Critique My Fund Portfolio - Don't Be Shy

jabbahut40

Hi All,


Thanks for all the comments. Here is a copy of my updated portfolio (with % allocation) after the changes made.


18.2 First State Asia Pacific Leaders Acc
12.5 Invesco Perpetual High Income Acc
12.7 Marlborough Special Situations Fd P Acc
12.3 Franklin UK Mid Cap Fund
11.1 Fidelity Index US Fund P-Acc
10.1 Schroder US Mid Cap Acc
6.3 Lazard Emergng Markets Institutional Acc
4.9 Fidelity Index Europe ex UK P-Acc
4.3 Fidelity UK Smaller Companies W-Acc
4.3 M&G Japan Smaller Companies Fund I Acc
3.3 Ignis European Smaller Companies I Acc




Any obvious gaps or things you think I should change?


Thanks.:o

kidmugsy

Linton wrote: »

If the OP is investing in the wrong things does it matter what the charges currently are?

It's not often that you are a chump, Linton. Nobody can possibly know whether he's investing in the wrong things, but the charges grind on remorselessly.

Linton

Linton wrote: »

If the OP is investing in the wrong things does it matter what the charges currently are?

My point was that the mistake the people who focus on charges seem to make rather often is to focus on the mice scurrying over the elephants toes. The OP was in my view (and in the view of other respondents) grossly overweight in UK Small Caps. Going for FTSE250 trackers or whatever wouldnt have helped - the charges saved would be very small compared with the potential losses arising from poor diversification.

Looking at the latest portfolio I think it is still insufficiently diversified. It is still nearly 30% in UK smaller caps (Marlborough SS is a small cap fund).

As a minimum change I would reduce UK smaller cap to around 15% and but the money saved into increasing Europe and Japanese Small Cap.

bowlhead99

kidmugsy wrote: »

It's not often that you are a chump, Linton. Nobody can possibly know whether he's investing in the wrong things, but the charges grind on remorselessly.

But surely the first thing to determine is what type of assets you'd like to hold in what proportion, then what type of strategy would best fit each of asset classes, then which funds meet your criteria, then finally what platform allows you to hold the desired funds or other instruments. The cost of doing that falls out at the end and if you don't like it you can then revisit to see what strategies or managers could be changed to provide a more efficient solution.

However fees isn't the first thing to look at, as if you only permit yourself the cheapest fund out there you'll just be stuck in a FTSE tracker and a U.S. tracker and perhaps slightly more expensively a global bond tracker. Cheap at under 0.15% all in, but not necessarily cheerful when see the results.

Given his pretty unbalanced portfolio that Linton was reacting to, OP needs to consider the markets he wants and why and how to access them rather than having huge holes in his portfolio. Fees is a factor, but returns after fees is what you see in the performance data you review in good years and bad anyway. If you focus on fees ahead of asset classes, markets and strategy you are letting the tail wag the dog.

jabbahut40

bowlhead99 wrote: »

rather than having huge holes in his portfolio. Fees is a factor, but returns after fees is what you see in the performance data you review in good years and bad anyway. If you focus on fees ahead of asset classes, markets and strategy you are letting the tail wag the dog.

Thanks bowlhead99. Agree that fees is a factor but not the primary one when selecting a portfolio. I personally like small caps and have reduced my portfolio in this sector by 10% based on the previous feedback but still like them which is why I hold them. Small caps aside what do you see are the huge holes you mention in my portfolio?

MrMalkin

bowlhead99 wrote: »

If you focus on fees ahead of asset classes, markets and strategy you are letting the tail wag the dog.

I'm sorry but this is a daft way to look at it. It's not like it's impossible to manage both asset allocation and expenses at the same time, his brain isn't going to implode if he examines both factors simultaneously. Expenses are one of the few things in portfolio building that an investor has some control over, along with asset allocation - therefore it's at least as important.

Some people seem to harp on about AA being more important than costs as an oblique way of criticising index funds, as if there's something fundamentally wrong with them.

