A single fund of funds for all investments?

EdInvestor

Andy1663 wrote:

Just what I wanted to know - a real help, thanks. :T

I now need to work out what I'm actually going to do :eek:

Some further references on dividend based strategies in case you need more info.

All about the HYP and its risk filters

Website for the IUKD high dividend ETF(tracker)

Performance stats of UK equity income funds - note defensive characteristics in market crashes

moneyandmountains

jamesd wrote:

EdInvestor, as Chrismaths mentioned, it is only true that the reduction in risk above 15 investments is small if their behavior is statistically independent. This obviously not true if you are sticking to only shares in UK companies.

Not sure that I agree with this.
For example, take 15 shares in different UK banks. Lets call it a bank tracker.
Now if we assume that there is a degree of correlation between the behaviour of banks due to monetary policies etc.
However, holding 15 shares will reduce the 'Diversifiable' risk, i.e. smooth out the effects of an individual bank's good/bad performance. What will be left is a base layer of beta risk due to the correlation.

What you can do is select a range of companies in all the overseas markets and sectors to reduce the country-based dependence.

This is an attempt to remove beta risk.
In an ideal world you don't necessarily want independent stock behaviour, negatively correlated stock is much better for reducing risk.
i.e. stock 1 goes up, stock 2 goes down.
This is why options are so popular for hedging.

What is practical is doing it via funds (or investment trusts) which get you the diversification across the foreign markets

During this thread I think some people have been talking at cross purposes. Ed is technically correct to talk about diversification as the process of reducing the diversifiable risk by buying several different shares in a sector.

However, that is not what is meant by others when using asset allocation for diversification is mentioned.

These two activities are complementary.
1) Reduce the risk of an individual company going bad. i.e. buy several companies (Diversifiable Risk)
2) Reduce the risk of backing the wrong sector.

Andy1663

Edinvestor

Thanks for the links. Could you tell me what shows the defensive quality in income funds - is it that the 5 year performance (i.e. including the last bear market?) is not generally down form the 3 year performance?

Could you check the link on the Mail article - its currently to trustnet.

Competitionsafe

Thanks for the very useful IT info.

I'd still welcome suggestions for a higher risk/return one stop shop than Midas Growth - or does an IT like RIT fit the bill?

Andy

StevieJ

A question on balance and diversification.
If you thought that bonds and property would perform badly, driven by shrinking commercial property yields and increasing interest rates, would you still include these in your portfolio?

Andy1663

Adding to SteveiJ's question - which funds not only have a balanced portfolio, but a good degree of flexibility in practise to adapt to market conditions/economic cycle? Do small funds tend to be more flexible in this regard than big ones?

dunstonh

StevieJ wrote:

A question on balance and diversification.
If you thought that bonds and property would perform badly, driven by shrinking commercial property yields and increasing interest rates, would you still include these in your portfolio?

yes. They give the portfolio a defensive stance and are a good aid when you rebalance.

If the stockmarket chunks go up so 20% and the bonds/property gives you 4%, then when you rebalance, money from the stockmarket chunk will go into the bond/property chunk. When the stockmarket goes down, not all of the portfolio will be hit and money will be moved out of the bonds/property back into the stockmarket to rebalance back again.

So, you are taking money out when it goes up and putting it back when its gone down. So, in itself, you may get periods when the lower risk areas are not performing as well but when used in conjunction with the other sectors and rebalancing is employed they still have a worth. As you move up the risk scale, the amount in these drops back.

EdInvestor

Andy1663 wrote:

Edinvestor

Thanks for the links. Could you tell me what shows the defensive quality in income funds - is it the 5 year performance (i.e. including the last bear market?)

Yes, it's even more marked over 6 years.Compare with growth funds over the same period, not forgetting also to factor in the dividend yield in both cases.

Link to Mail article now fixed.

Andy1663

Apologies for a rather basic question - but do the figures include dividend yield, and if not, roughly how much do they add?

Is citywire the site for figures over 5 years?

Thanks.

Chrismaths

This is an attempt to remove beta risk.
In an ideal world you don't necessarily want independent stock behaviour, negatively correlated stock is much better for reducing risk.
i.e. stock 1 goes up, stock 2 goes down.
This is why options are so popular for hedging.

Usually in my posts, I try to avoid using more than one or two investment concepts to keep the complexity level down, but it's hard in this case because your post touches on many quite complex concepts.

I take your point that Ed and I are concentrating on different types of diversification, but I find that it's more useful to concentrate on general diversification, as that will necessarily fix the specific type that Ed is talking about.

But I have to strongly disagree with negative correlation being ideal, and I think you have also misunderstood how options are usually used.

Having two negatively correlated stocks is basically not taking a view on the market, and will result in cash-like returns (for two stocks with equal volatility). If one stock goes up 10%, and the other falls 10%, you are back where you started. You haven't diversified your risk, you've removed it, negating the point of investing in the first place. You shouldn't be investing if you don't want any risk. What we are aiming for is the maximum return we can achieve for a given level of risk.

The way to achieve this is by taking on different types of risk that are not related - but we only want to take those risks (or bets) if we think that that bet will pay off.

An example. Two -vely correlated stocks (all other things being equal) should be an oil company (who sells oil) and a transport company (who buys oil). So if the price of oil rises, Shell's share price should rise, and National Express should fall. You haven't taken a view on the price of oil, and you've generated no return.

If you pick two independent stocks, (again these are grossly simplified examples, and the stocks are actually not independent, but you get my drift) which depend on different things, such as a recruitment company and a gold miner - then you have taken on two risks, independent of each other. This diversifies the sources of risk and therefore reduces the overall risk of the portfolio (but does not take it away).

These are gross simplifications, but I hope they illustrate the point.

As to options - they can be used for many things - but it would be an unusual strategy the bought a stock and bought a put option (an option to sell that stock) at the same price at the same time. If the stock falls, you have lost the premium on the put, and if it rises, it has to rise by the value of the premium before you break even. What is more common is for people to write put options at a price (say) 15% above the market price. This limits the upside, but gives you the extra income from the put. It's not a hedging strategy, but an income producing strategy.

The only time an option is really used as a hedge is when a manager predicts a market fall, but selling the portfolio would be too costly or difficult. The manager would then take out a put as insurance against the market falling, but this is a matter of insurance, not an ongoing strategy. Bolton did it with Fidelity Special Values recently, and Nutt did it with a Jupiter investment trust in 2003 (oops).

True hedging comes about in market-neutral hedge funds. Pair trading is the simplest example. A manager will look at a sector, and pick the stock he likes most, and the stock he dislikes most, then buy one and sell the other short. These means he doesn't take a view on the sector or the market (hence market neutral), just on the relative merits of each company. So the risk he is taking on is not related to the market.

EdInvestor

Andy1663 wrote:

Apologies for a rather basic question - but do the figures include dividend yield, and if not, roughly how much do they add?

No. Look at the "yield" column on the Trustnet tables to see how much each fund pays out ( note that charges are usually deducted from the yield: it makes the performance look better than if they are deducted from the capital, and many inexperienced investors don't even know about the importnace of the yield so they don't notice. )

Is citywire the site for figures over 5 years?

Thanks.

It's the only one I know that does 10 year figures.Of course there aren't that many funds with that long a history.Most of the dogs get closed and quietly disappear after 5 years - try and find details of the tech funds around at the millenium today.Totally invisible now.