Critique My Fund Portfolio - Don't Be Shy

Linton

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.

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.

There is nothing wrong with index funds if they invest in the things you want to invest in. It would be foolish in my view to invest in an index fund purely because it was an index fund and also foolish to refuse to invest in a sector because there were no index funds or the index was inappropriate - an example of the latter being sub FTSE250 small companies that the OP appears to like.

Simple observation will show that although lower costs have some correlation with higher returns (though its far from 100%), choice of sectors has a much larger effect. Sort trustnet's list by return and you will find that funds in the same sector cluster together whereas you can find high and low cost funds across the spectrum of returns.

So it is most efficient to choose a desired diversified set of sectors and then choose funds to access them. One factor could well be cost, another will be the extent to which the fund does follow your wishes for the sector. An example of this again can be found in small companies where the definition of "small" varies considerably between funds.

jabbahut40

InvestInPoker wrote: »

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

Yes. Good memory! After holding it for a few years I concluded that there were better funds out there.


Jabba

mark13

I am invested in Axa Fram. Biotech and getting some decent returns.

MrMalkin

Linton wrote: »

It would be foolish in my view to invest in an index fund purely because it was an index fund and also foolish to refuse to invest in a sector because there were no index funds or the index was inappropriate - an example of the latter being sub FTSE250 small companies that the OP appears to like.

Literally nobody has suggested this, but thanks anyway for the strawman.

The number of sectors that are not covered by effective trackers these days is actually quite small, and is generally limited to sectors which should form a minority of most investor's portfolios. At least half of the OP's portfolio was in sectors that are well covered by trackers so it's absolutely appropriate to consider using them.

Of course, you completely ignore that the OP had already presented his existing portfolio, which shows his thinking in terms of a desired asset allocation. So it's perfectly valid to suggest that he next decides to look at cutting costs where possible. But some people seem determined to steer these sorts of threads away from any hint of discussing indexing, which I think is irresponsible at best.

bowlhead99

MrMalkin wrote: »

But some people seem determined to steer these sorts of threads away from any hint of discussing indexing, which I think is irresponsible at best.

There are literally hundreds of threads on this forum and others that have discussed indexing and plenty of people who use those types of funds.

Some people are passionate advocates of index funds and will ram them into a thread at every opportunity. Some people dismiss them out of hand. Both those extremist / religious fundamentalist views are misguided IMHO. Clearly, cheap index funds can be valuable when used well, but every portfolio review doesn't have to start with "if you are paying more than 0.3% for fund management why not rip up the portfolio and start again with index funds".

So, it is not 'irresponsible' to fail to bring up index funds and rehash the active vs passive debate in every thread where someone is considering making an investment or looking at their existing investments. From my own point of view, I would prefer that we didn't have to have a multi-day conversation about what are the strengths and weaknesses of passive funds in every thread where anyone selects any type of fund, because I have read it all lots of times and contributed thousands of words to it myself, and I get bored.

Perhaps that is selfish and unfair to newbies who might want to go back to Investing 101 to learn about different types of funds that exist, in every thread, so they can be well informed about making fund choices from first principles for a given asset class. But it explains why I might choose to not try to get every thread entangled in that debate, when most people contributing to it are grownups who have been using this forums for years and have seen the arguments all over the place and perhaps do not need to be reminded of them yet again.

A completely standard approach to creating a portfolio is to see what types of assets you want and then consider what strategy you will adopt for each component of the portfolio (cap weighted index, equal weight index, voodoo magic, ethical, active stockpicking by a team reviewing fundamentals, consensus stockpicking following market momentum, etc etc). The start of that is seeing what types of assets you want: What percentage in Class A - equities; within that, what percentage in the subClass X - Asian equities; within that, percentage in the subsubclasss Y - Asian smallcap equities or subsubclass Z - Asian value equities. Once you have a roadmap of what you want, you can start.

Your suggestion in response to that was that '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.' Characterising us as 'harping on' about this, effectively an attack on our attitude or personality, seems an incredibly defensive argument as if there is some conspiracy theory and we are all out to get you and your index funds.

This is not the case. We are simply stating the facts that - disregarding the fact that most of us are capable of doing some level of of multitasking - if you had to pick between asset allocation and costs to look at first, then yes, asset allocation is more important than cost. To prove it: asset allocation can change your return on a part of a portfolio from massively positive to massively negative. 10, 20, 40, 60% swing. While a cost review cannot. 0.5% swing. Is this some sort of 'veiled dig at index funds'? No, not at all. It is pointing out that costs aren't everything therefore not the place to start a critique, while asset allocation is everything, so is the place to start a critique.

The extreme case to prove a point: deciding on awesome asset allocations but ignoring costs, simply risks you having a great diversified basket of investments paying 1.5% on them which is suboptimal. While deciding on an awesome costs structure that caps the fee at only 0.1%, gets you a UK ETF or US ETF at a great price but won't buy anything that covers Europe or Asia or rest of the developed or emerging world or anything non-equities. You dismiss that as a strawman argument and a misrepresentation of what you were saying, which I agree it is. The extreme case is merely put forwards to show that fees are less important than allocations because by focussing on minimum fees you lose exposure to certain assets, while assets are everything.

