Help me rebalance my failing S&S ISAs Portfolio - Sept 2011

Aegis

darkpool wrote: »

so what is your profession? or what profession are you trying to get into?

Financial advice. Not fund management. And before you ask, the company I'm going into is fee based, so no, commission won't enter into it.

so you admit there is no evidence that active managers, on average, outperform the benchmarks. i think some of us have been saying that all along......

Actually you haven't you've stated that there is evidence that passive funds outperform active ones on average. That's not the same as saying no evidence either way for the average funds.

i just don't understand what you mean by "include all the obvious dog funds"? you seem to be saying that if you ignore all the poorly performing funds the others would beat the benchmark? how many would you ignore? 90%? do you actually know what an average is?

Of course I know what an average is. I can even use different types of average to demonstrate if you like? Arithmetic mean, geometric mean, median, mode, whichever really. However, the important question here is not "do I know what an average is?" but rather "is it appropriate to apply a simple average to the full set of funds in each sector?", to which I believe the answer is "no".

And no, I wouldn't be looking to ignore 90%, probably closer to 10-30% tops, depending on the sector.

darkpool

masonic wrote: »

If the choice is between managed fund 'x' or tracker 'y', it's irrelevant whether or not 'x' is top quartile - 'x' just needs to perform better, after charges, 'y' to be worthy of investment. Consistent second quartile performance should be sufficient to do that. Often, simply keeping out of the bottom quartile is sufficient if a couple of good years are thrown in. Some sectors you'll have trouble finding a fund with a good enough record to give you confidence to invest, but for others the tracker consistently lags behind (or there is no appropriate tracker).

It's certainly nice to see a fund in the top quartile for 5 consecutive years (I hold a couple that have managed that), but I don't expect it when I invest. The odd bad year is not a problem as long as the good years can compensate for it.

i can see your viewpoint. but if fundmanagement was a skill you would expect consistent results.

if you repeatedly had a swimming race with same swimmers you would expect the same swimmers to be in the same positions fairly consistently. ie the best swimmer would normally be first, and the lard !!!! would always/ normally be last. That's because swimming is a real skill.

If you had a game of chance, like roll the dice, you would expect the winner to vary in each game.

Looking at the figures from S and P indicates that the performance is due to chance. And if you accept that you have to ask why consumers pay well over 2% for fund management.

Of course some funds will perform well for a prolonged period of time. But there is little evidence this is due to skill....

MrMalkin

Oh God what have I unleashed...

kar999 wrote: »

Having been in a couple of identical head-banging circular threads before I'm at a loss as to what part of some active funds being capable of significantly beating the index some of the time you dont grasp.

I don't think any sensible indexer denies that this is the case, the very nature of averages means that some funds will be above average.

My thoughts on this are that that yes, it is possible to find funds that outperform the index, sometimes for quite significant periods of time. However, there is no guarantee that such a state of affairs will continue, indeed the evidence tells us that periods of outperformance are very often followed by periods of underperformance. Therefore, to keep up the outperformance necessarily requires significant research into finding the next Great Man.

I'm not convinced that there is such thing as persistent performance skill in fund managers, and I'm even less convinced that I have the ability to identify it in them even if it does exist without referring to past performance, which I think we all know is a bad idea. I would therefore be churning my portfolio and incurring costs whilst exposing myself to the risk of making a mistake and investing in a fund that underperforms - an issue very likely to occur in a portfolio of 5-10 funds with my amateur understanding of the industry.

So, rather than take on this risk I would rather take the simple, low effort approach of using index funds and the expectation that over the long run I will probably do better than 50-80% (or whatever the number actually is!) of other investors in the market. This approach also allows me to concentrate on the things I can control in my portfolio, namely asset allocation (allegedly responsible for 90% or returns in any portfolio) and keeping costs down.

As I said before the most important thing is being comfortable with your portfolio. After some good and not-so-good experiences with active fund management I've settled on indexing as something that I'm very comfortable with, even if it does mean my chance of missing out on the next Buffett/Lynch/Woodford/<insert star manager here> and the potential bonanza on offer with them.