It's especially annoying too see people come out with this sort of stuff because even if you disregard index funds, lower fund charges have a very strong correlation with higher returns - so costs should be one of the major parameters in any portfolio building exercise.

bowlhead99

MrMalkin wrote: »

I'm sorry but this is a daft way to look at it. It's not like it's impossible to manage both asset allocation and expenses at the same time, his brain isn't going to implode if he examines both factors simultaneously. Expenses are one of the few things in portfolio building that an investor has some control over, along with asset allocation - therefore it's at least as important.

I agree it's important but going back to the original train of thought, the OP had invited questions and comments on how he had set up his portfolio and some of the key feedback he got was that he had a lot of duplication in some areas while entirely missing others.

Linton was basically called out as a chump for suggesting that if the assets weren't allocated sensibly it didn't really matter what the current fees were, because they won't fix glaring holes in the portfolio. A top down portfolio review across asset classes, sectors and geographies is going to force you to make changes to fix the gaps to move the portfolio in the direction of your your goals and risk tolerance and once you know what you want to invest in you can decide how to invest.

So, the way I had read Linton's comment was focus on what type of sectors and assets should and shouldn't be in the portfolio and maybe even the next step of the strategy to consider the strategies for each asset class or sector - e.g. how to pick between different companies by: cheap cap-weighted indexes or equal weight or 'value' or 'high income' or 'growth' or 'low volatility' or whatever. When you get to the latter stages of that, clearly there is some consideration of fees and the relative merits of each approach.

However there is no point looking at the fees of the existing portfolio and for us all to be going 'hmm, that seems high' or 'hmm, that seems OK', if the portfolio is going to get ripped up and thrown in the trash with a brand new approach to asset and sector and geographical allocation coming in because the original one was garbage anyway. I'm not saying it was garbage, but clearly if the goal may end up as being not to have loads of funds focussed on UK or smallcap or UK smallcap, and to have more than zero funds with exposure to Japan and Europe... a priority is to decide what level of Japan and Europe is wanted and if that takes us back to the drawing board then the researching of cheapest possible funds in a sector that doesn't make the final cut, is wasted time.

I do agree that we should be able to multitask and consider the fees as part of gauging the suitability of a particular fund but I don't think the 'how much do each of the current funds cost' is as important as 'what to each of the current funds do and importantly what do they not do'

Some people seem to harp on about AA being more important than costs as an oblique way of criticising index funds, as if there's something fundamentally wrong with them.

There are two sides to the active vs passive debate which tends to create some animosity or them-vs-us feeling when it comes up; I don't intend to rehash the pros and cons here. Most of us can see that different ways of investing come at different price points and present different risk profiles and may be suitable for different objectives depending what those objectives are and what type of things you want to invest in and why. I use some index funds in a portfolio and a lot of non index funds ; others are the other way around.

I am sure some people deliberately try to avoid mentioning their favoured way of investing if they have 'taken a side' in the great active vs passive debate because bringing up one of those sides may spark comment from someone in the other camp about how their way is indubitably better for whatever reason and distract from the main thrust of the thread. It can be better to remain neutral to get through a problem without turning it into a bun fight!

You can say promoting asset allocation above costs is a veiled dig at index funds, others would say it is just common sense. Asset allocation can change the return of part of your portfolio by 30% and a fee saving on that part of your portfolio is usually significantly sub 1% following RDR.

So frankly yes, I promote asset allocation above investing strategy or style or pricepoint within each asset class. Then within the asset classes, some would consider exposures to geography or industry sectors and others might go on to look at strategies like value/income, growth, smallcap vs largecap etc within those geographies or industries. Perhaps just globally. Some might look at prices as more important than value vs growth or smallcap vs largecap, deciding that over time they will all have their day so fees is the focus. But this, IMHO is *after* one has decided on the asset classes and geographies and perhaps business sectors you are aiming for.

Even a staunch advocate of index trackers is going to suggest that you consider what things you would like to track before you go out and buy the cheapest tracker that fits. They would likely end up with a number of trackers filling different roles in their portfolio because it takes some work to be comfortable that you are diversified and have the right risk/reward.

It's especially annoying too see people come out with this sort of stuff because even if you disregard index funds, lower fund charges have a very strong correlation with higher returns - so costs should be one of the major parameters in any portfolio building exercise.

Nobody is prohibiting anyone from suggesting cheaper substitutes for anything in anyone's portfolio, whether an index fund or another active fund.

