Vanguard Life Strategy

Marazan

Linton wrote: »

Even you seem to admit the difference is only worth perhaps a few % over decades.

Over decades the difference between a 0.15% charging fund and a 1.5% charging fund is enormous, like 20+% of your growth over 30 years.

minimumcost

Linton... your almost exactly wrong. Marazon's right. Compounding effect make the huge difference. Stick the numbers in a spread sheet and see what happens.... it is profound.

You need to consider probability and be aware of variance. Over any time period, long or short the difference between classes tends to zero. High variance gives you the false impression that there's value left on the table.

If you chose to invest in a fund that's currently above it's peers in the market then probability (specifically 'regression to the mean') says it with fall. In fact, good past past performance is a strong indicator of future falling performance. The fund may still stay above its peers and i's index, if there is one, but you're investing on a high and the probability of your losing out is high. The better the past performance the more likely you are to lose.

It's all quite counter intuitive and because of this the investment industry manages to convince the vast majority of investors to do the wrong thing so that they can get a cut. Now.... that's a good think 'cause it creates the market where us smart folks can trade at an advantage because we understand the true nature of the market.

Linton

minimumcost wrote: »

Linton... your almost exactly wrong. Marazon's right. Compounding effect make the huge difference. Stick the numbers in a spread sheet and see what happens.... it is profound.

You need to consider probability and be aware of variance. Over any time period, long or short the difference between classes tends to zero. High variance gives you the false impression that there's value left on the table.

If you chose to invest in a fund that's currently above it's peers in the market then probability (specifically 'regression to the mean') says it with fall. In fact, good past past performance is a strong indicator of future falling performance. The fund may still stay above its peers and i's index, if there is one, but you're investing on a high and the probability of your losing out is high. The better the past performance the more likely you are to lose.

It's all quite counter intuitive and because of this the investment industry manages to convince the vast majority of investors to do the wrong thing so that they can get a cut. Now.... that's a good think 'cause it creates the market where us smart folks can trade at an advantage because we understand the true nature of the market.

You are talking about comparable funds in the same sector. I am talking about choosing one sector over another - this can provide a far greater difference in return over an extended period. Choosing small companies vs a FTSE100 tracker has provided a greater return difference over 5 years than Marazon is suggesting would occur between a managed fund and a tracker over 30.

The long term differences between sectors may conceivably over many decades go to zero (though thios is very difficult to say because the nature of companies comprising the sectors changes over time) but the shorter term differences are clearly not random year by year. Small companies is the perfect example - it has broadly outperformed the general indexes for over a decade now, more than enough for an investor to take advantage.

So which aspect should you spend your time on? Comparing charges or comparing what the fund invests in? Should the absence of a tracker prevent you preferentially investing in particular areas?

ruperts

Linton wrote: »

Specialist funds have certainly outperformed general indexes for sufficiently long periods for the investor to take great advantage. Look at Smaller Companies funds over the past 10 years.

Global small cap funds with 10yr performance are in short supply and index data is sketchy, however I pulled together the following 10yr annualised returns:

MSCI World Small Cap 8.34%
McInroy & Wood Smaller Companies 11.8%
Invesco Perp Global Smaller Companies Acc 8.2%

Minus fees, the average managed fund matched the index.




Lots of data on trustnet for cumulative 10yr UK SC funds though:

IMA UK SMALLER COMPANIES PERFORMANCE 203.8
Median UK SC Managed 229.7
Median UK SC Managed (minus fees @1.4%*) 201.1

Adjust for failed funds and there is clearly underperformance at the median level. Some funds have smashed the index obviously, but then so have some lottery tickets.



*estimated average managed fund fee premium over trackers

Marazan

Small Cap Companies is a riskier sector than the FTSE 100 so it damn well better provide a higher return otherwise people wouldn't invest in it.

Linton

ruperts wrote: »

Global small cap funds with 10yr performance are in short supply and index data is sketchy, however I pulled together the following 10yr annualised returns:

MSCI World Small Cap 8.34%
McInroy & Wood Smaller Companies 11.8%
Invesco Perp Global Smaller Companies Acc 8.2%

Minus fees, the average managed fund matched the index.




Lots of data on trustnet for cumulative 10yr UK SC funds though:

IMA UK SMALLER COMPANIES PERFORMANCE 203.8
Median UK SC Managed 229.7
Median UK SC Managed (minus fees @1.4%*) 201.1

Adjust for failed funds and there is clearly underperformance at the median level. Some funds have smashed the index obviously, but then so have some lottery tickets.



