How to invest on a (weeny) budget

jamesd

gadgetmind wrote: »

Interesting. Do you have a link to this study? And do you think it would have been possible to identify these funds other than in hindsight?

It was easily possible to identify them without hindsight because they were in the top ten funds and buying one of the top ten produced outperformance in subsequent years, with a change of manager being a clear indicator of underperformance possibility. I think the most recent update was in this discussion back in 2007 covering the period from 2003.

For that sector during that period there are two clear conclusions:

1. Outperformance persisted.
2. Change of manager was a good indication of impending negative change in performance.

Both of those results are commonly expected by those who use active managed funds, part of why it's common to reduce or eliminate holdings when a manager changes.

We've also seen some investment methods and I think even a fund or two that base their investing on selecting top performers each period, anticipating outperformance. One UK study tried that and found that it improved performance but the cost of initial commissions eliminated the gains. Since there's no need to pay initial commissions these days that's a particularly interesting result.

darkpool

gadgetmind wrote: »

Did you see the list of funds recommended by an IFA in the "windfall" thread? I'm not familiar with the specific UK/US funds, but they all look fairly general, and there were three UK funds and four US ones. Maybe the IFA didn't trust himself to pick just one fund?

yeah, the person with the windfall really has an expensive tracker.

i suppose she is helping keep an IFA and the fund management industry in jobs, however if she wants to give away a wedge of her money each year there are more deserving people.

darkpool

Linton wrote: »

Over the long term one of two things must be true..

1) Individual managed fund performance is random about the average. So over the long term a managed fund performance, after fees etc, should approach the average - ie a tracker.

2) Individual managed funds out perform others. In this case those outperforming funds will outperform trackers in the long term.

In neither case does a tracker provide a long term advantage.

ehhhhhmmmmm ok,

1. so if fund performance is random how can funds that charge 2-3% a year in fees deliver the same return as trackers that charge 0.5%?

2. There is little or no academic evidence that shows unit trusts deliver long term alpha return. Unless you have managed to find some evidence? By evidence I mean academic evidence. ie not some details of a single unit trust that you found on trustnet.

gadgetmind

jamesd wrote: »

It was easily possible to identify them without hindsight because they were in the top ten funds and buying one of the top ten produced outperformance in subsequent years

Do you have a link to that peer-reviewed study?

One UK study tried that and found that it improved performance but the cost of initial commissions eliminated the gains.

Or that one?

Alternatively, a good reference book that covers active investing strategies via funds would be fine as I'm happy to do the reading.

darkpool

gadgetmind wrote: »

Do you have a link to that peer-reviewed study?

Or that one?

Alternatively, a good reference book that covers active investing strategies via funds would be fine as I'm happy to do the reading.

yeah, i'm interested as well in any hard evidence that active management is worth the fees. I've always thought active funds was the preserve of people that never had a clue about the basics of investment.

But if there is some good evidence to prove me wrong I'll happily put my hands up and admit I've been an investment numpty for the last 20 years.

gadgetmind

darkpool wrote: »

But if there is some good evidence to prove me wrong

Ditto. They say that there is no such thing as certainty, only people who are certain. I'm not one of those people.

jamesd

gadgetmind wrote: »

Do you have a link to that peer-reviewed study?

It was reviewed by my peers here. I did it by looking at the top ten tables in year one then at the ranks of the funds in the subsequent years. So can you. Unlike the peer reviewed formal studies I actually controlled for some of the more significant changes, notably change of manager. As you can see from the results, that initial year ranking did persist in outperformance unless the manager changed.

It's just one sector so it's not perfect but it is interesting and at least avoids some of the major systematic issues with published studies.

gadgetmind wrote: »

Or that one?

That one was from CASS/ City University Business School, around 2000 or so if I recall correctly. There's probably a link to it in some old discussions here somewhere. I might look it up sometime this weekend, not sure.

