Portfolio Advice

Hooloovoo

Perelandra wrote: »

I suppose that makes it simple to set up, but I'm a little surprised that it let you. Good to know, though, as I probably would've assumed it was (say) £50 minimum regular payment per fund, and not even tried the smaller amount...

I was a little surprised too, but I thought it was worth a try. I don't know, maybe it will get rejected when they actually try to process the order but as of now it's looking fine.

If you need to rebalance, will you do this by buying/selling amounts, or try to do it somehow with new purchases only?

I'm intending to try and do it using new purchases, but I suppose it all depends on how much it's off by.

cloud_dog

IronWolf wrote: »

The majority of shares are owned and traded by investment funds, therefore on average they have to average to the market movements. Factor in charges and you get under performance.

Surely this is only true if the fund is tracking an index (market).

Even those which are measured against an index, etc, don't have to trade in line with the index, only the stated objectives of the fund.

gadgetmind

IronWolf wrote: »

There are clearly some managers that can consistently beat the market, however I don't believe individuals can correctly predict who these will be unless they know a lot about investing themselves.

Evidence that *anyone* can predict which managers will outperform is very limited. Some funds clearly do outperform, but determining whether this is management skill or blind luck takes statistical analysis over a time period longer than most investment horizons.

gadgetmind

cloud_dog wrote: »

Even those which are measured against an index, etc, don't have to trade in line with the index, only the stated objectives of the fund.

TBH this "mission creep" is yet another thing about funds that annoys me as it makes it harder to get the portfolio construction that you want.

Linton

IronWolf wrote: »

There is a very simple reason funds cannot beat the index on average.

The majority of shares are owned and traded by investment funds, therefore on average they have to average to the market movements. Factor in charges and you get underperformance.

There are clearly some managers that can consistently beat the market, however I don't believe individuals can correctly predict who these will be unless they know a lot about investing themselves.

If you just rely on past performance, a) you risk getting a manager thats just lucky and b) his assets under management will likely have mushroomed making it a lot harder for him to beat the market.

In my opinion you underplay the significance of sectors and subsectors. Take for example Global which by definition includes all shares everywhere. Emerging markets and asia-pacific have greatly outperformed the global sector consistently for many years despite being subsets of that sector. Does anyone believe that it's just random luck with no inherent persistancy?

Similarly look at UK Small companies, they are part of UK All shares but again the returns available have been very high. The average UK Smaller companies fund has outperformed the FTSE AllShare index by a large margin over a lengthy time period.

You might say that these are different sectors. But we can apply the same arguments within some of the large "official" sectors. Take UK All share comprising several hundred funds and a well defined index, with corresponding trackers.

Within that sector there are what one might call sub-sectors - groups of funds that adopt a common focus. Sort the list of funds by 10 year performance and one finds that funds with certain words in their names tend to congregate together. So a high proportion of the Mid Cap focused funds have outperformed the All share sector trackers by a factor of say 3 or 4 times and incidentally achieved perhaps twice the performance of the few FTSE250 trackers.

The last point is interesting in that it seems that trackers are less successful in these niche areas. Often there is no index or if there is one there are few or maybe no trackers available that follow it. Those that are available may not perform well. For example compare the FTSE SmallCaps index with Small Caps funds, or have a look at income funds as an example where there is no index.

So can one chose long term successful sectors with better than random luck? I would contend that one can sufficiently well to make a better return than available to the investor in main index trackers. One of course is aided by the tendancy of the niche area, when successful, to perform extremely well. If one can double or treble values in one area in a few years, that pays for quite a few which perform really badly and halve their value.

Hooloovoo

Linton wrote: »

In my opinion you underplay the significance of sectors and subsectors. Take for example Global which by definition includes all shares everywhere. Emerging markets and asia-pacific have greatly outperformed the global sector consistently for many years despite being subsets of that sector. Does anyone believe that it's just random luck with no inherent persistancy?

The performance or lack of in any particular sector doesn't have any relation to manager skill.

Is a manager talented just because the mission of the fund he manages is to invest in a certain sector? I don't think so.

The last point is interesting in that it seems that trackers are less successful in these niche areas. Often there is no index or if there is one there are few or maybe no trackers available that follow it. Those that are available may not perform well. For example compare the FTSE SmallCaps index with Small Caps funds, or have a look at income funds as an example where there is no index.

I agree here and it clearly is a problem. But I don't see that as being a major argument against passive investing. It's just an example of where a passive core requires a selection of smaller satellite funds to tilt towards the sector you expect to perform. How much you tilt all depends on how much risk you want to add.

