An IFA who knows Monkey with a Pin

gadgetmind

Linton wrote: »

. Usually the complete dogs are pretty obvious

Only in retrospect. As we saw earlier, some once-popular funds from big name investment companies feature in BestInvest's Spot The Dog from time to time.

As long as the fund isnt significantly worse than average over a few years I would stay with it.

What is you objective criteria for making a switch and do you hold multiple funds in the same sector to avoid the return-sapping consequences of backing a fund just as the coin tossing switches from heads to tails?

Perhaps it can be the case that a fund manager's natural style is appropriate for a particular market for a particular possibly lengthy time period.

Agreed. All successful investment approaches work up until the point that they don't any longer.

But over time I havent seen volatility as a problem, even during 2008. This is mainly because I hold a fair amount of cash to pay the next few years living expenses.

Volatility used to rattle me but now I see it as my friend. After you've been in the markets through 1987, 1999 and 2008, you learn that low prices are an opportunity and that rebalancing isn't just a theoretical nicety.

I also usually keep 2-3 years of essential cash to hand, but I let this drop to just over 2 years during 2011. I might correct this come the next rebalance as what I did it late summer 2011 was just a bit of out of sequence madness!

Just the basics to ensure you havent got something appalling or something which doesnt do what its sector allocation implies it should.

The sods keep changing their mandate!

grey_gym_sock

Linton wrote: »

For ethical - I found 1 ethical fund in the top quartile and 7 in the bottom quartile for 5 year growth for funds in the UK AllShare sector.

well, ethical is such a small sector that, even if non-ethical funds have an advantage over non-ethical, it would hardly be significant.

it's also a very loosely defined sector - "ethical" means different things to different funds - so generalizations about performance probably don't tell us much.

Equity Income sector averages are pretty much the same as the Allshare.

yup.

Another very clear effect is the midcap funds within the Allshare sector. Over 10 years 7 out of the top 20 funds had "midcap" or (FTSE)250 in their name. I didnt find any below that. Why should midcap funds across the piece all be in the top 13% of the league table if performance is random?

well, this is a consequence of segmentation - mid-cap stocks have out-performed the all-share over the period - not a consequence of some funds not making high returns their top priority.

outperformance of a market segment can continue for a long time. it can also cease. can we predict when that will happen?

alternatively, are there any segments which genuinely outperform on average in the really long term? that might mean: that they outperform in almost any 20-year historical period.

These examples I believe demonstrate that the model that fund managers effectively pick shares at random is not a good one.

i wouldn't say it's at random. they follow a remit, and a methodology. both of which tend to give significant periods of outperformance, and significant periods of underperformance.

e.g. equity income has done better in some periods than in others. but it appears to roughly average out.

One general effect I have noticed with the successful niche sectors is that they are in general significantly more volatile than the main indexes. They also tend to do relatively better in the good years compared with the broad sector index than they do poorly in the bad years.

but are there not other niche sectors which underperform? and then the companies go bust, or the stock exchange in the obscure market closes, or the funds are mostly closed down, and the now-tiny sector gets merged into another sector?

by picking a niche sector, is 1 doing any more than picking something which is unlikely to be average?

gadgetmind

I've been heavy on equity income and small/mid cap from late 2011 to now because I felt they'd outperform given the animal spirits of the market. I did this via trackers and have been well rewarded.

It's nice when it works.

Come April, I'll sniff the air and probably go back to a more neutral position, which is my default stance.

jamesd

gadgetmind wrote: »

By the time it closed it certainly was insignificant, but what about earlier when it was underperforming?

I've no data on its sizes then. Have you? We know from the story that it had underperformed its index for four years, maybe by more than a tracker fund, so it seems unlikely that it had attracted a lot of money for at least those years.

gadgetmind wrote: »

Yes, all that hot money charged off somewhere else trying to find outperformance, and it will have gone into some active fund that had done well recently. And then along comes reversion to mean.

It had been under-performing for at least four years. That halving was more like the dribble just before the end for an unprofitable fund that the fund management house finally closed.

gadgetmind wrote: »

Such consistency of either under or over-performance is not something that active funds show in any way that's useful to an investor.

You keep on making that assertion, yet see for example the persistence of outperformance in the global growth funds that has been discussed both here and by an author you seem to like, or the large amount of money that has for a long time been put into the Invesco Perpetual [High] Income funds or some smaller companies funds, with long records of outperformance.

gadgetmind wrote: »

Yes, hot money does tend to flock together in that way, and this performance-chasing surge is part of what changes the fortunes of funds.

