Significant money to invest.

Bastiat

Your_Hero wrote: »

The work an of adviser is not just results orientated, and if you think it is then you've mistaken by a mile. Advisers don't and can't guarantee results of any investments.

Just like the cartomancer cannot guarantee your life will unfold the way he predicted or the economist that his predictions have any accuracy whatsoever.

Applying your logic, I would conclude that a Teacher cannot demonstrate his/her skills either because the results of their students are also so far out in the future. Clearly this is wrong.

Teachers are regularly evaluated even if imperfectly are they not? How do you separate a good financial advisor from a bad one? What would be the criteria? What service can possibly justify charging 2% initial fee and 1.6% yearly fee if it is never evaluated in any way shape or form?

Individual stock picking is very different to choosing the right fund managers and you can't even compare the two.

How is it different? I would argue picking fund managers is more risky than picking stocks since you have a lot less information. That is unless you are relying purely on his past X years performance or the latest hyped fund manager.
Again the academic evidence against active management is overwhelming (see "The Arithmetic of Active Management" or "The Value of Active Mutual Fund Management: An Examination of the
Stockholdings and Trades of Fund Managers" as examples). I do not know of a single academic paper supporting active management. The only support comes from practitioners with a vested interest in preserving the illusion.

dunstonh

What service can possibly justify charging 2% initial fee and 1.6% yearly fee if it is never evaluated in any way shape or form?

Where on earth did you get 1.6% from? Not this thead.
What makes you think there is no evaluation.

Bastiat

dunstonh wrote: »

Where on earth did you get 1.6% from? Not this thead.

Precisely from this thread. Although to be fair that is a total fee but since the adviser is selecting the platform and the funds it is responsible for the level of the fee. At this extortionate level you might as well go for a 2/20 hedge fund. With that amount of fees you are pretty much guaranteed to underperform the market every single year.

KPLpard

dunstonh wrote: »

Where on earth did you get 1.6% from? Not this thead.
What makes you think there is no evaluation.

Hi dunstonh, I indeed quoted 1.6% but I had broken it down in the OP to include platform / fund manager charges. IFA only takes 0.5% / annum on top of his 2% initial charge on capital.

I am very much leaning towards a Vanguard LifeStrategy x% Equity type fund. I like the idea of this as I feel it is somewhere in the middle to start with. Looking at this fund does still leave me with a few questions though.

- Should I drip feed?
- I know I should not put the entire 170k in there so perhaps I could look at some other index linked funds. Maybe even have a small 'punt' on an emerging market based fund.

bowlhead99

Bastiat wrote: »

With that amount of fees you are pretty much guaranteed to underperform the market every single year.

A great many fund managers are not trying to perform the same as the market every year. The 'market' for a particular asset class in a particular region will sometimes drop 40 or 50% in a year or so. So, many investors are actually happy to underperform in some years and outperform (by not losing half their money) in other years. They may actually get to a better place in the end having not been wiped out in a downturn and not needing to double their money to get back to where they started.

One of the tools that helps in the outperformance effort is "not having to have a garbage sector allocation by buying the total market". The FTSE 100 index and a number of other indexes in which one might invest, as market-cap driven indexes are not amazingly well balanced in terms of industry sectors. You would contend that any outperformance by an active manager is because they took on more 'risk' and then conveniently define risk as "holding anything not in the same exact proportions as the total market".

However, by choosing not to hold a massive amount of banking stocks as they grew in 2005/2006/2007, an active manager missed out on some potential gains but then avoided the catastrophe of losing 95% of his large holdings of each of Lloyds and RBS when they went titsup at the same time.

KPLpard wrote: »

I am very much leaning towards a Vanguard LifeStrategy x% Equity type fund. I like the idea of this as I feel it is somewhere in the middle to start with. Looking at this fund does still leave me with a few questions though.

- Should I drip feed?

Ah, the unanswerable question - because we have no way of knowing whether the average level of the FTSE over the next 12 months as you drip in £10k a month will be higher or lower than today's value.

One would assume you are buying because you believe it will go up over the long term. If you are buying something that is going to go up, it makes sense to buy it at the start of that journey and collect all the dividends and capital growth throughout the journey, rather than on average buy the middle of that journey with a smooth dripfeed over your investing timescale. Therefore, it would make sense to buy now.

Alternatively you may believe you have some special insight that it is more likely to go down before it goes up, rather than up before it goes down. You could then engage in market timing by setting up a plan to slowly move from cash to equities over the next year while the market gets cheaper and cheaper. This buys you more units than you could go out and get today.

