says that the market has risen on average 8.1% a year over the last 20 years. if you assume the average dividend yield has been 5% over that time you should have got 13.1% a year over the last 20 years. if you had invested £10k for 20 years at 13.1% you would have £117k now. so the fund hasn't really outperformed the market that much. if you consider all the dog funds it shows AM isn't really that good.

as a matter of interest does IP give any guarantee that the funds performance will continue?

concerning fees, if you invest £10k for 20 years at 7% you get £39k. Same investment at 4% gives £22k. So fees should be considered when investing.

if you lot are happy paying 3% a year good luck to you.

darkpool

Aegis wrote: »

You believe wrong. Projections use whatever figure makes sense for the client based on their portfolio composition.

Nope. This is counting the dealing costs twice. It would also assume that you could find the exact same underlying investment performance at a lower cost, which isn't the case simply because of the low probability that two investments will ever perform at the same underlying rate.

so what returns does the FSA require for projections? i'm sure it was 7%

why am i counting dealing costs twice? I thought it had been established that TER does dot count dealings costs.

dunstonh

When I gave a real live example of the risks that you have never mentioned or addressed associated with an equity approach I gave specific numbers over a 10 year period using the FTSE 100.

That shows that if the OP had invested in a range of equities ie the FTSE 100 (which you described as having all your eggs in one basket) and if he had depleted his fund as he said that he clearly he needs by 5% per year and paid small annual management charges then he would have run out of cash before the 10 years were up. He would have lost ALL of his money. None left. Zilch. <snip>

I'm not sure I follow. I have been doing the advice role for a very long time and 5% (net of tax/charges) is a very common withdrawal figure and no-one has run out of money and most are well in surplus on what they started or thereabouts. So, saying that annual management charges would deplete the fund is wrong (if I am reading you correctly).

Also, the OP has stated their risk profile and 100% equity and in a limited index like the FTSE100 is above the risk profile.

Aegis

darkpool wrote: »

that's an interesting document. do you think the fact that the statistics are "bid to bid" might make an impact on the actual returns though?

No, because almost all unit trusts and OEICs can be purchased with no spread, so the performance will be identical in percentage terms as long as the fund is available at zero initial charge.

I see on page 11 that it says that the market has risen on average 8.1% a year over the last 20 years. if you assume the average dividend yield has been 5% over that time you should have got 13.1% a year over the last 20 years. if you had invested £10k for 20 years at 13.1% you would have £117k now.

And the yield estimate came from where? Also, is it fair to compare the AllShare index with a fund which generally targets large cap companies? I'd think the FTSE 100 index would be a much better comparison given the investment mandate.

Looking at the most recent FTSE factsheet (issued 28 May 2010), the total returns over a 10 year period are listed as 1.4% p/a with dividends and -2.0% without, indicating that the 10 year average dividend would be c3.4% p/a rather than 5. Using this in your calculation, the end result would be a total of £88,200 compared to the IP High Income value of £124,000, which would represent a massive outperformance by the managed fund. Now, I'm willing to admit that the previous 10 years may have seen higher dividends, but I'd like to see a source before I simply accept the figure of 5%.

so the fund hasn't really outperformed the market that much. if you consider all the dog funds it shows AM isn't really that good.

Renders this point moot if the figures above are closer to the truth.

as a matter of interest does IP give any guarantee that the funds performance will continue?

Of course not, why would they? How could they?

concerning fees, if you invest £10k for 20 years at 7% you get £39k. Same investment at 4% gives £22k. So fees should be considered when investing.

They should be considered, but as a minor factor when compared to the much more important a) fund mandate b) sector allocation, c) demonstration of the manager's ability to persistently add alpha to the fund.

Charges only really enter into the equation if the manager persistently fails to deliver a good value service once all aspects of the total performance have come into play.

if you lot are happy paying 3% a year good luck to you.

As I've said before, returns are what really matters, not some estimate of what the fund could have done if it had achieved the exact same level of underlying performance without actually making any trades.

Aegis

darkpool wrote: »

so what returns does the FSA require for projections? i'm sure it was 7%

The FSA requires a demonstration of the effect of charges on underlying returns of certain levels, 7% being one of them. However it has to be made very clear to the client that it is a demonstration of the effect of charges, not a projection, not an actual estimated return, not a guarantee, etc. You have to demonstrate the same figures for the JPM Natural Resources fund (up over 40% in the past year) as you do for funds in the UK equity & bond income sector, though some flexibility seems to be allowed for very cautious funds.

This all forms part of the Reduction in Yield calculation, which again assumes this fixed level of underlying performance for all funds, therefore it is almost entirely meaningless except to compare charges in an artificially created like for like environment.

It fails to take into account the fact that some of the more expensive funds can make back their annual charges in a matter of days because of the average long-term returns they manage to generate.

As such, it most definitely isn't a projection in any meaningful sense of the word.

why am i counting dealing costs twice? I thought it had been established that TER does dot count dealings costs.

