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

MrMalkin

Ark_Welder wrote: »

The answer appears to be: no

Disappointing. As long as the quality of the discussion doesn't descend to the horrifying depths of the House Prices subforum though...

Jegersmart wrote: »

I guess we all have access to the same tools for research, but lets look at Pru FTSE100 Tracker. Returns as follows:

A few final points on this from me, before I stop responding to active vs. passive:

1. The Pru FTSE fund has a relatively high annual charge at 0.5%. This is a symptom of the fact that trackers are relatively new and unpopular in the UK, until quite recently most had charges that weren't far off those of active funds, rendering them somewhat pointless. I think Halifax have a tracker that charges 1.5% which is absolutely scandalous in this day and age. Charges are trending downwards though, and that will increase performance going forward. There is no reason to go with any tracker other than the cheapest in the sector you want to track unless it exhibits very poor tracking errors. The ones to consider for the FTSE are the HSBC funds (0.25%) or Fidelity Moneybuilder (0.1% but they attract HL's 0.5% additional charge which is why I went HSBC. They also rather strangely have a higher TER than HSBC).

2. 10 years is still a relatively short period over which to gauge performance. I guess the point of trackers is to capture the long term expected return of a market, so the longer you invest the more likely you are to do well with a tracker. Personally I'm looking at holding mine for a minimum of 40 years, maybe longer. Patience is required for indexers, especially so in prolonged bear markets.

3. The last 10-12 years, as we all know, have been very strange times for investors and the markets. The FTSE is still way off its 1999 closing price and has been all over the place in the meantime. This is similar to how the first trackers debuted in the 70s - the Vanguard S&P tracker was a real dog for the first few years because the market it was tracking was a real dog. When we hit the 80s the S&P took off and so did Vanguard, and the S&P500 fund remains one of the best performers over the longest term. I think when (if?) the markets return to growth then you'll find the average, long term performance of trackers improving, especially now that charges are generally lower.

I fully understand why some people aren't sold on indexing, to some extent it really does require a leap of faith, lots of patience, a long-term outlook, and a cool head. That's not for everyone. I have no trouble admitting that in down markets indexing induces panic and stress, you need the right mindset to be able to ride out the storm and harness the full power of the strategy. If you bail, you fail.

Now to re-iterate what I asked a couple of days back: picking tracker funds is generally straightforward, choose your market and pick the cheapest tracker, job done. What methodology do people who invest in active funds use to choose their funds? When I used them, I must admit that my thinking was very fuzzy and I may have been seduced by past performance. I'm interested in learning where I went wrong and what criteria other people use for their choices.

cloud_dog

gadgetmind wrote: »

Dunno about Jagersmart, but I'd want something more than arm waving before I invested my money.

So what you're looking for is statistical evidence. Give me a set of stats and with the same data I will provide you with two diametrically opposing evidenced views.

Sometimes, if it looks like ****, smells like ****, and tastes like **** then chances are its ****.

i think the whole AM / PM funds has been done to death and the long and the short is that if you are a novice/armchair investor, or wish to balance a portfolio then PM funds have their place, if you are a more active investor willing to put in the time and research then AM funds are possibly more your thing.

My one and only criteria is performance. I don't really give a monkeys about AMC if the fund is (out) performing. And for this to make sense I have to continually monitor my funds (which I am happy to do).

jamesd

darkpool wrote: »

did you consider survivorship bias in your research.....

Who cares? Those who find active funds interesting know that they would probably have switched out of a fund that wasn't doing well compared to its peers before it failed to survive. Someone who isn't watching for those things should very seriously consider using passive funds instead of active.

Survivorship bias, particularly when not weighted for assets under management is more of a problem with the models and studies than the funds. Active funds that do badly and then are closed with lots of money under management are interesting but most of the ones that are closed get closed because they fail to succeed in the market, often because people abandon them when good performance ceases.

Jegersmart wrote: »

I am not sure what "academic" proof is? Is that like when academics say that "capitalism works"?

Academic studies as proof is what you get when you have social scientists who use broad averages to say that passive funds don't succeed on average while ignoring how those who use active funds actually use them because that's harder to model and study properly.

There are rare exceptions like those that look at how the performance of the best-performing funds persists, using the sort of approach that is used by those who use active funds, maybe even switching out if a manager changes. You also get some relatively rare studies of momentum effects.

MrMalkin wrote: »

I fully understand why some people aren't sold on indexing, to some extent it really does require a leap of faith, lots of patience, a long-term outlook, and a cool head. That's not for everyone. I have no trouble admitting that in down markets indexing induces panic and stress, you need the right mindset to be able to ride out the storm and harness the full power of the strategy. If you bail, you fail.

That's not a reason to use active funds - though in changing market conditions those using active funds may well change funds, whether to different sectors or to managers with different approaches, much as some might adjust leverage. It's not lack of a cool head or stress, it's looking for the funds that are most likely to be able to exploit the situation. Or trying to deliberately time the market by taking money out or putting it back in.

MrMalkin wrote: »

What methodology do people who invest in active funds use to choose their funds?

First look at the extent to which studies of the performance of a human manager show alpha. Accept that some of that can be chance. Then look at the manager's style and see whether that style fits current and anticipated conditions. Don't use a highly leveraged fund if the world economy is failing, do consider a cautious manager.

If you look at active funds you can see things like the First State Asia Pacific Leaders and Fidelity South East Asia pairing where the managers have different approaches, with First State being more cautious. If you have a cautious view you'd switch into the First State fund, if you think a bottom might be around you might switch back into the Fidelity one.

