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

MrMalkin

Linton wrote: »

Those people who believe that managed funds are some finance industry scam would not have invested in SE Asia as there were no SE Asia trackers. They would have lost out.

This is totally untrue. Choosing to go passive instead of active is just one part of building a portfolio, there are lots of other elements involved. For example, in my portfolio listed earlier I have Marlborough Special Situations in place of a UK smaller companies index fund, because there isn't one that works for me.

Sometimes getting involved in an asset class is worth it even if you have to pay higher charges - e.g. emerging markets trackers have much higher costs than UK/US trackers but the higher expected return makes it worth it.

Ark_Welder

MrMalkin wrote: »

I don't understand, you think managed bond funds are better than passive bond funds? Or you think the bonds being tracked are not very good?

If it's the latter, they're not there to earn high returns, they're there to reduce volatility as part of my asset allocation strategy. To put it simply, I rely on the lower volatility of bonds and cash to meet some of the goals of capital preservation that you (it was you I think?) mentioned earlier.

The funds invest in sovereign bonds. As at the annual report the SWIP one is 33% US, 32% Japan, 13% Italy, 11% France. Unless there is likely to be a sustained deflationary period then sovereign bonds are not likely to do very well going forward. Eurozone problems also have hte potential to have an impact. Apart from the credit risk, inflation and rising interest rates are likely to mean that these types of bond are unlikely to be the best things to be in going forward. And that is the same whether a fund is active or passive. Company credits might offer a better return, if only for the simple fact that company balance sheets are generally in a much better shape than those for countries.

Of the six investment review perfomance periods the SWIP fund has always trailed its comparator index, and by different amounts each year - almost 3% in one year (although that was the earliest so there may have been other underlying changes made, but underperformance was still 2% in the last year). It has also underperformed against the global bonds sector in four of those six years: it did well in credit-crunching 07/08 (+10%) and 08/09 (+25%), but was -7% and -14% in the years either side (figures are net of charges). So for that particular fund its low charges have not translated into anything approaching a consistently better performance.

I assume that the RL fund is the index-linked? A different proposition and one that I would not reject out of hand although my linker preferences are more corporate and global right now.

Points to consider with bonds is that there are different types and they will do well or worse than the others for different economic circumstances.

The choices are for each of us to make, and if you are content with yours, then fair enough. But I, for one, would rather go managed and more corporate. Do you accept that that is fair enough too?

MrMalkin

Ark_Welder wrote: »

The choices are for each of us to make, and if you are content with yours, then fair enough. But I, for one, would rather go managed and more corporate. Do you accept that that is fair enough too?

Of course I accept that, I think my previous posts have been very even handed with regards to each of our choices. However I wish you had just come out and said this before rather than dropping vague hints that you disapproved of the funds - after all we're all here to learn.

I will say that I don't think you quite understand why I have them in my portfolio, they are there as part of my asset allocation strategy. The point is that they are low in volatility and counter-cyclical to equities and therefore have the effect of blunting losses. For example my equities funds are all down over the last 3 months or so, but the bond funds are both up a few percentage points. True, they will also blunt returns in equity bull markets but overall I think the strategy is superior. And my portfolio rebalancing will help take advantage of the swings between asset classes. As for what's going to happen with bond markets going forward, no one really knows, but I certainly think they're worth keeping up with.

I have dabbled in corporate bonds before but I no longer do so because they don't exhibit the same behaviour as sovereign bonds. They tend to have a high correlation with equities, so when shares are down corporate bonds tend to fall too, therefore they don't add the same value to my portfolio as sovereign bonds do.

gadgetmind

MrMalkin wrote: »

As for what's going to happen with bond markets going forward, no one really knows, but I certainly think they're worth keeping up with.

I've held bond funds before, and a few retail corporate bonds, but don't have any right now other than NS&I index linked certs as I moved to cash a wee while back. A lot of this is now back in equities.

I'll probably reread some of this thread later and perhaps consider some bonds as you describe in a few years.

Thanks

darkpool

Ark_Welder wrote: »

Then start a thread for discussing active vs passive and leave this for Jabba to discuss what is relevant to him.

Try applying it to yourself!

The only thing that you are capable of teaching others is patience and tolerance

like it or not moving money from active funds to trackers is likely to improve Jabbas portfolio performance.....

there has been some fairly robust academic evidence presented here that trackers are better than managed funds. so far no one has given any academic evidence that managed funds are better than trackers. the main "evidence" the managed fund side of the argument have used is pointing to a few funds that have done well.

i can accept that managed funds might be better for rookies or people wanting exposure to a specific area, however the overwhelming evidence is that managed funds are not worth the fees.

darkpool

Linton wrote: »

That was to counter those enthusiasts who seem to claim that a tracker is inherently more lucrative than a managed fund irrespective of what the fund invests in (ie sector).

