An IFA who knows Monkey with a Pin

gadgetmind

jamesd wrote: »

No need to guess, the answer is well enough known: it's false and markets are not in general efficient.

The major markets are sufficiently efficient for the vast majority of active funds to underperform trackers after fees have been taken into account. Yes, a lot of the evidence for this is from the US market, but it's also been investigated in numerous peer-reviewed studies in the UK and European markets.

I remain rather more neutral regards areas such as smaller companies, emerging markets, and even (nowadays) fixed interest, but there are plenty enough active funds that underperform their indexes in these areas that I still use a mostly passive approach.

We also need to consider that all the active and passive vehicles are the market. We can only have winners if we also have losers and I do really think I have the skills to be able to know which is which in advance when it's clear that most people (including those running funds or funds) can't?

or the ability of tracker fund buyers to correctly predict which tracker funds will have the best future performance.

As you say, the only way to get any insight into that is to look at historical tracking error and the level of fees.

You still might not get the absolute best performer but at least you won't be buying a consistent underperformer.

There is no such thing as a consistent underperformer any more than there is a consistent outperformer. No single atom will stay at the top of the jiggling heap for long, nor the bottom.

See the studies that have looked for (and failed to find) evidence to back up the "hot hands" theory.

I expect stock brokers to know something about P/E values and to be able to discuss whether they are high or low and what that implies for likely future returns.

I'd expect them to be able to discuss p/e ratios at length, but the question was "if the FTSE drops to 4000 where do you think gold will go?"

BTW, as for implications for future returns based on market p/e (or cape) then I'd hope they'd show a scatter diagram to show that there are a wide range of future possibilities and it's just that on balance these are slightly skewed in one direction.

unless I'm allowed to not participate at all, an even better strategy for improving expected returns in this market.

I don't participate in the lottery, but do I do invest in equities, and for exactly the same reasons.

Linton

gadgetmind wrote: »

By the way, here is a bit of fun. Without looking up the data, which looks best, portfolio A or portfolio B?

A
Blackrock UK Dynamic
Marlborough UK Income and Growth
Close Special Situations
CIS European Growth
Templeton Global Emerging Markets
Jupiter China
Legg Mason US Equity
Invesco Perpetual Japanese Smaller Companies
Kames Global Equity

B
Blackrock UK Special Situations
Fidelity MoneyBuilder Dividend
Marlborough Special Situations
Blackrock European Dynamic
JPM Emerging Markets
Schroder Asian Alpha Plus
JPM US
CF Morant Wright Japan
Aberdeen Ethical World

Over what time period? Are the investments equally allocated?

As an investor who believes that the primary criterion for buying a fund is the sector in which it invests, and that some sectors are far more desirable than others, I wouldnt chose either portfolio. However I do hold a couple of the funds listed, both have performed well and are in portfolio B I would guess that one. However I am sure there are a few
dogs there. Sticking a pin into an assorted list of funds isnt a sensible way to invest!

Now back to the matter in hand:

Hypothesis: a fund manager cannot beat any market

Consider the Global Market. Some sectors perform better than others each year, experiment shows this to be true. However according to the hypothesis this must be completely random, otherwise a fund manager could beat the market by choosing to invest in a predictably superior sector.

So over say 10 years sector performance should balance out.

Does it? Have a look on trustnet. What it looks like to me is that in the good years certain sectors do very much better than others. In the bad years they do a bit worse than average. On balance over 10 years the differences are massive.

Linton

gadgetmind wrote: »

......

I remain rather more neutral regards areas such as smaller companies, emerging markets, and even (nowadays) fixed interest, but there are plenty enough active funds that underperform their indexes in these areas that I still use a mostly passive approach.

.......

That's a testable assertion. Lets look at Small Companies over 10 years

FTSE Small Cap Index up about 100%, without dividends reinvested. OK add 3% dividends: Up 160%

UT UK Small Cap Index (average Unit Trust): Up about 230%

Number of funds failing to beat Small Cap Index inc dividends over 10 years: 3

Number of funds beating Small Cap Index inc dividends over 10 years: 33

gadgetmind

Linton wrote: »

However I am sure there are a few
dogs there. Sticking a pin into an assorted list of funds isnt a sensible way to invest!

Those in A are all drawn from BestInvest's Dog fund list for Jan 2013. Of course, it would be an unlucky investor who did their meticulous (but ultimately futile) research and chose all of portfolio A, but there are some big names there and many billions under management.