Of course, this only works if the market does in fact get cheaper over the next year and, say, the FTSE goes 6500, 6400, 6300, 6200, 6100, 6000 before improving to 6100, 6200, 6300, 6400, 6500, 6600 over the second half of the year. If instead it goes 6500, 6600, 6700, 6800, 6900, 7000 before having a pullback to 6900, 6800, 6700, 6600, 6500, 6600, you are left with significantly fewer units. So for this reason, if you have the cash available today and you want to spend it on buying equity investment funds, any decision to deploy the cash into equity funds at some point other than today is a market timing guess which you are (and I, and an IFA) are not qualified to make.

It is clear that market investments are not at all time low prices at the moment - this is not a March 2009 opportunity where you could beg borrow and steal cash to buy shares at a very low multiple of the companies' annual profits. Some assets, like bonds, are close to all time high prices and would have to come back to the 'average' at some point when interest rates normalise. Some like equities do not have to come back to an average because unlike fixed interest bonds, the value of equities grows with the value of an economy. If they went up smoothly they would be at an all time high price every single day.

As you have said:

- I know I should not put the entire 170k in there

, so you are acknowledging that you should not put all eggs in one basket and by holding a variety of assets you will have some other things that can be sold to buy more of something that becomes cheaper later. Some of that 'not equity index linked funds' stuff could be cash, some of it should be other investment types (which could include equity funds that are not index-linked, in more defensive or more aggressive sectors, as well as things that aren't equities at all).

You should definitely work out first how much you actually have to play with, and slice up the 170k into short term and medium term and long term and determine the goals for each and how much of a loss you could handle. This can then drive the allocation within each 'pot'. The short term stuff would be all cash, but even the long term stuff can have a cash component, if the returns on bank accounts happen to look particularly good compared to bonds or other non equities for the risks involved.

... so perhaps I could look at some other index linked funds. Maybe even have a small 'punt' on an emerging market based fund.

If you are buying one of the high equities VLS funds (or the equivalent from another provider, such as Blackrock Consensus funds) you already get a dedicated emerging market holding. There is nothing to stop you buying more on the side, because there is nothing to say that the VLS allocation among global sectors is right for you. It is the manager's choice of what he thinks someone in the UK might want from a 'straight out of the box, fund of tracker funds'. Some would want more UK, Japan, Emerging, Smallcap etc. That's all fine but be conscious how your overall mix is affected when you add more to one sector and less to another.

Personally I am higher in emerging markets than the VLS gives me out of the box. I am also higher in real estate, smallcaps, infrastructure, commodity plays, private equity and a few other themes that pull the global allocation away from a standard cap-weighted index of equities. I only use the VLS 100% as their standard allocation of government and investment-grade corporate bonds did not appeal despite its cheapness; to the extent I hold bonds and other fixed-interest assets, they are within strategic bond funds or active multi-asset funds or self-selected.

At risk of prolonging the 'active vs passive' debate which was not the thrust of this thread: If you are looking for other index linked funds and you are considering EMs, these are not two things that naturally work best together. Cheap index funds rely on buying the total market because the "efficient markets hypothesis" says that everyone has perfect information and everything is fairly priced.

That is not at all the case in markets that are not well developed. Consequently, buying the index exposes you to a bunch of companies with poor governance and potentially large overvaluations which everybody buys because they feature in the index, while active managers with dedicated research teams on the ground are able to navigate around it. There are of course people who charge high fees but still buy rubbish because they can get away with it due to large demand, but the cream generally rises to the top and track record gives a better insight of relative performance than it would in the developed world.

So in EMs you are likely to find managers with consistent track records of outperformance. Aberdeen Emerging Markets is up > 800% after fees since 1990 versus the IMA average of >300%. It is not that they are just holding riskier assets over a growth period, because in in the year from Nov 2011 they only dropped 40% vs IMA 50%. Given these performances are net of fees it shows fees are not the only thing to consider.

If you look over the last 5 years, that Aberdeen fund is up 61%, and their Smaller Companies EM fund is up 104%. First State's Emerging Markets fund has done 77% and their EM Leaders fund has done 81%. This against a backdrop of turbulent fortunes in the EM sector where the Vanguard Emerging Markets Stock Index Fund only delivered 37.6% in the same period. If you can pay 1% extra in fees a year but end up 40% better off after 5 years then 'guaranteed to underperform the market every single year' is wide of the mark :cool:

Bastiat

bowlhead99 wrote: »

A great many fund managers are not trying to perform the same as the market every year. The 'market' for a particular asset class in a particular region will sometimes drop 40 or 50% in a year or so. So, many investors are actually happy to underperform in some years and outperform (by not losing half their money) in other years. They may actually get to a better place in the end having not been wiped out in a downturn and not needing to double their money to get back to where they started.

