How to invest on a (weeny) budget

gadgetmind

darkpool wrote: »

this managed/ tracker debate has been going on for a year

Make that many decades.

There was an interesting article on the front page of Telegraph Money today about how a lot of the big name superstar funds have underperformed over the last few years.

Their suggestion? Switch to funds that have performed better!

jamesd

gadgetmind wrote: »

No, they have tracked actual managers to see if any do have persistent "hot hands".

The ones that do that are more likely to have value. But I don't recall seeing any academic studies that do it. If you know of any that really do track managers and which also look at the methods those using active funds use to pick funds they would be far more interesting than those which ignore them. Even better if they are UK studies of markets other than the UK (which has stamp duty as an extra tax on active management).

gadgetmind wrote: »

In hindsight, yes.

Not in hindsight. I looked first in 2005 I think and the post I referred to was in 2007, updating some earlier posts.

gadgetmind wrote: »

Please explain.

You seem to think that higher fees are a predictor of underperformance for tracker funds. So do I. This means we both think we can predict the future relative performance of tracker funds.

gadgetmind wrote: »

Ah yes, the "never back a horse that's going to lose" principle.

The one you surely follow, unless you're in the habit of choosing the tracker fund with the highest charges instead of the lowest. And you will surely succeed in your future predicting activities.

We can both easily do things like predicting that anyone using Virgin's pension - 1% FTSE tracker - will end up less well off than picking one of the better FTSE tracker buys. Unless they really need to invest £1 per month, something the Virgin one allows.

gadgetmind wrote: »

And it just the same way, the funds themselves have to outperform the market by more than their costs. So, if adding layers of management doesn't seem to work ...

You seem to have missed the point there - those specific funds did outperform. So they even managed to pay for the extra costs.

I also don't like the combatant word. Perhaps because I freely use both active and passive investments and have done since I started any significant investing.

The active passive discussion here was around back in 2005 when I first started reading this place. Been going on for a long, long time elsewhere.

gadgetmind

jamesd wrote: »

The ones that do that are more likely to have value. But I don't recall seeing any academic studies that do it. If you know of any that really do track managers and which also look at the methods those using active funds use to pick funds they would be far more interesting than those which ignore them.

A number of studies have looked for (and failed to find) hot hands. I don't recall their geographical scope but neither do I consider it particularly relevant. As for active fund pickers, we can see how professional "fund of funds" managers have done and I've also seen evidence (but perhaps not peer-reviewed) that amateur investors perform even worse and dramatically under-perform the markets.

You seem to think that higher fees are a predictor of underperformance for tracker funds.

"Predictor"? No, not really, they are the direct cause of said under-performance just as it is with active funds.

You seem to have missed the point there - those specific funds did outperform. So they even managed to pay for the extra costs.

Sorry, are you saying that the high-fee Virgin FTSE tracker out-performed the underlying index over a multi-year (ideally multi-decade) period? If true, I find that very interesting. Vanguard have managed modest out-performance at times but they put this down to their policy of doing very careful stock lending.

The active passive discussion here was around back in 2005 when I first started reading this place. Been going on for a long, long time elsewhere.

It's been going on for decades, and the academic evidence is *very* clear. Active funds have seen *massive* outflows over the last year, and at least some of this money is moving into trackers, so I think the message is slowly getting across.

bigadaj

The views here seem quite entrenched on the basis of passive versus active. It seems as though the majority of fund managers will under perform, and so passive will beat the vast majority of active funds. However there is no doubt that a tiny percentage of managers do add value such as Neil wood ford and Anthony Bolton, until his Chinese ventures, so should we not be looking for an early indicator of a good manager, as if they can be identified after a couple of years playing with other people's money then there would be more certainty placing my or your money with them.

gadgetmind

The views here seem quite entrenched

Mine most certainly aren't, far from it.

bigadaj wrote: »

so should we not be looking for an early indicator of a good manager, as if they can be identified after a couple of years playing with other people's money then there would be more certainty placing my or your money with them.

Tim Hale recognises that Mr Bolton's record is quite remarkable, and spends a couple of pages looking at his record. Identifying his fund as winner wasn't each, as Hale's example shows. If you'd looked at its record in 1989 (beaten market over last few years by 8%) and invested £10,000, then three years later you'd find yourself 45 percent behind the market and your holding would only be worth £9700. Stick or twist? Hold or sell? Has his luck run out?

In 2000 the FSA commissioned a report (Rhodes, 2000) which concluded -

"The literature on the performance of UK funds has failed to find evidence that information on past investment performance can be used to good effect by retail investors in choosing funds. The general pattern is one in which investment performance does not persist. Small groups of funds may show some repeat performance over a short period of time. However, the size of this effect and the fact that it is only short lived means that there is no investment strategy for retail investors that can be usefully employed."

Or there's Allen et al from 2002 which looked at USA, UK and Australia.

"Good performance seem to be, at best, a weak and unreliable predictor of good performance over the medium to long term. About half of the studies found no correlation at all between good past and good future performance. Where persistence was found, this was more frequently in the shorter term (one to two years) than in the longer term."

Maybe a *very* dedicated and talented private investor could concoct a winning strategy by ditching and switching between funds, but they've got quite a current to swim upstream against!

Would anyone really recommend that a beginner attempt this?

bigadaj

Just wonder if the specific point you made about Bolton is flipping the usual point made in promoting active over passive, ie selectively defining a period of out/ under performance retrospectively. I recall that Bolton outperformed the Market by something like 5 per cent per year over 25years, though never held his fund. I do hold Neil woodford's fund and have done well with it, though it has certainly underperformd over limited periods. Diversification is an answer but won't make anyone a fortune.

gadgetmind

bigadaj wrote: »

Diversification is an answer but won't make anyone a fortune.