Anyway, there is no point falling out over it. Whatever we suggest to Jabbahut he has heard before and made some decisions. Pretty much every 6 months he is back with a new request to review everything he holds, give him ideas as he seeks validation that why his unbalanced portfolio which suits his specific preferences rather than our generalist advice, is now finally going to work. We've probably all participated in them before and will again.

Do any of these threads of his spring to mind?

*This thread "Critique My Fund Portfolio - Don't Be Shy"
"Review My SIPP Pension - What would you change?"
"Critique my S&S ISA & SIPP portfolio"
"Critique my S&S ISA/SIPP portfolio - What would you keep/change/add?"
"Assess my isa fund portfolio - what would you change?"
"Sample Portfolio Ideas - Help Required"
"Great trackers that should be in my portfolio...?"
"Critique My S&S ISA Selection"
"Help me rebalance my failing S&S ISAs Portfolio - Sept 2011"

As an example, if you go back two years - https://forums.moneysavingexpert.com/discussion/comment/55873041#Comment_55873041 - you can see that index funds are mentioned, quite amicably, and Jabbahut40, Linton and MrMalkin participating in the discussion.

Just as a bit of lighthearted banter... in that thread there was a great point about not just randomly picking funds from HL marketing bumf, but instead focussing on a plan for exactly what you wanted to hold and why in terms of asset allocation and investment classes, before going anywhere near the choice of specific funds, active/passive etc.

Besides, my point still stands - if he's just picked these funds based on HL's recommendation, how can he know that they will be better at helping him reach his goals (be they high return, low volatility, or whatever) than any other fund, active or otherwise?

Choosing the actual funds where you put your money should be among the last stages of building your portfolio, after stating your goals and identifying the investment classes, and the proportion of your investments that you put into each, that are most likely to get you to those goals. Using the HL wealth 150 and then working backwards is not a good way to build a portfolio.

I like that point. Ensure that the asset class allocations are really suitable before focussing on fees or strategy for each type of holding. I guess Mr Malkin does too, as it's his quote.

MrMalkin

bowlhead99 wrote: »

I like that point. Ensure that the asset class allocations are really suitable before focussing on fees or strategy for each type of holding. I guess Mr Malkin does too, as it's his quote.

I'm flattered that you feel the need to go through my entire posting history, but your analysis of what I said isn't correct. I'd firmly place cost control as part of the 'stating your goals' part of portfolio building, which is consistent what I've been saying in this thread.

You've posted an awful lot of words whilst completely missing my point. It was Linton who made the first mention of trackers in this thread in an eventual response to a a fairly basic question about what the costs were of each of the funds. The jist of the conversation from then on was that we shouldn't be discussing costs, because that leads to trackers, and because they might not be appropriate for some investment classes, by jove we can't possibly be discussing those, can we?

As I said in my first post in this thread, costs matter even within the active world. Low costs have a high correlation with returns, and moreover in my view low costs are one of the few ways of distinguishing actual management skills - keeping trading and associated costs low demonstrates a certain level of conscientiousness and professionalism on the part of a fund manager. That is why it is irresponsible to steer the conversation away from cost control (or even in this case any discussion of the charges at all), indexing or no indexing.

bowlhead99 wrote: »

To prove it: asset allocation can change your return on a part of a portfolio from massively positive to massively negative. 10, 20, 40, 60% swing. While a cost review cannot. 0.5% swing.

I'm sorry but you don't understand the difference between relative and absolute percentages, and you haven't 'proved' anything.

Investment classes, over the long term, tend to have fairly steady average expected returns. These generally fall somewhere along the range of 1% for cash, 3% for bonds, 5% for stocks, and perhaps 6-7% for more exotic stocks like emerging markets or small caps. Within these bands, cost savings of anywhere from 0.1-1% are nothing to be sniffed at.

Ryan_Futuristics

TCA wrote: »

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.



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.

I'm pondering Latin America too ... But as with Russia, they are very tricky markets to value - on earnings per share, some say Brazil's looking slightly overvalued (at least in the near-term)

So I've been getting most of my exposure through Lazard Emerging Markets (which has Brazil and Russia in its top 3), and Murray International has a fair bit in Brazil too

With me what it comes down to is lack of conviction in any one region ... I've thought about having a pure CAPE component in my portfolio - a dozen ETFs tracking the cheapest countries, and rebalance so I'm always holding the cheapest ... Or Meb Faber runs the Cambria GVAL ETF, which tracks them for you ... But generally I use Morningstar's fund analysis (and a spreadsheet) to track my portfolio's overall P/E and P/B, so I know it's at least in the cheaper half of the spectrum


On small and mid-caps, Woodford certainly seems to think there's value to be found in smaller companies - but I think very much a stock-picker's market