"Surge"? The funds have been hugely popular and outperforming over the long term. It's not hot money it's long term investing with a successful manager, who's long been rewarding those who have invested with his funds. This doesn't mean his funds have beaten the index every year, of course, just that long term they have, spectacularly.

gadgetmind wrote: »

There's a very good section in "Smarter Investing" on exactly this, and if I can get my copy back next week I'll pull out some quotes and references to the key studies.

You might also check whether that's the book you like that refers to the same thing I found here about the persistent outperformance of the global growth funds.

doughnutmachine wrote: »

??? would it not be easy to look at a sample of unit trust investors portfolios and see how they compare against a tracker?

How does that make the tracker vs active studies any more accurate?

It's well known, and I agree, that typical private investors make mistakes in their investing.

doughnutmachine wrote: »

in case someone says US investors are less smart than us british ones

I suspect not, but I do wonder how much that word "typical" is hiding, like how many investors who stick money in a pension balanced managed fund and never look at it for 30 years are affecting the results.

I don't care how a typical investor does. What I care about is how I do and how other investors who pay attention to what they are doing do. the rest can't be influenced because they just aren't paying attention, and for those I suggest use of trackers.

doughnutmachine wrote: »

nice idea about retail investors being able to outperform the market, but the evidence doesn't back your thesis

You have presented no data or studies that contradict it. That word "typical" is a waffle word just like "average" and tells nothing about how the more successful investors do, rather it masks the range of performances.

For the two studies you mentioned to matter you'd first have to determine whether my performance or that of gadgetmind or yourself is that of a typical investor. Or whether any specific investor we're considering is typical.

I don't assert that retail investors in general can beat the market or select the right funds. I think that most will not and do not, because I think that most just don't pay much attention to what they are doing and in this field as in all others, get rewarded appropriately for their lack of effort.

I'd also want to know whether the studies were using mean investor performance or performance weighted by money invested. That is, whether lots of poor-performance investors with little money were reducing the apparent performance and masking the performance of the better ones.

That sort of thing will help to tell us whether financial education can improve things or not. Can telling investors about common mistakes change their behaviour and prevent them from buying high and selling low?

gadgetmind wrote: »

Yes, but how do we square this with your view that the average investor is good at picking which active funds to use, and furthermore is able to sense when they've gone off the boil and switch to one that's going to perform better?

In general I don't write to average investors here, because average investors don't even pay enough attention to post and ask for help or do much learning. Here we start with an advantage: people are interested enough to at least start to ask questions, which is likely to improve their performance compared to investors as a whole. They at least are going to get some idea about what to do or not to do.

gadgetmind wrote: »

I'm not sure what the solution is for the average investor as they seem to be their own worst enemies.

Education, particularly about risk tolerance so they don't sell at the bottom of the market might be one way that could work. Encouraging regular investing even during market dips may also help, by decreasing the tendency to buy high. But the biggest challenge in this isn't what to say, it's getting them to pay enough attention to do any learning at all.

gadgetmind wrote: »

I prefer to use trackers to gain exposure to the major markets

In my main, non-work, pension pot, I have about 47% by value in trackers, most of that in global trackers. I think that one or more global trackers makes an excellent core of an investment portfolio. Not necessarily one because there are different "global" indexes, like FTSE Developed World or MSCI All-World, in ex or non-ex UK versions and so on. Around 17% in managed emerging markets in various ways. Around 10% in smaller companies, mostly UK and EU.

I freely use both trackers and managed funds, depending on what I'm trying to do.

gadgetmind wrote: »

Only in retrospect. As we saw earlier, some once-popular funds from big name investment companies feature in BestInvest's Spot The Dog from time to time.

The interesting thing there is in part, why they change. Spot the Dog is about funds, not about managers and a known common reason for a drop in performance is a change of manager. It's what caused the main drops in performance in the global growth sector funds I looked at. All you had to do during the time I looked at was switch to another of them if the manager changed and you'd have continued to do well. If they became dogs after a manager change that'd be well worth knowing - as would any other causes.

gadgetmind wrote: »

Volatility used to rattle me but now I see it as my friend. After you've been in the markets through 1987, 1999 and 2008, you learn that low prices are an opportunity and that rebalancing isn't just a theoretical nicety.

But how do we get the majority - who won't even read one post here - to learn this?

gadgetmind wrote: »

I also usually keep 2-3 years of essential cash to hand

I tend to do that sort of thing as well, but I also keep lots in ISA investments and consider that to be available if needed longer term. But that's because being able to survive unemployment long term has been one of my main financial objectives.

Most of my new money has been going into equity income for the last year or so. Seems we both thought that a rotation into those funds and the shares they hold would happen. I'm not sure it's over yet, though, still lots of money in bonds and not invested. Same sort of view on small cap, still a way to go, potentially.

