***New Questions***Advice on Fund Investing - all answers/comments welcome

bobsy31

*****New Questions are halfway down this thread - please read and reply!******

Hi

Having only recently 'self taught' in the world of fund investing I was hoping I could get advice on a few things from people more experienced than me!

Some of you may recognise me from previous thread - In a nutshell I have opened a h-l s&s Isa and am paying 600 pm across a number of funds and plan to do this for 10/15+ years

My questions/advice needed are:

1. TER
I have a basic understanding of what TER is and how it erodes some of the gains you make when investing through funds. Apart from investing in Trackers which I don;t want to do for now then it seems there is no choice than to accept this as part of fund investing? The funds I have chose are all between 1.5 and 2.

2. RE-BALANCING
I am trying to get my head around this too and have read how if you do not re-balance then it could make a big difference to my returns. Please can someone explain this concept and with examples, specifically for someone like me who has 10+ funds where I am paying an equal amount into every month.

3. MOST OF MY INVESTMENTS ARE WITH 1 COMPANY
With all the research I have done and the plethora of choices available it seems that 75% of my fund choices are with First State as they seem to have the best track record and managers for the funds I have chosen for the markets I am in!

There is an obvious putting most of your eggs in one basket and whilst I sincerely hope not but the fact that if First State go belly up then I am in big trouble. Is there any re-assuring words out there? Or do other investors have this when analysing their portfolio?

4. HEALTH/PHARMA/TECH FUNDS - WHY THE BELOW PAR PERFORMANCE?

I was keen to invest in funds that focus on these areas however looking at their past performances (even prior to the crash) it wasn;t great. 3 sectors that can help fuel growth (especially tech) but are also 'in demand' in any set of market conditions or economic state or country around the world (pharma/health)?

5. ARTEMIS ENERGY FUND
This fund is being heavily plugged recently and am aware not to get caught up in the excitement of it all, even when the fund manager himself is investing his own money!
Having researched the ENERGY sector and the funds again the performances have not been great and again I wonder why is that? Considering it is a 'market' where demand comes from all countries and economies it seems it should be more of a growth area and such funds should be successful. what does everyone think?


Lots of questions, I hope the answers will help others who may be thinking about one or more of the above points.

Many thanks in advance for your responses!

Ilya_Ilyich

bobsy31 wrote: »

Hi

Having only recently 'self taught' in the world of fund investing I was hoping I could get advice on a few things from people more experienced than me!

Some of you may recognise me from previous thread - In a nutshell I have opened a h-l s&s Isa and am paying 600 pm across a number of funds and plan to do this for 10/15+ years

My questions/advice needed are:

1. TER
I have a basic understanding of what TER is and how it erodes some of the gains you make when investing through funds. Apart from investing in Trackers which I don;t want to do for now then it seems there is no choice than to accept this as part of fund investing? The funds I have chose are all between 1.5 and 2.

This is pretty much part & parcel of fund investing, yep - it's just another aspect you have to weigh up when deciding on funds.

2. RE-BALANCING
I am trying to get my head around this too and have read how if you do not re-balance then it could make a big difference to my returns. Please can someone explain this concept and with examples, specifically for someone like me who has 10+ funds where I am paying an equal amount into every month.

Say you've chosen 10 funds and invest £1000 into each of them, so each holds 10% of your investment. As you go through time each will have phases where it performs better and worse, and this can get its proportion 'out of synch' with the others - say after the first year your Taiwan fund has gone up 20% and your UK fund has gone down 20%, while the others kept the same value. Now your Taiwan fund is worth £1200 -- 12% of your portfolio -- while your UK fund is only 8%. This reduces the level of diversification in your portfolio and can lead to more volatility in your returns. Rebalancing is 'reshuffling' the extra gains from the better-performing funds into the worse-performing funds to get you back to the proportion you want.

In a situation like yours where you're investing a fixed amount each month, your funds are unlikely to get significantly out of whack for at least a few years down the line, though it's something worth keeping an eye on - perhaps the simplest way to rebalance would be by adjusting your contributions to help each fund get to its desired proportion.

3. MOST OF MY INVESTMENTS ARE WITH 1 COMPANY
With all the research I have done and the plethora of choices available it seems that 75% of my fund choices are with First State as they seem to have the best track record and managers for the funds I have chosen for the markets I am in!

There is an obvious putting most of your eggs in one basket and whilst I sincerely hope not but the fact that if First State go belly up then I am in big trouble. Is there any re-assuring words out there? Or do other investors have this when analysing their portfolio?

If they do go belly-up you won't lose any of your investments; they are held 'in trust' for you which basically means First State (or whoever the fund manager is) can play around and invest them for you, but they can't sell them to take the money for themselves if they go bankrupt etc. If the company does start struggling your returns might suffer but you would be able to pull out your investments at that point without losing too much.

4. HEALTH/PHARMA/TECH FUNDS - WHY THE BELOW PAR PERFORMANCE?

I was keen to invest in funds that focus on these areas however looking at their past performances (even prior to the crash) it wasn;t great. 3 sectors that can help fuel growth (especially tech) but are also 'in demand' in any set of market conditions or economic state or country around the world (pharma/health)?