Those people who believe that managed funds are some finance industry scam would not have invested in SE Asia as there were no SE Asia trackers. They would have lost out.

i don't think anyone here would argue that all trackers will outperform every single managed fund. i can't remember anyone suggesting that.

i don't think managed funds are exactly a scam, i think they are more like a product that has a lot of hype attached to it. a hype that isn't justified.

jamesd

DavidLaGuardia wrote: »

1. You are correct the performance is after costs but it is also why most funds fall below the market returns and the smaller group above this does not say the same.

This isn't a useful argument for advancing a view that unmanaged funds are better than managed because approximately 100% of all unmanaged funds will underperform their index.

Rather, the reason to prefer unmanaged to managed is to eliminate the risk that managers might underperform or because of a view that managed funds can't do better in a particular well researched market.

Darkpool's quote from the Measuring Luck in Estimated Alphas (2008) report is of interest: "The negative average performance documented in past studies is not due to the majority of funds but is caused by 20% of the funds." There's a report done for the FSA that concludes that underperformance persists.

What this means is that for those buying managed or unmanaged funds they can improve their results by eliminating from consideration the consistent underperformers and can beat the average result by doing so.

darkpool wrote: »

so far no one has given any academic evidence that managed funds are better than trackers

It's been given in many discussions but people still claim it hasn't been given. One of the more interesting ones was a study of funds for those resident in New York that found that active funds on average outperformed passive funds before taxes but underperformed after taxes. That is of particular interest to UK investors because we don't have a higher CGT on sales within the first year that hurt the performance of the active funds.

Tax matters and US habits are affected by their local taxation, including things like buy and hold strategies and the notion that fund turnover hurts performance. In the US fund turnover triggers individual capital gains tax liability for the consumers. In the UK it doesn't trigger any CGT liability for the consumer until they sell the fund, then they get to use their tax wrapper or CGT allowance and timing to reduce their potential tax liability.

There's also the interesting UK study from Cass/City University Business School from some years back that showed that past performance was reflective of future performance, picking the best performing fund in the past year each year improved performance. But the dealing costs with full initial and annual fund charges were greater than the gains. Nobody needs to pay full initial commission, though, so the potential is there. Note though that changes in economic environment can make this sort of approach fail badly - you don't want a highly volatile fund when the markets have switched from boom to bust. It's far from the only study that has showed some momentum and short term persistence of performance.

It's perhaps worth noting that I make heavy use of both active and passive funds.

darkpool

jamesd wrote: »

Darkpool's quote from the Measuring Luck in Estimated Alphas (2008) report is of interest: "The negative average performance documented in past studies is not due to the majority of funds but is caused by 20% of the funds." There's a report done for the FSA that concludes that underperformance persists.

It's been given in many discussions but people still claim it hasn't been given. One of the more interesting ones was a study of funds for those resident in New York that found that active funds on average outperformed passive funds before taxes but underperformed after taxes. That is of particular interest to UK investors because we don't have a higher CGT on sales within the first year that hurt the performance of the active funds.

Tax matters and US habits are affected by their local taxation, including things like buy and hold strategies and the notion that fund turnover hurts performance. In the US fund turnover triggers individual capital gains tax liability for the consumers. In the UK it doesn't trigger any CGT liability for the consumer until they sell the fund, then they get to use their tax wrapper or CGT allowance and timing to reduce their potential tax liability.

so how easy is it to avoid the bottom 20% of funds? it's only possible if you have a crystal ball.

i've certainly not seen any academic evidence to show that active funds are better on this thread. could you put a link to the evidence for active funds? would you accept that the vast bulk of academic evidence shows that trackers are better than managed?

In america they don't have stamp duty, but in the UK we do. You not think that a drag on UK fund performance? At the end of the day the investor only really cares about the return he gets, If he's better of in trackers he should put his money there.

gadgetmind

darkpool wrote: »

so how easy is it to avoid the bottom 20% of funds? it's only possible if you have a crystal ball.

I do wish one of the share/ISA platforms would provide a way to sort funds by future performance.

jamesd

You don't need to know the future performance. The underperformance perists, so you reject them based on their past performance. Whether that's a tracker or a managed fund. This should be obvious: you wouldn't want to buy a passive fund with a 1.5% annual charge when you can get one for 0.25% instead, unless the cheaper version was substantially worse in something like tracking error or counterparty or other risk. It doesn't take a genius or knowing the future to predict that the passive fund with the higher fee will have worse performance.

I do agree that most studies using averages and ignoring how people use and should use active funds show that passive funds in the US well studied markets do better. The list of caveats is significant and substantial, though, since just about every study has massive flaws. Largely due to treating active funds as though they were passive funds instead of paying attention to the differences. Average performance may be OK for passive funds that have very similar performance but it's a pretty poor approximation for how active funds work. Complete rubbish like ignoring changes in fund manager that routinely cause active fund users to switch fund before underperformance starts are rife in such studies. Or applying US studies with US tax rules to UK investors with different taxation.

If time allows I'll dig up the references for those two studies, both have been discussed in the past here, though.

Still, as a joke, if you want a list sorted by future performance, just get a list and sort by yield. That search is commonly available and generally is anticipated future yield for the next year.