If you are talking about hedge funds and other absolute return funds, these have faired very poorly since the crisis. Also they tend to be very expensive leading you to underperform badly in good times and do ok during crashes. Also during crashes correlation in all sectors goes up as everyone dumps everything to meet margin calls and redemptions. So even if you avoid the sector causing the crisis you can still be down just the same.

At risk of prolonging the 'active vs passive' debate which was not the thrust of this thread: If you are looking for other index linked funds and you are considering EMs, these are not two things that naturally work best together. Cheap index funds rely on buying the total market because the "efficient markets hypothesis" says that everyone has perfect information and everything is fairly priced.

You don't need the efficient market hypothesis to show that active funds are just overpriced leveraged beta funds. There is abundant statistical evidence. Did you look at the papers I quoted or is fund marketing the only literature you are allowed to read? I am still waiting for an academic paper supporting active investing.

If you look over the last 5 years, that Aberdeen fund is up 61%, and their Smaller Companies EM fund is up 104%. First State's Emerging Markets fund has done 77% and their EM Leaders fund has done 81%. This against a backdrop of turbulent fortunes in the EM sector where the Vanguard Emerging Markets Stock Index Fund only delivered 37.6% in the same period. If you can pay 1% extra in fees a year but end up 40% better off after 5 years then 'guaranteed to underperform the market every single year' is wide of the mark :cool:

I would argue a fund charging 2% initial fee and 1.76% management fee is a terrible idea for a 5y time horizon.

bowlhead99

Bastiat wrote: »

I would argue a fund charging 2% initial fee and 1.76% management fee is a terrible idea for a 5y time horizon.

I assume you're including the adviser's 2% and 0.5% fee in that because the premium of the active EM funds themselves (with the exception of those soft closed) is less than a percent over the Vanguard index one. So within the extra charges from the adviser you are getting the tax planning advice and sector allocation advice and so on, of which a bit of it gets allocated to that particular fund, but the fund itself is not so inherently more expensive and you could buy it yourself if you were comfortable your own strategy.

Clearly buying any emerging markets equities fund is a terrible idea for a 5 year time horizon if it is a large portion of your investment because a 5 year time horizon is not long enough to ride the ups and downs. The 5 years was simply used as data existed for it while you can't get quickly get data on the Vanguard UK EM index fund for 10 years or 15 years because it didn't exist back then. Lack of index products for all the investment sectors in which one might want to participate is a negative for passive investing, but I digress.

I had already mentioned the same active EM managers did not lose as much as the average during a recent crash. So the fact they did that (having outperformed in the preceding two decades, and went on to perform better in the post crash period too) is an example of persistent outperformance, which I would argue is perfectly possible in a less-developed market where there is a lot of rubbish to avoid and a lot of money coming into the market that just wants 'exposure' and is happy to take the total return per the index. The manager's return in that instance was not just 'leveraged beta' because he made more hay than the average in the good times and did not lose more hay than the average in the bad times. This can happen, when markets are not perfect.

I must admit I didn't try to track down the papers you mentioned. I also didn't go and read any fund brochures. I am generally comfortable with how markets work and I hold some index funds as part of an overall strategy. I also hold some active funds. I am not entrenched in one camp and inherently anti index for every scenario. But I am not going to nod along that the 100 years of data says index is the best in the long term and strategy is pointless so I should always use an index. My goal is to invest for periods other than 100 years and my strategy is not always to be fully cap weighted.

If you are talking about hedge funds and other absolute return funds, these have faired very poorly since the crisis.

As an aside, I was not talking about hedge / AR funds in my previous post. Merely pointing out that all fund managers that depart from the index are not trying to deliver the return of an index. Some may try to achieve a reliable income and therefore only engage with a subset of stocks. Others create strategies which have more validity in certain parts of an economic cycle.

As we are not all trying to deploy trillions into the market we don't have to allocate cash in equal weighting in an index. For the sake of argument: the market has fairly valued all stocks based on their known assets, annual profits or whatever other measure. It considers a fair price today for Apple to be $587bn and a fair price for Samsung to be $183bn based on all available information. If all other global manufacturers of phones, computers and TVs were private, the total investible market would be $770bn.

However, I am not trying to deploy half a trillion dollars. I want to allocate my £1. The 'market' return will be the return of an allocation of 24p in Samsung and 76p in Apple. If I pay an active manager he may decide to invest 49.75p in each and keep half a penny himself. Now when one of them loses half their revenue and valuation to an unlisted competitor, I will lose 24.87p no matter which one it is. When one grows their revenue and valuation by half I can gain 24.87p no matter which one it is.