Does it? Have a look on trustnet. What it looks like to me is that in the good years certain sectors do very much better than others. In the bad years they do a bit worse than average. On balance over 10 years the differences are massive.

And does that give a fund manager an edge over the market? How much of an edge? Seemingly not enough to cover their fees.

gadgetmind

Linton wrote: »

FTSE Small Cap Index up about 100%, without dividends reinvested. OK add 3% dividends: Up 160%

Hmmm, I'm not sure I'm too happy with that fiddle factor.

Number of funds beating Small Cap Index inc dividends over 10 years: 33

How many funds were in your backtesting at the start of the 10 year period that have now ceased to be?

However, even though I do use small cap trackers, I also hold active funds (both OEICs and ITs) that operate in this sector. In areas where passive is clearly better, I use passive, in those areas were active can (but not will!) give an edge, I use active but I also understand that returns can be so diverse with active funds, I feel the need to diversify.

As time goes by, I find myself seeing less value in trying to identify active funds that stand a chance of outperforming (or at least not crashing and burning!) and more value in using my time to do asset allocation and (on the side) research on individual tech companies.

Those with the psy talent to pick winning active funds, but don't know one end of a patent from the other, may find the opposite.

gadgetmind

BTW, this article on the well-known Equilibrium study stresses why even those who choose to go with active need to keep an eye on fees.

http://citywire.co.uk/money/why-passive-funds-beat-active-management/a553818

A 0.07% advantage per year with active only proved possible as they could access those funds at 0.625% pa. What chance does your average HL punter have?

Linton

gadgetmind wrote: »

.......

As time goes by, I find myself seeing less value in trying to identify active funds that stand a chance of outperforming (or at least not crashing and burning!) and more value in using my time to do asset allocation and (on the side) research on individual tech companies.
....

Why do you do research on individual tech companies? Surely you would be better off investing in a tech tracker and saving all that wasted time? If not why couldnt a highly resourced fund manager do the same research or even more thorough research over a wider range of companies? Fees might reduce the returns by 1% but I am sure you are after a bit more gain than that.

gadgetmind

Linton wrote: »

Why do you do research on individual tech companies?

Because it's what I know.

Surely you would be better off investing in a tech tracker and saving all that wasted time?

To date, no, in future, who knows?

Anyway, I'd do much of the research anyway as I need it to do my job.

If not why couldnt a highly resourced fund manager do the same research or even more thorough research over a wider range of companies?

What it comes to my area of the sector, they all spout total rubbish that makes them sound like idiots. Perhaps they also do it in other areas but elsewhere I don't have the deep knowledge to see it?

(BTW, the fund managers are bad, but don't get me started on the brokers!)

Fees might reduce the returns by 1% but I am sure you are after a bit more gain than that.

Yes, I am, and I'm far too greedy to share it.

On a more serious note, I avoid getting additional technology exposure wherever possible as I'm already far too exposed (20%+) via direct holdings that also lack much in the way of diversity.

mj62mj62

gadgetmind wrote: »

How many funds were in your backtesting at the start of the 10 year period that have now ceased to be?

As the more knowledgeable continue discussing in this thread, I humbly submit that the above point is a key feature of the Monkey with a Pin book.

He shows that (with apparent research to prove it) that when you look at all the fund managers against their respective indicies that 15% beat their index and the rest do not.

He also highlights how underperforming funds vanish and suddenly you can't get information on them anymore. Effectively it's each company trying to show how fantastic they by hiding their faults. Sometimes I see a fund with billions invested but charts that only go back a few years - assuming the billions didn't arrive over night, it must that the fund was closed and customers moved across into a newly name fund with no negative history.

mj62mj62

jamesd wrote: »

You should read the early pages of the book. Particularly this part:

"Peter is a private investor who has been trading shares for over a decade. he has a degree in psychology and he has worked for most of his career in market research."

That should be telling you that the author is far from unbiased but is clearly not hugely experienced, particularly given his apparent age. His own objective seem pretty clear: to make money and a name using a book with a catchy title and argument.

I appreciate your lengthy post, but I also have to defend the author here (to a point).

Why? Because he's done a ton of research gathering and given it away for free.

Maybe he is trying to build a name for himself, who knows, but I appreciate his effects while most in the financial industry take home huge salaries and bonuses regardless of whether they're making the correct and/or ethical decisions with my money.

He appreciates that the little guy is no match for the mis information spewed out by a badly regulated industry.


Likewise, I'm hugely appreciative of those on this forum who are spending their time on this thread! You're all stars :-) :starmod: :starmod: :starmod: :starmod: :starmod: