Balanced Portfolio help

grey_gym_sock

A_Flock_Of_Sheep wrote: »

they lay on a fancy buffet too apparently.

i just hope they don't serve lamb

mrsweep

I can see your point bowlhead99. The FTSE and developed markets are also likely to correct further before too long, so all equities look to be set for some short term losses for anyone trying to invest now. Bonds are not looking good either. So the chance of EM falling further should not put me off my balanced portfolio plan.

I think my concern is partially because for the larger allocations I can drip feed over several months so I am not too concerned if the UK and developed markets fall a bit and allow me to buy in cheaper. But for my smaller EM and commodities allocations it is more cost effective to buy in at a single time as the dealing costs, although only £10, would start to add up if I buy in relatively small amounts over several months. So although I don't want to time the market for EM and commodities, it is a harder decision to make in case now is a really bad time to buy my full allocation.

My 5 year horizon is that I would like to be able to start drawing down around 3% p.a. in income. But I have no plans that require access to the whole fund. So I am going for growth and intend to hold the investments themselves beyond the 5 year horizon.

Thank you all for your patience with these basic questions and concerns.

bowlhead99

badger09 wrote: »

This is fascinating stuff, but do most investors have the time, inclination, or intellectual capacity to follow events such as the departure of a fund manager (correct terminology?) or to predict what the likely impact of that departure on their investment will be?

Isn't this precisely why Hale recommends passive investing through trackers?

But trackers are not the best choice for immature (again correct terminolgy?) markets, so where is a newbie supposed to look for guidance?

Hale's argument is that it's as difficult for you to pick an above average manager as it is to pick an above average individual share, so while you don't need to hold as many funds as you would individual shares, it's still not worth trying to do.

You are right, in some markets (e.g. I'd suggest emerging markets, small caps to some extent, high yield equities etc) there is a lot of garbage in the indices -at least according to the people managing the active funds investing in those sectors ; clearly they are biased, but I believe them!

For example a company might be on a high yield because it has tanked in price as it's going bust, or because it's paying dividends which aren't really covered by expected profits any more. Or a Chinese manufacturing company with minimal corporate governance standards, zero transparency, an inability to reduce staffing to counter scaled back customer demand because of the politics making it difficult to lay people off, and a heavy reliance on certain suppliers, customers, family shareholder finance or whatever.

Or a UK smallcap without adequate cashflow to renew its technology to keep up with its peers. All of these things are in their respective 'index' but you absolutely do not want them and it is stupid to buy them just because they are in the index if you could instead pay a manager to research and buy the companies which don't display these bad characteristics. There are of course specialist managers who specifically go for companies like undercapitalised smallcaps because they can be cheap and a good turnaround story. But they still don't buy all of them and generally such markets are best left to experts imho.

So that's the argument to get an active fund manager. If an IFA was recommending funds to you, each of those funds will have been taken through a 'due diligence' process where they look at track record of the fund, tenure of the individual manager etc amongst other things and try to form a view whether it is something you should have in a portfolio. Most IFAs would not do this as individuals but outsource it to a dedicated person or team in their organisation or externally. When you are not using an IFA, you have to do it yourself.

But to answer your question (eventually ), the time the manager has been in place is only one of the factors. You look at a chart or a table to see its track record against its peer average over a decent time period, and you read the quarterly reports if its an investment trust, or press interviews with the managers of a fund, to try and understand why they think their strategy is paying off. Hale might say that the managers doing best in the good years are just doing that because they are taking more risk - and indeed you might see more volatility, so you consider whether the return compared to their peer average has held up over the longer term and whether you think that means you don't mind a bit of volatility.

Then if you are happy with the above, you can look at whether the investment manager (the individual(s)) have been the same throughout the period. If yes, that's great, because it means your research is perfect - everything you like about the track record has come from the same person and hopefully will continue. People like Neil Woodford at the Invesco income funds or Susie Rippenhall are examples of 'star' managers who have a great record over time.

However in most cases the managers change every so often. If they change every couple of years it's a red flag because you really want the people to be incentivised to stick around and believe in what they are doing. And your research might be less valid if there were different people at the helm investing through the good times versus the bad.

But most large fund managers have wide teams of co-managers or analysts feeding into all decisions made. Groups like First State or Franklin Templeton or Aberdeen are good in emerging markets as they have strength in depth and although one person might be the figurehead of a particular fund at a point in time, it is probably not all going to collapse if they retire. If your track record against your peers is good in emerging markets over a prolonged period, it's likely the company knows what it's doing and has good processes and procedures because you generally can't achieve these results in the wild west of Emerging Markets by luck.

Hale notes that a fund might be top quartile one year and third quartile the next year and on average not beat the index. This is more the case in S&P500 or FTSE100 generalist funds where everyone has perfect information and the markets are transparent - but in EM I think it is different.