The FTSE 250 looks a bit expensive, with a P/E of 18 - so the consensus seems to be a gradual correction, dropping a bit further
http://91.235.121.4/objects/csv_to_table.jsp?infoCode=NGUK&theseFilters=&csvAll=&theseColumns=MCwxLDIsMyw0LDU=&tableTitle=FTSE%20UK%20Index%20Series%20Values

There are good multicap funds like Liontrust Special Situations, which can rotate towards or away from smaller companies through the market cycle (that managed to get all the upside of the mid cap boom recently, and now seem well positioned with large caps)


And I'd love to buy JEO - had an outstanding run recently ... But looking at its regional allocations, it's all firmly in the most expensive parts of Europe now (Denmark, Germany ... That fund's performance tracks how they got expensive) ... But the new TM Sanditon European is apparently targeting cheap peripheral Europe (Italy and Spain) - Chris Rice had a great run on Schroder's European funds ... Also small-caps might really benefit in Europe if we get QE

TCA

Ryan_Futuristics wrote: »

I'm pondering Latin America too ... But as with Russia, they are very tricky markets to value - on earnings per share, some say Brazil's looking slightly overvalued (at least in the near-term)

So I've been getting most of my exposure through Lazard Emerging Markets (which has Brazil and Russia in its top 3), and Murray International has a fair bit in Brazil too

Russia is probably somewhere I'm not brave enough to invest in with any conviction, although I have been tracking JRS with interest. I hold Murray International and will likely buy Aberdeen Latin American Income (ALAI) in the next couple of days, seeing as its dropped a bit recently. A very long-term purchase potentially.

Ryan_Futuristics wrote: »

And I'd love to buy JEO - had an outstanding run recently ... But looking at its regional allocations, it's all firmly in the most expensive parts of Europe now (Denmark, Germany ... That fund's performance tracks how they got expensive) ... But the new TM Sanditon European is apparently targeting cheap peripheral Europe (Italy and Spain) - Chris Rice had a great run on Schroder's European funds ... Also small-caps might really benefit in Europe if we get QE

Yes, JEO is about 17% Denmark from memory. The majority of it is in two companies, one of which is global healthcare and the other is global biotechnology. I don't hold much in either of these sectors, so kind of tempted by it despite the valuations. But my head tells me if I really want such exposure, there are maybe other better ways to do it. Must have another look at TM Sanditon.

Ryan_Futuristics

MrMalkin wrote: »

Literally nobody has suggested this, but thanks anyway for the strawman.

The number of sectors that are not covered by effective trackers these days is actually quite small, and is generally limited to sectors which should form a minority of most investor's portfolios. At least half of the OP's portfolio was in sectors that are well covered by trackers so it's absolutely appropriate to consider using them.

Of course, you completely ignore that the OP had already presented his existing portfolio, which shows his thinking in terms of a desired asset allocation. So it's perfectly valid to suggest that he next decides to look at cutting costs where possible. But some people seem determined to steer these sorts of threads away from any hint of discussing indexing, which I think is irresponsible at best.

Just my own personal reservation with index trackers is that while we've just come out of a good run - with lots of stimulus propping up the markets - simple cap-weighted funds with low charges have been hard to knock ... Everything's grown roughly in proportion

The big uncertainty now is how much market growth and valuations really reflect underlying growth, and to what extent the largest sector weighted countries and companies are now overvalued

Most investors probably won't be seeking broad market exposure now - instead the challenge is to find value in regions, sectors and companies that haven't grown or have been overlooked ... And trackers are evolving with that - we're getting more value-based trackers - you can create new indexes, using valuation metrics - but then the charges and approaches can blur quite a bit with active management ... I actually struggle to find cheap trackers giving me exposure to markets I'm interested in - otherwise I'd use more

Ryan_Futuristics

TCA wrote: »

Russia is probably somewhere I'm not brave enough to invest in with any conviction, although I have been tracking JRS with interest. I hold Murray International and will likely buy Aberdeen Latin American Income (ALAI) in the next couple of days, seeing as its dropped a bit recently. A very long-term purchase potentially.



Yes, JEO is about 17% Denmark from memory. The majority of it is in two companies, one of which is global healthcare and the other is global biotechnology. I don't hold much in either of these sectors, so kind of tempted by it despite the valuations. But my head tells me if I really want such exposure, there are maybe other better ways to do it. Must have another look at TM Sanditon.

I'm actually hoping for a market correction next year so I can pick things like JEO up on the dip

There it is on Morningstar - one of the best rated in the sector
http://tools.morningstar.co.uk/uk/cefreport/default.aspx?tab=8&vw=f&SecurityToken=E0GBR01DOK]2]0]FCGBR$$ALL&Id=E0GBR01DOK&ClientFund=0&CurrencyId=GBP

The P/E at 20 doesn't look terrible, but the Price/Book at 4 is high (I think it's only looking at their top 10 holdings, but probably tells the tale) ... I think of Murray International as fairly expensive, and that's only at 15 and 2 ... Hopefully Sanditon will release the full details of the fund soon - Neptune European Opportunities is one I'd been considering for its exposure to cheaper regions