Fund managers

Linton

MrMalkin wrote: »

If you want to invest in niche markets, then yes you are correct, there are no relevant indices or funds that track them. However picking sectors in this manner is frought with the same kind of dangers as picking individual stocks - for example internet stocks was a booming market right before the tech bubble burst.

Now if you think you can succesfully pick sectors then go for it, but an indexing strategy is exceedingly unlikely to recommend doing so for exactly the same reason that it encourages people to avoid picking individual stocks or even individual markets - the chances for success are not high, statistically speaking. A big part of indexing is the desire to diversify across wider markets so I don't see why a failure to be able to focus on specific sectors is a flaw - it's against the point of indexing.

It depends on how many niches you go for and what other investments you hold. Yes it would be foolish to put all your wealth in one niche area. But then it would be equally foolish to put all your money in say the FTSE100 or Allshare.

MrMalkin

Linton wrote: »

It depends on how many niches you go for and what other investments you hold. Yes it would be foolish to put all your wealth in one niche area. But then it would be equally foolish to put all your money in say the FTSE100 or Allshare.

Well no but then a good indexer uses an asset allocation strategy. I, for example, invest in the FTSE All-Share, US, European, Pacific and emerging markets index funds for stocks (as well as a managed fund for smaller UK companies, because there aren't many readily available index funds for them), and UK and global index funds for bonds. Nobody is indexing into a single market only, unless they are very bad at executing the strategy.

I honestly think if you care about indexing (even to the point of deciding it's not for you) then you should read the books that gadgetmind has recommended, Bernstein and Hale in particular. A lot of the arguments you've been making against indexing aren't really relevant to the strategies that most indexers employ.

Ark_Welder

MrMalkin wrote: »

However picking sectors in this manner is frought with the same kind of dangers as picking individual stocks

It is possible to extrapolate this further and say that picking the desired weighting between indexes has the same kind of dangers. Although reality would dictate a reduced danger, just as investing in a sector is of a lower risk than holding individual securities.

MrMalkin wrote: »

Now if you think you can succesfully pick sectors then go for it, but an indexing strategy is exceedingly unlikely to recommend doing so...

A pure indexing strategy might not recommend, but there are others that use either trackers or global active managed funds as the core holding, but then use smaller fund holdings to increase exposure to specific areas. Called 'bar-bell' investing (which also gets applied to a few other strategies too, e.g. some income ones).

Linton

MrMalkin wrote: »

...A lot of the arguments you've been making against indexing aren't really relevant to the strategies that most indexers employ.

I am not against indexing, it has its place. But, unlike the indexing enthusiasts who believe managed funds are the work of the devil to be avoided at all costs, I believe that whether a fund is indexed or managed is very much a secondary concern to be considered only after you have chosen the sector and assessed other characteristics of the potential candidates.

MrMalkin

Ark_Welder wrote: »

It is possible to extrapolate this further and say that picking the desired weighting between indexes has the same kind of dangers. Although reality would dictate a reduced danger, just as investing in a sector is of a lower risk than holding individual securities.

Completely true. One of the biggest decisions to make in asset allocation is deciding your mix of stocks and bonds, but there are plenty of rules of thumb to help with that.

Overweighting in particular markets is more of an intermediate level decision for investors who are more comfortable with understanding the risks involved with doing so. Like all investing you need to do your research and understand what you are doing before you do it.

MrMalkin

Linton wrote: »

I am not against indexing, it has its place. But, unlike the indexing enthusiasts who believe managed funds are the work of the devil to be avoided at all costs, I believe that whether a fund is indexed or managed is very much a secondary concern to be considered only after you have chosen the sector and assessed other characteristics of the potential candidates.

That's entirely your choice, and I can respect that. I know this thread has been hard work, darkpool is not the most pleasant individual nor is he a shining example of the virtues of a dispassionate investor. We're not all like that, honest.

However, you can't deny that an indexing/asset allocation strategy is one of the most powerful portfolio strategies available, and nobody should dismiss it out of hand without seriously considering the implications of doing so. But then, I can say the same of any other investing strategy (high yield, permanent portfolio, or whatever else).

You pays your money, you takes your choice.

Linton

MrMalkin wrote: »

Completely true. One of the biggest decisions to make in asset allocation is deciding your mix of stocks and bonds, but there are plenty of rules of thumb to help with that.

Overweighting in particular markets is more of an intermediate level decision for investors who are more comfortable with understanding the risks involved with doing so. Like all investing you need to do your research and understand what you are doing before you do it.

Cant disagree. What I would add is that when chosing sectors and investments it should be to meet a simple objective. It should be possible to review ones portfolio to confirm that the investments are still appropriate for the reasons they were purchased.

I can understand why one may want to invest in the highly focussed niche areas. I can understand why one may want to invest in cash or fixed interest bonds. I can see why someone may want to invest in high dividend shares. I find it difficult to identify a clear objective that would lead someone with the wealth to buy a wide range of investments and the time and skills to manage them to say - ah, that calls for a general FTSE fund.

MrMalkin

Linton wrote: »

I find it difficult to identify a clear objective that would lead someone with the wealth to buy a wide range of investments and the time and skills to manage them to say - ah, that calls for a general FTSE fund.

Well you'd need to look at the long-term historical trends of the FTSE. It has a history of delivering decent long-term returns with lower volatility and risk than individual sectors, emerging markets, etc. Granted, the last 10 years have been terrible, but then the 10 years up to 1980 were terrible - then we had 20 years of stellar returns that made up for the 10 bad years. And the 10 bad years were an excellent chance to load up on cheap shares.

You'll hear a lot of talk about 'staying the course' and buy and hold from indexers, because for the most part we're looking to capture very long term historic average returns. I know a lot of the data you have been posting has been from the last 5 years, which isn't all that relevant.

gadgetmind

Linton wrote: »

I find it difficult to identify a clear objective that would lead someone with the wealth to buy a wide range of investments and the time and skills to manage them to say - ah, that calls for a general FTSE fund.

It's called a long-term view and a balanced portfolio. OK, so anything >20% in the UK would need more justification, but FTSE companies tend to have good corporate governance (p/e and p/b can be mostly trusted) and these both broadcast "value" right now, as does yield.

Linton

gadgetmind wrote: »

It's called a long-term view and a balanced portfolio. OK, so anything >20% in the UK would need more justification, but FTSE companies tend to have good corporate governance (p/e and p/b can be mostly trusted) and these both broadcast "value" right now, as does yield.

Is the FTSE100 balanced? 50 years ago most of business in the UK was UK owned, and what happened in the UK was vaguely representative of what was happening around the world. The FTSE could reasonably be called balanced.

Now? Large parts of UK business are unrepresented - eg motor vehicle manufacturing is a major UK industry but happens not to be UK owned. Others are arguably over-represented - insurance and financial services, even after the collapse of the banks.

More importantly we now live in a globalised world. IMHO a balanced portfolio needs to represent that. A UK bias is a distortion as many things that are important globally dont happen much in the UK. Where is consumer electronics manufacturing in the FTSE?

You suggests it is appropriate for a longterm view. Does holding the FTSE for the long term imply taking a long term view? ISTM the whole flavour of the FTSE has varied considerably over time. Is the FTSE you may have invested in say 30 years ago the same thing as it is now or is it just a constant name for an ever changing collection of large companies and companies buoyed up by the latest bubble that just happen to have shares quoted on the LSE?

No, if you want a balanced core I would suggest you look elsewhere.