By using an index, I would instead be losing 12p to 38p or gaining 12p to 38p and my fortunes are very heavily tied to Apple. If tying my retirement to Apple is not my plan, I may be happy to give up the half penny even though mathematically it is an inferior result. Over a hundred years of running the maths, some of these 'calls' to overweight Samsung versus the index will work out and some will not. The passive investor will be screaming that whether it works or not I am giving away money. However I am buying something for that money. I am buying a risk reduction because my eggs are no longer in the Apple basket.

The passive investor is baffled because my total return every day is always higher or lower than the total return of the market announced on breakfast telly, so I must have paid money out to buy 'volatility' against the 'normal' reported return of the market, which sounds stupid. Others read risk differently.

jamesd

Bastiat wrote: »

The academic research in favour of passive investing is overwhelming.

No, it isn't.

There are a huge number of studies that share the same systematic flaws. They do completely bogus things like ignoring manager changes and saying "manager change" when they mean only fund management house change and ignore the change in the human, when everyone using active funds should know that a change in human manager is a sign that performance is likely to change in a negative way.

Worse still are US studies that are then relied upon by UK investors who don't understand the effect of the US tax system. Things like the higher rate of capital gains tax for holdings of less than a year and charging investors in the year in which a fund transacts instead of when the investors buys or sells the fund make a significant difference because those effects do not exist in the UK. One of the relatively few US studies to look at this found that the active funds on average outperformed significantly before tax and underperformed a little after. This tax difference is one reason why tracker are so popular in the US: they reduce buying and selling and hence the tax cost. The corresponding UK situation only has the relatively modest cost of purchase or disposal taxes in some markets, like stamp duty here, and the usual dealing costs.

jamesd

KPLpard wrote: »

My worry is that my knowledge only comes from what I read on websites such as Investors Chronicle. Whether this be share tips or fund tips or perhaps a structured product that tracks the FTSE 100 level. This makes it quite hard for me to pull the trigger as I feel like I am playing with my families future (the money is not to be touched now but instead used for things such as private education fees later in life). It may be that in a few years I may want some of the cash to assist with moving up the property ladder so I dont want to tie it all up for long periods of time.

OK, lets start with a basic way to approach things, noting that you appear not to be concerned by the 45-50% drops that can be expected by pure equities, at least based on your later posts.

A good initial core holding would be something like a FTSE World (not developed world version that exists, the whole world) tracker. That gets you much of the world market but concentrated by market capitalisation of markets and companies.

Next step on refining things might be to notice that emerging markets are an area where it is widely accepted that managers can add value, compared to the largest companies in developed markets where it is harder. So you might switch from the FTSE World to the FTSE Developed World tracker and add an active managed emerging markets fund.

Now you might look at relative values of markets and price/earnings ratios and notice that some markets are relatively expensive at the moment and some are relatively cheap. You might also now that there is a general trend that those who buy at times of relatively high cyclically adjusted price/earnings in markets tend to do less well over the following years while those who buy on the low side tend to do better. So you might cut the proportion in the FTSE Developed World tracker that has high US and UK holdings and add an active managed European fund to exploit the relatively low valuation in Europe at the moment. You might also notice that emerging markets are relatively lowly valued but higher volatility and perhaps increase that holding a little.

Moving on you might look at asset classes and observe that while corporate and government bonds are at quite high prices/low yields, UK commercial property has not yet recovered from the events of 2008 and offers a way to diversify out of pure equities into relatively, compared to bonds, inexpensive fixed interest and may want to add an active fund in this area.

Going further you might notice that historically smaller companies have outperformed larger companies, but with higher volatility, so you might want to consider one or more smaller companies funds in an attempt to trade higher volatility for higher performance.

There are other ways to structure your decision making but this one is one of the reasonable ways to look at things and has the advantage that a person can stop at any point along the track to keep things simple or can go further if desired.

jamesd

KPLpard wrote: »

I am very much leaning towards a Vanguard LifeStrategy x% Equity type fund. I like the idea of this as I feel it is somewhere in the middle to start with. Looking at this fund does still leave me with a few questions though.

Lets look at what you would buy with that fund:

1. A high US and UK weighting because those are quite large markets. More than 50% of the equity portion in the US which is at around record high numbers, though not inflation-adjusted, and showing some signs of being a bit toppy.
2. Variable corporate and government bond exposure, concentrating money into assets that are currently at high prices/low yields.

For those reasons I'm not currently keen on buying this style of fund. that's based on knowing where the fund invests and the state of those markets, there will be times when I'd say something else.