*estimated average managed fund fee premium over trackers

Rather a lot of confusion here!!!!

Managed fund performance figures are AFTER fees have been deducted, fees arent something you are charged in addition. So your adjustments are wrong - you dont need to adjust.

The IMA figures arent "the index" they are the mean managed fund result. The fact that the IMA figures are higher than the median indicates that the good funds do better than the bad funds do poorly. Not surprising since you can gain more than 100% but you cant lose more than 100%.

Linton

Marazan wrote: »

Small Cap Companies is a riskier sector than the FTSE 100 so it damn well better provide a higher return otherwise people wouldn't invest in it.

A bit riskier but not as much as you might think. In the credit crunch crash a typical UK SC fund dropped by about 48% high to low as did the FTSE100 index. A FTSE100 tracker would have picked up a few % in dividends so I accept its a few % less risky from that point of view.

gadgetmind

Linton wrote: »

I am not as such, what I am interested in is being able to invest in whatever sectors I like.

Yes, and I prefer to spend my time on asset allocation rather than hunting for the next superstar manager or winkling out some new unexplored niche with no meaningful benchmark.

For my wife's small SIPP, even constructing something from individual trackers wasn't a practical option so I'm perfectly happy to use VGLS 100% equities with some strategic bond funds alongside. (I don't think the bond markets are anything even close to efficient at the moment but do also hold some passive bond ETFs in my SIPP.)

ruperts

Linton wrote: »

Rather a lot of confusion here!!!!

Managed fund performance figures are AFTER fees have been deducted, fees arent something you are charged in addition. So your adjustments are wrong - you dont need to adjust.

The IMA figures arent "the index" they are the mean managed fund result. The fact that the IMA figures are higher than the median indicates that the good funds do better than the bad funds do poorly. Not surprising since you can gain more than 100% but you cant lose more than 100%.

I see. Thanks for that. Then I'm struggling for a 10yr comparison for UK SC funds as I can only find FTSE SC index data for five years.


MSCI World SC Index gave an annualised 10yr return of 8.34% while the MSCI World SC ex-UK returned 8.27%, so from that we can see that the UK must have performed slightly better, maybe 8.5%? Which cumulatively would give us 226%, or just slightly lower than the median managed fund at 229.7%. Account for the failed funds and your median fund underperforms still. Though that might be clutching at straws a bit.


Do you know of any research into this I can access online? Or better sources of info?

minimumcost

Linton wrote: »

You are talking about comparable funds in the same sector. I am talking about choosing one sector over another - this can provide a far greater difference in return over an extended period. Choosing small companies vs a FTSE100 tracker has provided a greater return difference over 5 years than Marazon is suggesting would occur between a managed fund and a tracker over 30.

The long term differences between sectors may conceivably over many decades go to zero (though thios is very difficult to say because the nature of companies comprising the sectors changes over time) but the shorter term differences are clearly not random year by year. Small companies is the perfect example - it has broadly outperformed the general indexes for over a decade now, more than enough for an investor to take advantage.

So which aspect should you spend your time on? Comparing charges or comparing what the fund invests in? Should the absence of a tracker prevent you preferentially investing in particular areas?

'I am talking about choosing one sector over another - this can provide a far greater difference in return over an extended period.' No it doesn't the data says they tend to zero. The logic also says they should.

'Choosing small companies vs a FTSE100 tracker has provided a greater return difference over 5 years than Marazon is suggesting would occur between a managed fund and a tracker over 30.' True over that 5 year period, but how do you know the same it's true for a period at the beginning of that period. It is a mathematical certainty that a tracker will outperform the average of the included managed funds. In every 30 period this has been the case.

'The long term differences between sectors may conceivably over many decades go to zero (though thios is very difficult to say because the nature of companies comprising the sectors changes over time)'. It's not conceivable. It is an objective fact shown in the data.

'but the shorter term differences are clearly not random year by year. Small companies is the perfect example' They are random. There's a random test you can do that produces a set of random graphs that can't be logically differentiated from a sector performance graph.

'it has broadly outperformed the general indexes for over a decade now, more than enough for an investor to take advantage.' This means the probability of making a loss for a new investor to the sector is in fact high. This is really basic stuff. You're advocating a buy high-sell low strategy.

'So which aspect should you spend your time on? Comparing charges or comparing what the fund invests in?' Charges #1. Asset allocation should be considered. Time to needing to draw done governs your equity/bond mix. There's probability of lose in market timing and class switching.

'Should the absence of a tracker prevent you preferentially investing in particular areas?' Yes.