OK, first of all the confession: I can't tell people to do as I do because I've made some mad calls in the past, and have even extended my mortgage to acquire equities. How mad is that!

It should have failed, big time, but it didn't. I invested in companies that were players in markets I knew well, and overall the results were awesome, so our capital gains allowances are all accounted for well into the future.

This is get rich(ish) quick, it's what everyone dreams of, but it's also as rare as buying the winning lottery ticket. It's also very scary, and I sailed close to the edge of ruin several times, and perhaps that's why I'm now more cautious.

I'm now a believer in "get rich slow" but that's maybe because I've been there with seat-of-your-pants duck-and-weave investing, and maybe this is something everyone needs to get out of their system?

I've plotted my own course, and have nearly been wrecked on the reefs several times, and as a result I'd always advise those without the drive to research funds or equities to go for a slow and steady passive portfolio.

The end results will almost certainly be better and you'll be able to sleep a bit more easily.

jamesd

gadgetmind wrote: »

I don't recall their geographical scope but neither do I consider it particularly relevant.

Geographic scope can matter because some jurisdictions have taxes that penalise short term holdings in various ways, like the higher CGT for holdings of less than a year in the US or stamp duty in the UK. Those act as factors that make it harder for active managers to make more money than passive managers.

gadgetmind wrote: »

As for active fund pickers, we can see how professional "fund of funds" managers have done and I've also seen evidence (but perhaps not peer-reviewed) that amateur investors perform even worse and dramatically under-perform the markets.

We can, but did you take a look? You referenced a Telegraph story yesterday, have a read of what it says about the manager of manager funds I've mentioned to you - the Jupiter Merlin range.

gadgetmind wrote: »

Sorry, are you saying that the high-fee Virgin FTSE tracker out-performed the underlying index over a multi-year (ideally multi-decade) period? If true, I find that very interesting.

Hardly; that branch of the discussion was about multi-manager funds, not expensive trackers.

gadgetmind wrote: »

Vanguard have managed modest out-performance at times but they put this down to their policy of doing very careful stock lending.

Do you agree that choice of parties for stock lending is a form of active management? How about the timing of when to buy shares of companies that are about to be added to or removed from an index?

gadgetmind wrote: »

In 2000 the FSA commissioned a report (Rhodes, 2000)

That's one of the systematically flawed reports that is mostly misleading for active users of active managed funds. It's flaws include:

1. the usual one of completely ignoring changes in managers.
2. an assumption that retail investors won't change funds, so effects lasting or a few years are of minimal value.
3. an assumed bid/offer spread that mostly no longer exists to any significant degree, when buying OEICs efficiently.

Even with those massive flaws it did find - but then dismissed because of its assumptions - some ability to predict both outperformance and underperformance.

You simply can't prove or disprove whether active management makes a difference in a study that completely ignores when managers change, as that one did. It's not even bothering to look at one of the more significant factors in causing a change in performance.

It was also looking at the UK market with its tax on purchases, which favours buy and hold strategies and passive investing, though perhaps not as much as the US system. Fair enough for a study of UK funds by a UK regulator, but worth knowing when trying to draw conclusions about how methods that avoid the tax or markets without it might do.

Allen 2002 (revised 2003) A Review of the Research on the Past Performance of Managed Funds is a survey of academic studies so shares the common flaws of those acadamic studies, notably the usual one of ignoring manager changes. Like the FSA study it observed "More studies seem to find that bad past performance increased the probability of future bad performance", that is, an ability to predict underperformance and hence improve performance by eliminating underperformers. The UK study summary in this one is interesting because most of the studies of open-ended funds found persistence of performance, in spite of the flaws.

Last week I mentioned a UK study that found outperformance before charges that no longer exist. That seems to have been Quigley and Sinquefield 2000 Performance of UK equity unit trusts: "The winners' repeat performance, gross of expenses, is intriguing but not exploitable because of high turnover costs". Page 83 (in the publication, 12 in the PDF is where the discussion of picking top ten funds each year starts: "the turnover from this strategy is over 80 per cent per year. The average bid/offer spread is 5 per cent", a spread that no longer exists for anyone buying funds efficiently. This one still has the usual flaw of ignoring a change in manager that would cause sensible users of active managed funds to adjust holdings mid year.

jamesd

gadgetmind wrote: »

OK, first of all the confession: I can't tell people to do as I do because I've made some mad calls in the past, and have even extended my mortgage to acquire equities. How mad is that!

About as mad as me using stoozed 0% credit card money to buy in 2009.

gadgetmind wrote: »

It should have failed, big time, but it didn't. I invested in companies that were players in markets I knew well, and overall the results were awesome, so our capital gains allowances are all accounted for well into the future.

And I also was successful.

gadgetmind wrote: »

It's also very scary, and I sailed close to the edge of ruin several times, and perhaps that's why I'm now more cautious.

I didn't go that far, though I did have an interesting negative position in my spread betting account late last year before the markets changed direction. Kept within bounds of what I could handle by my exposure management but still larger than I was really comfortable with.

It's scary but it's also interesting that we've both successfully used leverage. I'm not inclined to assume it's just luck. Maybe you are, given our discussion of active management?

iAMaLONDONER

gadgetmind wrote: »

As this comes up here fairly often, I thought this article might be of interest.

http://monevator.com/2012/01/17/how-to-invest-on-a-budget/

Thanks! :T