Linton

gadgetmind wrote: »

TBH this "mission creep" is yet another thing about funds that annoys me as it makes it harder to get the portfolio construction that you want.

Is it mission creep? Why should the mission or your portfolio construction correspond to the rigid boundaries of the FT indexes? It may make comparison with the indexes difficult, but surely the objective is to achieve gain not make life easier for statisticians.

Linton

Hooloovoo wrote: »

The performance or lack of in any particular sector doesn't have any relation to manager skill.

Is a manager talented just because the mission of the fund he manages is to invest in a certain sector? I don't think so.

I agree here and it clearly is a problem. But I don't see that as being a major argument against passive investing. It's just an example of where a passive core requires a selection of smaller satellite funds to tilt towards the sector you expect to perform. How much you tilt all depends on how much risk you want to add.

Perhaps we are getting somewhere.

I dont care whether a manager is talented or not. Or well paid or not. I only care that I get a high return, certainly a return higher than I need for my retirement plan and a fair number of additional luxuries.

As to core and satellite - yes I agree if you have that philosophy then what you say may be reasonable. However that is not the only option. When I look at the potential core I feel that it is rotten, or at least smells dubious, so why have one? Why not have a portfolio of satellites, balanced by a solid counterweight of cash, bonds and other safe holdings?

So, yes passive investing may have its place, but only as part of an overall portfolio strategy. Likewise with managed funds. I believe what is important is to decide on the strategy, identify the sectors you need to hold to implement that strategy, and then to chose those funds that are most appropriate for the sectors. You cannot start off by fixing on a small subset of the universe of available funds.

gadgetmind

Linton wrote: »

Is it mission creep?

Often, yes. If I buy a UK small cap fund then I don't expect to suddenly find it buying Glaxo and Vodafone, but it's happened to me. Similarly, a UK blue chip income fund I was looking at decided to hold a tech company in Israel in its top ten even though it had never paid a dividend.

You may be perfectly happy to try and maintain a sensible portfolio with such shaky foundations but it's not for me.

IronWolf

Linton wrote: »

In my opinion you underplay the significance of sectors and subsectors. Take for example Global which by definition includes all shares everywhere. Emerging markets and asia-pacific have greatly outperformed the global sector consistently for many years despite being subsets of that sector. Does anyone believe that it's just random luck with no inherent persistancy?

Similarly look at UK Small companies, they are part of UK All shares but again the returns available have been very high. The average UK Smaller companies fund has outperformed the FTSE AllShare index by a large margin over a lengthy time period.

You might say that these are different sectors. But we can apply the same arguments within some of the large "official" sectors. Take UK All share comprising several hundred funds and a well defined index, with corresponding trackers.

Within that sector there are what one might call sub-sectors - groups of funds that adopt a common focus. Sort the list of funds by 10 year performance and one finds that funds with certain words in their names tend to congregate together. So a high proportion of the Mid Cap focused funds have outperformed the All share sector trackers by a factor of say 3 or 4 times and incidentally achieved perhaps twice the performance of the few FTSE250 trackers.

The last point is interesting in that it seems that trackers are less successful in these niche areas. Often there is no index or if there is one there are few or maybe no trackers available that follow it. Those that are available may not perform well. For example compare the FTSE SmallCaps index with Small Caps funds, or have a look at income funds as an example where there is no index.

So can one chose long term successful sectors with better than random luck? I would contend that one can sufficiently well to make a better return than available to the investor in main index trackers. One of course is aided by the tendancy of the niche area, when successful, to perform extremely well. If one can double or treble values in one area in a few years, that pays for quite a few which perform really badly and halve their value.

Just because one sector has done better historically doesn't mean it will do well in the future. Just looking over 10 years is inadequate, you need more like 100. The last 10 years have been dominated by commodity price increases due to the huge expansion in China, coupled with record low interest rates substained by downward pressure on inflation because of low wages in the East.

Coupled with a huge housing boom in most countries caused by said interest rates being low, which was used to leverage domestic spending.

Is that going to continue being the case over the next 10-20 years? I very much doubt it, pretty much anything could happen, we could have a 10 year long depression where smaller companies are destroyed by the mega caps with greater financial resources that can tough out the austerity. Or oil prices could collapse due to new technology, just like natural gas in the US has.

It's easy to identify sectors, or funds that 'outperform' after the event has happened, a lot harder to do it before hand.