To be fair, some indexers need to chill out a little - I know a big draw of the approach is that it gives the little guy an excellent chance to beat more professional investors whilst sticking one to the financial industry, but there are plenty of ways to skin a cat and at the end of the day what another investor does with their money is their business, not mine. Indexers do tend to be a little evangelical!

darkpool

Aegis wrote: »

Financial advice. Not fund management. And before you ask, the company I'm going into is fee based, so no, commission won't enter into it.

Actually you haven't you've stated that there is evidence that passive funds outperform active ones on average. That's not the same as saying no evidence either way for the average funds.

Of course I know what an average is. I can even use different types of average to demonstrate if you like? Arithmetic mean, geometric mean, median, mode, whichever really. However, the important question here is not "do I know what an average is?" but rather "is it appropriate to apply a simple average to the full set of funds in each sector?", to which I believe the answer is "no".

And no, I wouldn't be looking to ignore 90%, probably closer to 10-30% tops, depending on the sector.

Ahhh, so there is likely to be a certain amount of pro management bias in your posts.

The UK has a lot of mathematics professors and phd students. I'm just surprised that the financial industry hasn't managed to find one of them that can prove active management is worth the fees. there seems to be a lot of evidence that active management isn't worth it. All the pro studies that "prove" AM is worth it have come from AM industry.... and to be honest there research is shocking, some studies even suggest ignoring inconvenient results..... which leads me onto......

So you'd ignore up to 30% of the fund results that you didn't agree with. I'm just glad you don't work in medical research.

masonic

darkpool wrote: »

i can see your viewpoint. but if fundmanagement was a skill you would expect consistent results.

if you repeatedly had a swimming race with same swimmers you would expect the same swimmers to be in the same positions fairly consistently. ie the best swimmer would normally be first, and the lard !!!! would always/ normally be last. That's because swimming is a real skill.

If you had a game of chance, like roll the dice, you would expect the winner to vary in each game.

Looking at the figures from S and P indicates that the performance is due to chance. And if you accept that you have to ask why consumers pay well over 2% for fund management.

Of course some funds will perform well for a prolonged period of time. But there is little evidence this is due to skill....

A manager could make the right calls but get the timing slightly wrong, for example going highly defensive a year before a major crash. That will hit performance over that first year, but ultimately leave the fund better off. Imperfect timing is probably a significant cause of otherwise excellent managers having 'off' years.

Managing funds is quite different to swimming. If you wanted to make the analogy closer, you'd need a very varied environment to match the variability of the economic climate - so have a long distance swim in the Atlantic, Arctic and Indian Oceans, followed by a race in a standard pool and see if the same person wins each time. I'd guess not, but there will probably be one or two who could do consistently better than the others in aggregate and probably one who gets left behind every time.

In terms of charges, "well over 2%" sounds obscenely high - surely nobody is paying that much. My managed funds are around the 1.6% mark and even that is further discounted 0.1-0.2% to below 1.5% on average. I hold a few trackers at well below 0.5%, but if I were to switch some of my managed funds to trackers I'd be going from 1.5% to 1%, which is not that significant.

darkpool

masonic wrote: »

A manager could make the right calls but get the timing slightly wrong, for example going highly defensive a year before a major crash. That will hit performance over that first year, but ultimately leave the fund better off. Imperfect timing is probably a significant cause of otherwise excellent managers having 'off' years.

Managing funds is quite different to swimming. If you wanted to make the analogy closer, you'd need a very varied environment to match the variability of the economic climate - so have a long distance swim in the Atlantic, Arctic and Indian Oceans, followed by a race in a standard pool and see if the same person wins each time. I'd guess not, but there will probably be one or two who could do consistently better than the others in aggregate and probably one who gets left behind every time.