Giving less to the manager, equals more left for the investor: seems obvious. And a popular fund that is successful and attracts huge inflows can make a 0.3% charge or a 0.7% charge equate to a massive amount of absolute pounds per year, so some of these funds can afford to charge relatively little for great management compared to others who might be charging 0.9% or 1.1% for garbage. Obviously you can't ignore the outliers who charge above average if they are a gatekeeper to an asset class or mix of assets you really want to access and which would be a pain to construct yourself out of other products.

But the point I keep coming back to is that saying "Let's not get into fees now, because we should firstly consider whether all bases are covered" is a perfectly reasonable thing to do. If the bases are covered we can look to economise on fees and charges. If the bases are not covered we can consider the fees as we try to cover them.

And that might mean getting rid of a fund to make room, in which case we can consider how else to cover that other base as we do our researching and switching, which might involve looking at fees as part of that process to ensure we end up with something workable and efficient. However, I contend that fees are not the question to ask at the start, when the allocation to classes / geographies / industries needs work: they are something that will be reviewed when you have some semblance of structure.

InvestInPoker

You sold Jupiter financial opportunities then jabba? I remember you making a thread on that fund before.

Ryan_Futuristics

Re: Active vs Passive (and charges)

It's certainly a consideration ... However, studies pitting active vs passive are generally only talking tiny differences in total return (and often offset by lower volatility from active management) - so don't ever be dissuaded from picking an active fund if it fits a part of your portfolio better (and look at spreads, because many studies look at buy-and-holding a single fund; not managing a portfolio)

Two personal considerations:

- as trackers have exploded in popularity, their fundamentals have been pushed up (there may be a chicken & situation) ... Statistically, low valuations (low P/E, low Price/book) are the best predictors of future returns ... Everyone buying FTSE trackers today is pushing up valuations on the biggest companies (and this doesn't necessarily reflect underlying value) ... Meaning at some point - we may have already crossed - the popularity of trackers may become their Achille's heel (as tends to happen with every asset class)

- interestingly, Vanguard - whose studies 'sold' trackers to the world - are in a funny situation because their own range of active funds outperform their own trackers by a significant margin


Re: the portfolio

All I'd say is don't go on hunches ... Use a system (any system - CAPE, P/B, P/E, Graham allocation, magic formula, etc) of valuation to work out what's expensive and what's cheap; work out your own investment goals; and figure out an asset allocation based on the facts (what's done well for you so far is more likely due a correction)

Here are the cheapest (low CAPE) and most expensive countries right now
http://www.starcapital.de/research/stockmarketvaluation


Valuations on UK mid-caps look to be stretched, so personally I'd do as suggested and reduce the exposure to smaller companies ... We've had a 5 year bull market where it's been almost impossible to lose money - the next 5 look far less certain (we know we're going to be in a rising rates environment ... Traditionally this has favoured global dividend paying large caps)

Statistically, any significant growth will likely be coming from Europe and Emerging Markets - however there may be a fair few hurdles in the way first

TCA

Ryan_Futuristics wrote: »

Here are the cheapest (low CAPE) and most expensive countries right now

http://www.starcapital.de/research/stockmarketvaluation

I've been looking at something similar which has convinced me to go ahead and buy some Latin America exposure. Although admittedly I've been watching the sector for a while. Brazil presidential elections are imminent too, which I'm hoping will have a positive effect on markets.

Ryan_Futuristics wrote: »

Valuations on UK mid-caps look to be stretched, so personally I'd do as suggested and reduce the exposure to smaller companies ... We've had a 5 year bull market where it's been almost impossible to lose money - the next 5 look far less certain (we know we're going to be in a rising rates environment ... Traditionally this has favoured global dividend paying large caps)

Statistically, any significant growth will likely be coming from Europe and Emerging Markets - however there may be a fair few hurdles in the way first

I'm torn when looking at small caps given that although they've been on a great run, many have conceded their gains from the past year. I don't have any exposure at all and am tempted to pick some up now (the likes of SLS and BRSC) but I take your point that small companies could have further to fall.

Europe is the other area I'm looking at for more exposure, such as JEO and EAT, although the latter brings the small caps question to bear again.