5. ARTEMIS ENERGY FUND
This fund is being heavily plugged recently and am aware not to get caught up in the excitement of it all, even when the fund manager himself is investing his own money!
Having researched the ENERGY sector and the funds again the performances have not been great and again I wonder why is that? Considering it is a 'market' where demand comes from all countries and economies it seems it should be more of a growth area and such funds should be successful. what does everyone think?

I'm no expert in these market sectors. However areas/companies which are identified as 'growth' generally have this priced into their shares - eg a company worth $100m might have shares priced as if it's worth $200m, because people expect it to grow to that size. Thus even when these companies do grow, the increase in share price is minimal because they're just reaching the level they're priced at - and if they fail to grow (or even do grow, just not to the expected level) then the shares will turn out to have been overpriced.

Lots of questions, I hope the answers will help others who may be thinking about one or more of the above points.

Many thanks in advance for your responses!

Hope my responses are of some help; good luck!

jhxmt

As a similar first-time, self-taught funds investor, I'm interested in a lot of the same questions as you! Particularly regarding the TER - for active managed funds I'm assuming that the usual range is 1.5-2% TER, as I'm finding it difficult to find anything below this boundary (if disregarding trackers, obviously).

Following this thread with interest!

jimjames

Some active funds have TER under 1% but very few do. One example is Lindsell Train UK Equity which has TER 0.94% with AMC of 0.65%.

You need to focus on which funds or sectors are likely to do well in future. Looking at past performance isn't always the way to see what will perform best next year. Much the same as driving looking behind you won't give warning of a crash ahead.

Health & pharma may not have done so well recently but that could be a buy signal if you have contrarian views. I've bought into private equity funds that had dropped massively because I felt the market had overdone the drop but if you'd looked purely at their performance you would have avoided completely.

darkpool

It should be remembered the Total Expense Ratio does not actually cover all the expenses......

Reaper

For those wanting to minimise the TERs there is always the option of using Investment Trusts instead of OEIC funds, particularly if you are looking at the longer term.

If interested you do need to read up on them first as they are not directly equivilent to a fund. You can find previous threads on the subject on this board.

Rollinghome

jimjames wrote: »

Looking at past performance isn't always the way to see what will perform best next year.

It's counter-intuitive for most of us but as JJ has said past performance is a poor indicator of future performance. The FSA has commissioned various studies with the same conclusion which is why fund managers are now legally required to include a warning to that effect in their advertising.

You might want to glance through this: http://www.fsa.gov.uk/pubs/occpapers/op09.pdf

It says:
"WM found that funds which are initially ranked in quartile 1 show no more than a random chance of being similarly ranked in a subsequent period. In fact they found that a fund ranked in quartile 4 showed a stronger probability of subsequently being ranked top. The conclusion was that historic top quartile performance was not a good guide to picking funds."

These are their figures.


As you can see in that study they found that funds in the top quartile had only a 22.2% chance of being there in the following period. Those in the bottom quartile had a 43.8% chance of being at the top in the next period.

Which is one reason why charges, the biggest drag on performance, are so important. Charges can be known, future performance can't.

More on the subject including the psychology of why investors buy the funds they do: http://www.fsa.gov.uk/....past_performance_report.pdf

PS. The risk of having all your funds with one manager isn't that they'll go bust. The risk is that there may be a house view that all the funds tend to follow so if one fund gets it wrong then they all may.

fimonkey

darkpool wrote: »

It should be remembered the Total Expense Ratio does not actually cover all the expenses......

Don't just give half the story...... Why doesn't TER cover all expenses and which expenses doesn't it cover?

Thanks from another novice

Reaper

fimonkey wrote: »

Don't just give half the story...... Why doesn't TER cover all expenses and which expenses doesn't it cover

Trading costs i.e. buying and selling shares. Here is a Telegraph piece on the subject:
http://www.telegraph.co.uk/finance/personalfinance/investing/7923367/More-than-meets-the-eye-to-fund-charges.html

middlepuss

Reaper wrote: »

Trading costs i.e. buying and selling shares. Here is a Telegraph piece on the subject:
http://www.telegraph.co.uk/finance/personalfinance/investing/7923367/More-than-meets-the-eye-to-fund-charges.html

I did not know that! Thank you, I have read the article and this came as a shock:

"That said, investors have to expect some extra cost here: after all, you would be seething if your manager just sat on his backside all year. On average, trading costs can add another 1 per cent to your annual fees but some argue that managers buy and sell shares simply to rake in this extra revenue."

Rollinghome

Not mentioned there is that some fund managers are able to manipulate the AMC figure by paying a broker over the odds for dealing charges, which aren't required to be shown in the AMC or TER figure, and in return the broker provides services which would otherwise appear in the AMC, such as research, software, etc. So costs are moved out of the figures that have to be published, into the figures that aren't published.