This is exactly why you're counting dealing costs twice. The underlying performance is inclusive of dealing costs. As such, when you show these charging illustrations at 7%, the assumption is that all charges have been paid other than initial charges and the TER. Deducting your estimate of the dealing costs is therefore an attempt to make the fund look more expensive than it actually is, because the assumption is that the 7% figure already includes the dealing costs required to generate that 7% figure.

All in all, charging illustrations are still fairly pointless if you're actually trying to demonstrate likely returns.

darkpool

Aegis wrote: »

No, because almost all unit trusts and OEICs can be purchased with no spread, so the performance will be identical in percentage terms as long as the fund is available at zero initial charge.

so let's get this right, there is not a bid/ offer spread with unit trusts? there is also no initial fee? i think you have been misinformed if you believe that.

yeah i agree that IP high income has done well over the last 20 years. however to argue that one fund proves that active management is worth it isn't much of an argument. it's like saying that all female students at St Andrews Uni are absolute foxes just because Kate Middleton is a fox and went to St Andrews uni.

dunstonh

so let's get this right, there is not a bid/ offer spread with unit trusts? there is also no initial fee? i think you have been misinformed if you believe that.

Most are OEICs nowadays. These have no spread and most have no initial charge. There are some UTs left that havent converted to OEIC but they are now in the minority. Again, most have no initial charge.

yeah i agree that IP high income has done well over the last 20 years. however to argue that one fund proves that active management is worth it isn't much of an argument.

What about the other consistent performers or those that are designed to work well in certain periods of the economic cycle? (The type a lazy investor should avoid but an active investor can take advantage of at the right time).

Dog funds are not an excuse to not consider managed funds. Just in the same way that the top performing funds are not an excuse to consider them. There has to be a reason for it. Picking a selection of shares from the FTSE100 will not give you a cautious risk spread and will leave your diversification lacking. If you assume you got equal to a FTSE 100 tracker then that has been pretty easy to beat long term using a balanced portfolio of funds.

From the period of 1997 to 2007, Britain was the 8th worst performing stockmarket out of the worlds 50 largest stockmarkets.

Aegis

darkpool wrote: »

so let's get this right, there is not a bid/ offer spread with unit trusts? there is also no initial fee? i think you have been misinformed if you believe that.

Yes, there's a bid offer spread on unit trusts and an initial charge on OEICS. However, most of this is paid out in the form of commission to an adviser, and therefore going through an execution only broker the initial charges or the spread can usually be reduced to 0, or very close.

Since we're comparing just the performances, it's correct to strip out the costs of advice and to look only at the investments themselves, where possible anyway.

So no, I have not been misinformed, I'm just comparing like for like.

yeah i agree that IP high income has done well over the last 20 years. however to argue that one fund proves that active management is worth it isn't much of an argument. it's like saying that all female students at St Andrews Uni are absolute foxes just because Kate Middleton is a fox and went to St Andrews uni.

I didn't make any such claim. All I was doing was rebutting the claim that the IP High Income fund was something that could be beaten by a chimp and that the stock selection meant you may as well buy a FTSE tracker, which was certainly the implication.

I'm aware of the fact that a lot of managed funds are utterly rubbish. However, if you strip out the retail bank funds and then look for teams with the right investment mandate and a strong track record of adding value for their investors, it is possible to outperform the index fairly regularly in many sectors. It doesn't work in some, where the Efficient Market Hypothesis holds most validity, however in many others, including the UK, it is certainly possible for managers to add a lot of value for clients.

darkpool

Aegis wrote: »

I didn't make any such claim. All I was doing was rebutting the claim that the IP High Income fund was something that could be beaten by a chimp and that the stock selection meant you may as well buy a FTSE tracker, which was certainly the implication.
.

yeah, i think actively managed funds could be beaten, on average, by a chimp. IP high income has 16% of it's value in big pharma, if it does well the manager will be treated like a god and IP will advertise the fund. If pharma does badly they'll just advertise another fund, after all they have 37 of them - one is bound to be doing ok.

Do you remember that squid that predicted all the football results in the world cup? Was it luck or did the squid have more football knowledge than all the football pundits......

DavidHayton

darkpool wrote: »

yeah, i think actively managed funds could be beaten, on average, by a chimp. IP high income has 16% of it's value in big pharma, if it does well the manager will be treated like a god and IP will advertise the fund. If pharma does badly they'll just advertise another fund, after all they have 37 of them - one is bound to be doing ok.

The skill of the manager is being able to predict which sectors are going to over-perform and be willing to increase the fund's weighting in them. But he also has to be able to predict when those sectors will peak, and then reduce the fund's exposure before they fall.

I agree with some of what Darkpool says.

Mature markets like the UK and US are very well researched and it is difficult for a fund manager to uncover hidden information to advantage his fund over the market as a whole. Then when the management charges are levied the fund inevitably underperforms.

Most of my money in the UK and US is therefore invested in trackers. However, I do have some money in Neil Woodford's funds because he appears to have the ability to outperform consistently over a long period. Maybe it is skill, maybe it is luck, but it is serving me well either way.

David