Or you might avoid a fund with a manager who takes a defensive view, like Invesco Perpetual Income, during a recovery, and pick a tracker, a more aggressive fund like M&G Recovery or a different sector like natural resources or emerging markets by adjusting your sector weightings.

Linton

MrMalkin wrote: »

Now to re-iterate what I asked a couple of days back: picking tracker funds is generally straightforward, choose your market and pick the cheapest tracker, job done. What methodology do people who invest in active funds use to choose their funds? When I used them, I must admit that my thinking was very fuzzy and I may have been seduced by past performance. I'm interested in learning where I went wrong and what criteria other people use for their choices.

Active fund approach:

1) Decide what specific sector to invest in based on my need (eg income, growth, diversification, stability), my current sector allocation and my assessment of long term world economic movements.

2) Look at Trustnet and make a short-list of relevent funds based on:
- fund manager.
I look for the main players, preferably large household names with apparent expertise in that sector.

- past performance in individual years.
The overall 5 year figure can be very misleading as it may all depend on one lucky year.

- specific focus on how well they did in the bad times.

- Look at what they are currently invested in.
For example different Emerging Market funds tend to focus on different countries. Some emerging market funds may be mainly invested in mining and oil and so are really Natural Resources funds.

3) Chose a fund based on which gives the best match of plus points.


Neither whether a fund is a tracker or actively managed nor the charges are criteria. I am only interested in what the fund will do for me. What it does for anyone else is irrelevent.

kar999

darkpool wrote: »

be honest, most of the pro fund arguments on this thread have been along the lines of "perp high income has done well". some of us here require slightly more sophisticated evidence than that.

perhaps you have something more than anecdotal evidence to support the value of active management?

You might want more sophisticated evidenceand and you guys can debate about laws of averages and the general rights and wrongs of PM v AM ... fair enough .. it's an intereting debate....

....but personally an extra £20k in my wallet from Perpetual High Income is all the evidence I need.

(Yes, it has underperformed some of the time but long term I'm quids in.)

Linton wrote: »

Neither whether a fund is a tracker or actively managed nor the charges are criteria. I am only interested in what the fund will do for me. What it does for anyone else is irrelevent.

Absolutely.

darkpool

i think the people that like unit trusts are a bit like the punters in a betting shop. they talk about the wins they've had, but never the losses they have made.

i've never met anyone who got rich by investing in unit trusts.

kar999

darkpool wrote: »

i've never met anyone who got rich by investing in unit trusts.

Please let me introduce myself then!

Of course it depends on what your definition of rich is but having invested in unit trusts for 20+ years via PEP's and then ISA's my return, net of charges and tax-free, on my portfolio has been significant. My portfolio has had it's share of poor funds but overall it has certainly outperformed both cash (and maybe even property if you include the current slump - unless you live if the SE).

I would hardly say it's betting, but then any investment that is risk based either unit trusts, index trackers, shares, investment trusts, ETF's are ALL risk based and as such you are still gambling on rises or falls.

Ark_Welder

20+ years of indirect and direct holdings has done for me too. I have used some trackers in the distant past, but 'the market' hasn't been a fixation for me a while now: I'm more interested in current income generation from non-pension assets, and a future income stream from the personal pension when I'm eligible.

My poorly-performing fund for the current calendar year is PSource Structured Debt. It was a 'credit-crisis recovery risk play', and the one that didn't work. Just keeping it now to see what the wind-up proposals are. Or you can take what is now Foresight 5 VCT, which has put in an abysmal return. But as it is only about one tenth of one percent of assets it is hardly even noise and even a recovery will make minimal impact. There: a bit of balancing-out of all the success stories!


I'd like to add cash to the list of risk assets too. There is inflation risk, which can reduce its purchasing value - but after allowing for compounded interest. Even inflation-linked cash has a risk, which is that inflation will be low and interest rates high(er), meaning that a better return could be made on holding cash in a fixed-rate account.

MrMalkin

darkpool wrote: »

i think the people that like unit trusts are a bit like the punters in a betting shop. they talk about the wins they've had, but never the losses they have made.

You get that with all sorts of investors though. There's a guy who writes a column in the Telegraph every Saturday that I've read on and off for the last 3 years, he somehow manages to buy into the exploding shares just before they take off yet miraculously manages to skirt round the shares that take a dive. Either he's the world's greatest investor or more likely a liar.

Thanks to everyone posting answers to my question, I would quote each of you but that would be a monster post so I'll refrain.

DavidLaGuardia

Jegersmart wrote: »

If you take the 12 year period from 1999 to 2011 (a very unfortunate period ofc) a FTSE100 Tracker would be overall considerably down. Very few managed funds have done anywhere near as bad as that.

I would only ever use a tracker at extreme lows and even then I prefer to pay extra for a fund manager with a long history of overperformance. At the end of the day, a tracker is a dumb instrument - can be used to great effect with skill but for longer term plays they suck imho.

This [oft-used] argument is fundamentally flawed since it assumes that a good passive porrtfolio is executed through exclusive use of a FTSE 100 tracker. While this remains anyone's perception of what passive managed investments is all about, they have only half understood understood how to use effective passive investing strategies.

Personally I wouldn't have a FTSE 100 tracker in my own passive portfolio.

Managed funds must be judged by the specific markets they are invested in. Even if a managed fund is 100% in equities it is likely to have elements of the whole market, smaller companies and even some passives that cluster value stocks BUT without the market timing, inidividual stock picking and frequent trades that occur in AM funds adding to the costs.

It is when the asset allocation of AM funds is compared to the markets that they represent that the judgement can be made and the return compared against representative passive portfolios.

Furthermore, If a managed fund gains additional performance when it takes additional risks then this also should be taken into consideration since any increase in risk can also result in negative results in the future.