But bottom line, if you like the historic results and you are not just looking over the last 1 year or 3 years, and the individual fund manager is not changing very often, you are probably OK to ignore most of the speculation about 'what will happen if x person retires'. With the large fund managers I would not change from investing in their active EM fund to go and dive into an index just because they had a change of personnel in one role.

Yes it is worth knowing whether someone has been running the fund for 6 months or 6 years, and what he/she did before that, which is all easily find-outable from somewhere like Trustnet or Google. But it's only one part of the process really, to help validate your conclusions and is a secondary thing to the actual track record against 'the market'.

If you like the fund but the manager has only been in place a month, that's not ideal, but if you assume he will have an average skill level (Hale loves averages) then he should do OK in the high quality environment that his predecessor must have been operating in for the last 10 years to produce those results that attracted you to the fund.

A_Flock_Of_Sheep wrote: »

The sheepdog doesn't reveal to me all of his portfolio.

He does have LSE: EDIN and shares. The shares I know he does have are Easyjet, Falkland Island Holdings, Hyder Consulting, NYSE: MasterCard and NYSE: Visa, National Grid, Rexam and he also has PIBS.

For someone who apparently dumped all of their fund holdings a month or two ago and dived into cash because this board suggested they were not particularly diversified and didn't provide broad enough coverage of the world markets, I'm fascinated with how you keep adding or changing the individual shares in your portfolio bought on tips or whatever. Every couple of days a new share is thrown into the conversation that you or the doggie are buying or topping up or have held for three months but never mentioned before. You interchange between whether it's you or the doggie holding them and how many of them you bought at what point of the market.

I'm trying to work out whether the dog is simply the other half of your split personality and you don't have any consistency of investing style between the two, or you are simply a fantasist making up whichever shares you wish you'd bought on tips from time to time, while staying resolutely in cash waiting for the perfect time to buy back into some safer funds.

Given you've been so easily panicked by a couple of percent market movement when most of your money is in cash, it seems quite surprising that as a newbie investor you are aquiring any direct holdings at all. Certainly a < £50m AIM company like FKL is a different bag of risks from the multibillion income funds in EDIN and perhaps it adds a bit of fun. But a £4bn packaging company like REX, which last year paid 15p div (only 3% of current 500p share price) and has already risen 67% in only 21 months, seems a strange addition when you are waiting in cash for funds to get cheaper and avoiding EMs because they are risky.

Apologies to the OP for staying off-topic :beer:

A_Flock_Of_Sheep

The sheepdog is actually a completely separate person to me.

I am a novice. He is quite experienced in several talents

Totton

badger09 wrote: »

@ Totton & bowlhead99 - and with apologies to OP for going further off topic

This is fascinating stuff, but do most investors have the time, inclination, or intellectual capacity to follow events such as the departure of a fund manager (correct terminology?) or to predict what the likely impact of that departure on their investment will be?

Isn't this precisely why Hale recommends passive investing through trackers? ...

Rippinghall's departure was very well signposted but of course many investors will have stayed until they see how Tulloch et al manage the fund after her leaving. I am confident they will continue to do very well as will other funds from First State. However I prefer to follow managers and therefore sold SST last month, no harm done if markets forge ahead as it can't be a bad thing to bank a healthy profit.

I think there is a lot to be said for the tracker argument put forward by Hale and others.

bowlhead99

I agree, banking a profit is a good thing- the only problem is if you bank the 40% "win" instead of holding out for the 80%, you'll regret it if the next time you have a dabble and lose 60%... such is the problem with volatile sectors.

I seem to have been quite lucky to have exited a couple of large tranches of SST when I did, it was looking too good to be true when compared with some other more typical EM and Europe gains I had since last summer - but looking at the last couple of years EM has not been a particularly shining star sector for me compared to some others and I wondered if I might regret not leaving more on the table. Seems I got away with it for now.

I agree Hale has a point re trackers making sense, and Buffet agrees with him as a recommendation for the common man (even though he engages in stock picking and market timing for himself and generally produces very superior returns). In his famous Smarter Investing book he writes accessibly but does really push indexes down your throat, even though he acknowledges they don't always work in all markets.

For better or worse, I use some indexes but in the more interesting markets I do prefer someone to try and take control of what's being bought for me rather than buying an index number - I'll take an interest in what they're doing and try to understand why, even if I'm only picking the manager and not the stocks.

