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

DavidLaGuardia

jamesd wrote: »

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.

I think one easy less academic way is to look at what funds were being promoted and highly regarded a few years ago and look at their postion/performance now. The fact that it is all over the place is the reason I started reading on passive objectives in comparison to active management, not through being preached to by EMH/tracker enthusiasts who I had previously dismissed. I atached a link in a previous post in this thread a link to an article of "leading funds" from a few years ago to illustate this point.

I agree there is some more weight in being active in less well researched markets, but not enough to convince me that actives are a good bet due to hte addtional costs in those markets. I am convinced of the fact though that many trackers are not fit enough for purpose though.

Ironically the behavioutalists who seek to dismiss the EMH theory based on its flaws have repeatedly failed to come out with an alternative way of working that sticks.

When anyone (myself included previously) picks a successful managed fund it is too easy to be convinced it was based on sound evidence like the guy on the fruit machine who expouses his "great playing talent" when the jackpot turns up.

This will continue to be an interesting debate and I'm not so dogmatic or closed minded as to ignore anything that challenges my position, its just that every path I have followed to counter the passive argument has sent me full circle back to it.

Here's a pretty balanced look summary the history of pro and anti examples with an interesting conclusion: http://www-typo3.cs.ucl.ac.uk/fileadmin/UCL-CS/research/Research_Notes/RN_11_04.pdf

jamesd wrote: »

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.

:eek: missed the joke bit on first reading!

darkpool

gadgetmind wrote: »

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

yeah, it's such an obvious idea. i just wonder why no one has thought of it before.

or perhaps we should all start playing the lottery. all we'd have to do is exclude the numbers that aren't going to come up. easy.

darkpool

jamesd wrote: »

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.

but virtually every academic study shows passive is better. of course the fund management industry produces "studies" that show active is better. but the evidence produced by the fund management industry is best described as biased.

even if a fund manager had the magic touch it's likely he would get a massive salary to match his skills. so the manager would get the bulk of the rewards due to his skills. the investors would still get a feeble return. as it is fund mangers get massive salaries for not a lot of skill (i think it's been agreed that the bulk of funds, at best, match trackers)

i could be persuaded that a good manager might add a little alpha, say about 1%. however that alpha is swallowed up by TERs and dealing costs of circa 2.5%.

the fund management industry is huge, there are a lot of vested interests to encourage people to stick with managed funds. on this thread a lot of the people on the side of managed funds have worked in the fund management industry....


below is from the FT

"Most academic studies of active management versus passive show the average active manager underperforms, and there is no persistency among the top performers over the longer term. Perhaps, though, those figures are brought down by all the mediocre active managers who should not be in the game."

IronWolf

DavidLaGuardia wrote: »

Ironically the behavioutalists who seek to dismiss the EMH theory based on its flaws have repeatedly failed to come out with an alternative way of working that sticks.

When anyone (myself included previously) picks a successful managed fund it is too easy to be convinced it was based on sound evidence like the guy on the fruit machine who expouses his "great playing talent" when the jackpot turns up.

This will continue to be an interesting debate and I'm not so dogmatic or closed minded as to ignore anything that challenges my position, its just that every path I have followed to counter the passive argument has sent me full circle back to it.

Here's a pretty balanced look summary the history of pro and anti examples with an interesting conclusion: http://www-typo3.cs.ucl.ac.uk/fileadmin/UCL-CS/research/Research_Notes/RN_11_04.pdf


:eek: missed the joke bit on first reading!

You should read a speech given by Warren Buffett at Columbia Business School in 1984. He puts forward several investors who were all students of Benjamin Graham and have beaten the stock market indices consistently over very long time periods.

Proof enough for me that the EMH is incorrect.

Linton

darkpool wrote: »

but virtually every academic study shows passive is better. of course the fund management industry produces "studies" that show active is better. but the evidence produced by the fund management industry is best described as biased.

But they havent. What the one quoted earlier in the thread has shown is that on average in the USA managed funds after fees do not provide a statistically significant better total return than passive funds beyond what luck could have done. It does not claim that passive are better, it basically says they provide much the same net return - ie managers make sufficient to pay their own fees.

BUT:
- for some sectors active are clearly better.
- for some sectors there are no available passive funds
- there are important criteria other than total return, for example variability, for which no data seems to be available.
- there is minimal data from the UK where fund managers operate under a different tax regime


No, the best advice is to chose the sector then look at the funds available. Whether the one that appears to best meet your needs is active or passive is only one (a minor one in my opinion) of many factors you could consider.

darkpool

Linton wrote: »

it basically says they provide much the same net return - ie managers make sufficient to pay their own fees.

apart from the 20% that deliver negative alpha of course.

why invest in active if there is a 20% chance you'd be better off in a tracker and only a 2% chance you'r beat a tracker?