How are you doing on the exchange rate? I'm around 10% up on some P2P lending in Estonia just due to Euro exchange rate moves at the moment... which is nice while it lasts. Anticipating that sort of move is part of why I'm invested there.

gadgetmind

jamesd wrote: »

We know from the story that it had underperformed its index for four years, maybe by more than a tracker fund, so it seems unlikely that it had attracted a lot of money for at least those years.

I'm sure they'll have made all the right noises, changed the manager, and generally tried to keep up their AUM. Some investors will have hung on in the hope that it would recover (which is statistically very likely) and others chased alpha elsewhere.

You keep on making that assertion, yet see for example the persistence of outperformance in the global growth funds that has been discussed both here and by an author you seem to like

It doesn't matter whether I like an author or not. Either there is peer reviewed academic evidence or there isn't.

This doesn't mean his funds have beaten the index every year, of course, just that long term they have, spectacularly.

The laws of probability allow for such funds, just as they allow a coin to be tossed 20 times in a row.

It's well known, and I agree, that typical private investors make mistakes in their investing.

Yup.Market timing, lack of diversity, chasing performance, and not keeping fees to a minimum are the main ones.

I don't care how a typical investor does. What I care about is how I do and how other investors who pay attention to what they are doing do. the rest can't be influenced because they just aren't paying attention, and for those I suggest use of trackers.

I would, of course, go a little further with that.

I don't assert that retail investors in general can beat the market or select the right funds.

I assert that they shouldn't even try.

Education, particularly about risk tolerance so they don't sell at the bottom of the market might be one way that could work. Encouraging regular investing even during market dips may also help, by decreasing the tendency to buy high. But the biggest challenge in this isn't what to say, it's getting them to pay enough attention to do any learning at all.

This is why I mostly stick to recommending books and giving general advice. If they won't read the books, then why should I bother myself further?

Spot the Dog is about funds, not about managers and a known common reason for a drop in performance is a change of manager.

While it may be well known, it's been shown to be wrong by long-term studies that have looked at the influence of the manager on investing success.

Most of my new money has been going into equity income for the last year or so. Seems we both thought that a rotation into those funds and the shares they hold would happen.

In my case it was partly that but also because value investing *has* been shown to give better long term results as has exposure to small caps. I therefore upped my exposure to both but still with a very keen eye on fees.

How are you doing on the exchange rate?

Utterly disinterested in it as I avoid exposure to exchange rate moves as I can neither prevent them nor predict them.

Linton

gadgetmind wrote: »

In my case it was partly that but also because value investing *has* been shown to give better long term results as has exposure to small caps. I therefore upped my exposure to both but still with a very keen eye on fees.

How does this square with your previous comment that investors shouldnt even try to "beat the market" by buying the right funds?

grey_gym_sock

gadgetmind wrote: »

I avoid exposure to exchange rate moves as I can neither prevent them nor predict them.

does that mean you do or don't hedge currency when holding overseas equities?

and does it imply you hold no non-sterling bonds?

gadgetmind

Linton wrote: »

How does this square with your previous comment that investors shouldnt even try to "beat the market" by buying the right funds?

I can't see any issue as I'm using an evidence-based approach regards both selecting certain sectors and avoiding the decision of which high-fee fund to back.

Of course, it's worth noting that there are *much* more passive investors than myself. I'm an incurable INTJ and can't help but fiddle with things, but I try and ensure my fiddling is driven by a ratiocentric approach and I also restrict it to less than 5% of my main portfolios. Slight sector/cap tilting extends beyond this 5% but is still relatively mild and driven by value.

I do monitor my performance on a portfolio level against certain other mixed investments and remain happy. The main drivers of over-performance are actually outside my SIPPs and ISAs and are down to tech share picking and contrarian moves out of cash and into equities, both of which could have gone very wrong so I count myself as a "lucky fool".

gadgetmind

grey_gym_sock wrote: »

does that mean you do or don't hedge currency when holding overseas equities?

No, I don't hedge as I regard equities as having an underlying value that is unaffected by currency prices, at least over the long term.

and does it imply you hold no non-sterling bonds?

The only non-sterling bonds I hold are via small holdings in some strategic bond funds and they do hedge in many cases. Most of my bond exposure is via sterling corporate bond ETFs.

I'm happy to be convinced that my approach to both is wrong!

Linton

gadgetmind wrote: »

In my case it was partly that but also because value investing *has* been shown to give better long term results as has exposure to small caps. I therefore upped my exposure to both but still with a very keen eye on fees.

How do you indulge in "value" investing without the services of a manager who can distinguish between a value stock and an HMV?

And doesnt what you state has been shown, presumably in an academic paper, imply that "value" filtering on the FTSE would give better long term results than tracking the market? The market which you assert cannot be beaten in the long term.