But many (most) don't have the time or inclination to make investing an entertaining or educational process and I can fully understand that someone would successfully beat cash if they just followed an index for a long enough time - if the upside is minimal (in terms of possible extra long term returns, or cost /benefit of me doing lots of time researching and thinking) then I'm happy to buy a core of equity indexes. I'd just get bored if I didn't dabble in active funds and individual stocks too.

vectistim

Also, don't forget to consider all your wealth when trying to assemble a balanced portfolio.
eg: If I simply look at my ISAs I get one answer to where my money is invested. If I remember to include all my privatisation/demutualisation shares then they have enough of an effect to shift the weighting such that my portfolio suddenly looks overweight in UK shares. (Well overweight to where I think it should be invested)
If I then include cash and non owner-occupied property the portfolio suddenly looks horrendously overweight in residential property.

badger09

bowlhead99 wrote: »

But many (most) don't have the time or inclination to make investing an entertaining or educational process and I can fully understand that someone would successfully beat cash if they just followed an index for a long enough time - if the upside is minimal (in terms of possible extra long term returns, or cost /benefit of me doing lots of time researching and thinking) then I'm happy to buy a core of equity indexes. I'd just get bored if I didn't dabble in active funds and individual stocks too.

That is exactly the point I was trying to make in my post (7) last night.

Thrugelmir

mrsweep wrote: »

I can see your point bowlhead99. The FTSE and developed markets are also likely to correct further before too long, so all equities look to be set for some short term losses for anyone trying to invest now. Bonds are not looking good either. So the chance of EM falling further should not put me off my balanced portfolio plan.

A number of fund managers see little value in either equities or bonds, and are holding as much as 30% of their funds in cash. The poker game has started I feel. As it's merely a question of when rather than if, that we might to see a market correction (downwards that is). Only going to take one piece of bad news story to light the flames.

bowlhead99

badger09 wrote: »

That is exactly the point I was trying to make in my post (7) last night.

I suppose something that might be relevant to you, is that EMs and other inefficient markets are the places where indexes are the least sensible thngs to use (imho), BUT they are also the places where you are less likely to have a large proportion of your portfolio.

So if your (no offence) 'lazy' approach gets you a naff performance in EM over 10 years compared to EM peers, it a) might still be better in percentage terms than the low growth UK funds even while underperforming over a long long term and b) won't hurt your portfolio much because you don't have much there anyway.

Still, if the markets are tanking and your fund tanks with them because your non-active index couldn't avoid it, and your index fund then takes forever to recover because the lack of being able to pick and choose stocks in a rough market, it is really not great.

To illustrate why lazy trackers are not the way to go in EMs, first see
- North American market over 5 years:
Aberdeen American Equity A Acc 54.2%
Baillie Gifford American A Acc 52.7%
F&C North American 1 53.7%
Invesco Perp US Equity Acc 45.2%

Is there any reason to bother spending hours researching who's best of the bunch, given past performance is no predictor of future etc? On that data no, it all seems much of a muchness in terms of annual result after a few years. Especially when you then see, from the low-fee index contender:
HSBC American Index Ret Inc 63.0% !!

So all those famous guys got beat by the tracker - are you confident you would have found JPM US Select I Acc at 76.5%?

Probably not. Now if we extend for a longer time period, over 10 years HSBC's 91.2% is beaten by Aberdeen, JPM and Baillie Gifford, so it's not true that the index always wins due to low fees. And these days, looking forwards, everyone is charging 'clean' prices on funds so the tracker's cost advantage is down to half a percent per year instead of 1.5%+ which means it might fall further down the rankings. So tracking is far from a slam dunk, but did seem to work in this particular market over 5 or 10 years. Well done for saving time on research and just buying the index.

Move over to EM equities. The FTSE EM All-Cap index went up somewhere between 5-10% in GBP over 5 years. Not great compared to the stellar returns you've heard about for EMs in the long term - it just hasn't been a particularly great period. But the IMA sector average of funds in the global EM space was about 16.5%. So just by picking a very average one of the EM funds, you'll double the index? There is some 'survivorship bias', in that the funds that did really badly might already be wound up, but generally, yes the average fund can beat an index.

Examples of famous names doing better than the index's 5-10% over 5 years in the global EM space include:

Baillie Gifford Growth , Henderson (9.5 - 10%)
Baring, AXA Framlington, Threadneedle (10-20%)
Blackrock, JPM (20-30%)
Lazard, Dimensional (33-37%)
Aberdeen, McInroy & Wood, First State (70-80%)

If you were going even more specialist there are Templeton or Aberdeen's EM Smaller COmpanies funds at 37% or 138%. And that's without looking at the individual country-specific funds around the place.

Now these, like some of the US funds I quoted earlier, are all famous blue-chip names with slick marketing materials and are easy to find. The difference is that unlike the players in the North American space, they seem to effortlessly beat the index - the sector average is double the index and the decent funds can reliably outperform by 3 or 4 or 8 or 10 times the indexes in the EM space, by avoiding the garbage.

Some of it is by taking more risk (in that any departure from 'buying everything' and going with your research and instincts is 'taking a risk'), but I feel that actually if you blindly follow an index in an undeveloped market you are taking a pretty big risk of being stuck with some unattractive badly run and far from transparent businesses.

That is a nutshell is why I don't just follow indexes.