Have you seen the studies on momentum investing that shows that it seems to work?

gadgetmind wrote: »

Alternatively, a good reference book that covers active investing strategies via funds would be fine as I'm happy to do the reading.

Fundology is one of the more commonly cited ones. I've got a copy and it's somewhat interesting, though it spends a bit too much time explaining why comparing trackers to active funds with averages is silly.

Though it's not that difficult and there's much in common with passive investing:

1. Decide what sector you want to be in.
2. Throw away all funds that consistently underperform.

So far it's the same as passive investing.

3. Pick one that seems to outperform with some regularity and still has the same management team, economic environment and a manager attitude to the current situation that you agree with (like avoid Invesco Perpetual Income in 2009 if you thought there would be a market recovery, pick a tracker or recovery fund like M&G Recovery instead; but use it in 2011 if you thought people would favor income and safety).

4. If you can't find one that seems to consistently outperform, consider a tracker instead.

5. If you aren't going to do the research, use a tracker instead.

6. If the manager changes, switch fund with a large chunk or all of the money fairly promptly unless you have clear data to support the view that the new manager will do well. Better to use a proved manager in a different fund than speculate on how well the new one might or might not do. The new manager may do OK but there's substantial risk that can be avoided.

jamesd

gadgetmind wrote: »

Ditto. They say that there is no such thing as certainty, only people who are certain. I'm not one of those people.

Do what I did. Start checking for yourself to see whether you can find persistence doing the things that real investors do and not ignoring the things they don't ignore.

gadgetmind

jamesd wrote: »

It was reviewed by my peers here.

I don't know how to break it to you, but that really isn't the same thing.

It's just one sector so it's not perfect but it is interesting and at least avoids some of the major systematic issues with published studies.

Yes, but by limiting yourself to the short term and a single sector, you've not really demonstrated a working strategy.

Fundology is one of the more commonly cited ones.

Thanks, I'll try and track it down, and also dig into whatever studies it references.

2. Throw away all funds that consistently underperform.

This is the point at which we have an empty list.

Have you seen the studies on momentum investing that shows that it seems to work?

They seem to suggest that momentum investing works until it doesn't. How do you know exactly when it's ceased to work?

Pick one that seems to outperform with some regularity and still has the same management team, economic environment and a manager attitude to the current situation that you agree with (like avoid Invesco Perpetual Income in 2009 if you thought there would be a market recovery, pick a tracker or recovery fund like M&G Recovery instead; but use it in 2011 if you thought people would favor income and safety).

Sorry, is this supposed to be a strategy for beginners? Is a novice with a small budget going to do that, and keep reviewing the situation looking for manager changes, and make macro-economic calls? What are their chances of 1) doing it in the first place, 2) getting it right, 3) beating a tracker?

If the manager changes, switch fund with a large chunk or all of the money fairly promptly unless you have clear data to support the view that the new manager will do well.

My evidence-based view is that over the long-term the manager will perform identically to the previous one. The one (debatable!) exception here is for *very* small niche areas, where the manager has direct and relevant knowledge of the area in which the companies operate.

Lokolo

gadgetmind wrote: »

Sorry, is this supposed to be a strategy for beginners? Is a novice with a small budget going to do that, and keep reviewing the situation looking for manager changes, and make macro-economic calls? What are their chances of 1) doing it in the first place, 2) getting it right, 3) beating a tracker?

But you suggest all newbies get a UK FTSE 100 Tracker?

Come on gadget, equities risk isn't for everyone and because of all the threads you comment about trackers and that trackers never under perform gives the wrong impression to a lot of people who read this forum.

https://forums.moneysavingexpert.com/discussion/3742829

The fact is, without caring about T vs. M, a newbie should not be coming on this thread, reading that article and thinking "You know what, lets open a S&S ISA and shove £50 a month into this HSBC tracker they go on about.".

How on earth is that the best approach for a newbie? It's not. They need to learn the basics first and unfortuantely threads like this miss that out completely.