In terms of charges, "well over 2%" sounds obscenely high - surely nobody is paying that much. My managed funds are around the 1.6% mark and even that is further discounted 0.1-0.2% to below 1.5% on average. I hold a few trackers at well below 0.5%, but if I were to switch some of my managed funds to trackers I'd be going from 1.5% to 1%, which is not that significant.

i agree that timing can matter, but S and P are using 5 year time frames. so you'd expect good share selection to show iteself over that time.

but the "swimmers" are all facing the same economic conditions. to be fair S and P were one of the rating companies that failed to spot the credit crisis coming. but overall i'd trust what they produced.

Total Expense Ratios are about 1.5% to 1.7% in the UK. But they don't include dealing costs....

BLB53

Total Expense Ratios are about 1.5% to 1.7% in the UK. But they don't include dealing costs....

True, and therefore mangers who tend to churn their porfolio, attempting to beat their benchmark (and therefore collect their large bonus!) will probably be pushing the TER over 2%.

Not surprising therefore, that over time, they will not be able to consistently beat the low cost trackers with TERs well under 0.5%. They are constantly running up the down escalator and in the end don't make a lot of progress.

The OP was asking why some of his funds had not done well and I think you have to point to fund charges as a contributory factor in this in addition to the OPs acknowledged mistakes.

kar999

MrMalkin wrote: »

Oh God what have I unleashed...

I don't think any sensible indexer denies that this is the case, the very nature of averages means that some funds will be above average.

My thoughts on this are that that yes, it is possible to find funds that outperform the index, sometimes for quite significant periods of time.
To be fair, some indexers need to chill out a little - but there are plenty of ways to skin a cat and at the end of the day what another investor does with their money is their business, not mine. Indexers do tend to be a little evangelical!

Absolutely, Well said.

After years of successful investing, and having offered evidence to support the debate, I dont need blinkered preaching to or having my intellience questioned, but I'm thick skinned enough not to be bothered, The better than index overall performance of my porfolio (which includes some trackers & ETFs but mainly AM funds) over the decades is all the evidence I need.

Aegis

darkpool wrote: »

Ahhh, so there is likely to be a certain amount of pro management bias in your posts.

No, actually, but don't worry too much about drawing more false confusions.

The UK has a lot of mathematics professors and phd students. I'm just surprised that the financial industry hasn't managed to find one of them that can prove active management is worth the fees. there seems to be a lot of evidence that active management isn't worth it.

Except there isn't. There are studies which look at the "pick an active fund completely at random and invest in it" type of approach... Which I've never seen anyone actually use.

All the pro studies that "prove" AM is worth it have come from AM industry.... and to be honest there research is shocking, some studies even suggest ignoring inconvenient results..... which leads me onto......

Who would fund it if it wasn't the active management fund providers? Studies aren't generally done for free, after all.

Incidentally, most of the evidence I've seen for the supposed superiority of trackers in the UK stems from a study by Vanguard, a group which really likes to sell its trackers. If you're going to try to attack the source of studies, at least do so consistently.

So you'd ignore up to 30% of the fund results that you didn't agree with. I'm just glad you don't work in medical research.

Yes, if I was analysing whether it's possible to generate returns in excess of the market by careful selection of active funds, I'd like there to actually be some selection criteria involved in the study. Otherwise it's assuming that active investors only ever pick a fund completely at random, which is a strategy so profoundly stupid that I've never heard it cited as the reason someone invested in a fund, even someone with no experience at all.


For the record, medical research ignores results too, if people break the protocol of the trial, i.e. the selection criteria for the sample. In statistical terms, there's no problem with ignoring results as long as you have a clear methodology in advance of the study to define what elements of the statistical set are deemed to qualify for the study and which are excluded for various reasons.

darkpool

kar999 wrote: »

Absolutely, Well said.

After years of successful investing, and having offered evidence to support the debate, I dont need blinkered preaching to or having my intellience questioned, but I'm thick skinned enough not to be bothered, The better than index overall performance of my porfolio (which includes some trackers & ETFs but mainly AM funds) over the decades is all the evidence I need.

sorry, what evidence did you offer the debate? was it the evidence that out of the thousands of unit trusts two managed to outperform the market?

with the greatest respect you are an IFAs dream customer.

You were bothered enough to put me on your "ignore" list, i thought it was because you realised your argument was, limited.