Balanced Portfolio help

mrsweep

bowlhead99 wrote: »

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.

This was a really informative post. I will certainly review my choice of EM fund on the basis of the logical points you make.

badger09

@bowlhead99

Thanks again for a really informative post, in words that even a novice investor can understand

I don't know what you do for a living, but your written communication skills are excellent IMHO

Wonder what your verbal skills are like

mrsweep

badger09 wrote: »

@bowlhead99

Thanks again for a really informative post, in words that even a novice investor can understand

Couldn't agree more.