Ark_Welder

MrMalkin wrote: »

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.

I understand why you want these funds in your portfolio and I neither disapprove or approve of them for anyone other than myself. My purpose was to show why a tracker is not necessarily desirable for everyone, and that they do, at times, underperform against something that is managed, and even the index being tracked. I have done well with actively managed funds. For some of them, I don't think that there is even an index that could be tracked, never mind a tracker alternative.


Similar sentiments to your own, previously expressed: http://forums.moneysavingexpert.com/showpost.php?p=45600242&postcount=29.


There are different types of corporate bonds and they would normally perform differently according to the economic conditions at the time. High-yield bonds tend to perform more inline with shares because they are a higher risk than high-grade bonds. Shares perform well when economies are expected to perform well. As such, companies that have issued higher-yield bonds are less likely to default so the bonds are deemed safer to hold, and their prices will also tend to rise.

High-grade bonds would normally perform the opposite to the shares of the issuing company and more inline with the performance of sovereigns. When economies are expected to perform poorly then shares would normally fall and high-grade bonds rise. The reason is that dividends could be cut, and they would be cut before the coupon on the bonds was not paid. So investors might move into what they perceive as the extra safety of bonds.

That would be in normal circumstances. These days, normal circumstances have been put on hold and the choices seem to be between certain sovereigns and everything else. When this situation will revert to normal is a separate debate, but revert it will at some stage.


There is more to capital preservation than an allocation to bonds and cash, and it does actively require a level of active management - whether subcontracted to a third-party or by the individual. CP should involve deciding when to move between asset classes so that capital is preserverd (or losses reduced). You state in an earlier post
that you doubt that a fund manager can time the market an know when to move into cash, but then can anyone? (And if the answer is yes, then so can a FM). But when a fund manager decides to sell an asset and move into another, it does not trigger a potential liability to CGT, whereas it might do so for an individual.


If fund charges are a main concern then you might want to investigate what investment trusts have to offer. Whilst the vast majority of these are actively managed funds, the charges tend to be lower.

MrMalkin

Ark_Welder wrote: »

You state in an earlier post
that you doubt that a fund manager can time the market an know when to move into cash, but then can anyone? (And if the answer is yes, then so can a FM).

Well I think you can probably guess by now that my sentiments lie with the camp that says market timing is impossible Time in the market, rather than timing the market, as the phrase goes.

I think a portfolio should reflect your attitude to risk rather than any expectation of what markets are about to do. For longer term investors this generally means a more conservative attitude in terms of asset allocation, so emphasis on bonds rather than equities. For shorter term investors I genuinely have no idea, I haven't spent a great deal of time thinking about it since all my goals are long term.

I will say that I think it's very clear from the portfolio that I posted earlier what my strategy is and how I will manage my portfolio going forward. However, it isn't clear to me what the strategy is for the people who have posted their portfolios which are more actively managed - it's not obvious why the specific funds were chosen or why they are held in the ratios stated. Perhaps this is something you and other active investors can expand upon? I'd genuinely be interested and maybe we can start to turn this thread away from the catty (and somewhat boring) active vs. passive debate.

And yes I fully agree with your previous post - by far the most important thing is to be comfortable with your portfolio. For me, I was never fully comfortable with my managed funds. Coming across the passive + asset allocation strategy really cleared away some of the opacity of investment and left me with a much greater comfort factor. For others things may well be different There, something we can agree on!

gadgetmind

MrMalkin wrote: »

my sentiments lie with the camp that says market timing is impossible

Mine too, but some of the "one day sales" recently have worked rather well for some of my purchases.

I think a portfolio should reflect your attitude to risk rather than any expectation of what markets are about to do.

I'm afraid that I do tend to time my rebalancing and change my asset allocation based on macro economic factors. I'm currently very light on bonds, on par with cash, and overweight in equities. In 2-3 years, this will either prove to have been wise or stupid.

MrMalkin

gadgetmind wrote: »

I'm currently very light on bonds, on par with cash, and overweight in equities. In 2-3 years, this will either prove to have been wise or stupid.

I'm currently very light in single digit numbers on my lottery ticket, with par on numbers in the 20s and 30s. In 2-3 hours this will either prove to have been wise or stupid

If there was a 'right' answer to any of this stuff it would be easy and we'd all be millionaires.