Critique my Investment Strategy

HSVX

Ryan_Futuristics wrote: »

I'd recommend 10-15% in P2P lending - I use RateSetter and Funding Circle ... The investment world's still cautious about it, but in an age where income's so hard to come by, and valuations are a bit precarious, a steady 6-8% return is a very useful thing to have

Peer-to-Peer lending is a good idea actually for a bit more diversification. Will look into it some more. I always wondered why the rates you can achieve vary quite significantly across the platforms (with Funding Circle being the highest of the most popular ones I've looked at).

masonic

Ryan_Futuristics wrote: »

They're diversifiers - not extreme Alpha generators

Buy Newton, GARS and Troy Trojan and you've got about 50 different strategies, and almost every asset class under the sun - and a total exposure of about 15% to bonds

Buy a strategic bond fund and you're 100% exposed to bonds ... The whole point of these funds is that they're not reliant on any one type of market, and are unlikely to crash when a single asset class does

50 different strategies would make my skin crawl. Anyway, my point is that these funds have looked like bond funds because that's what they have been primarily invested in. No point benchmarking them against the FTSE100.

And yes, I wouldn't advise anyone to put 100% into bond funds, nor 100% into a FTSE100 tracker. Diversification is key. But these absolute return funds don't seem to be benefiting much from their strategic asset allocation.

Ryan_Futuristics

HSVX wrote: »

Peer-to-Peer lending is a good idea actually for a bit more diversification. Will look into it some more. I always wondered why the rates you can achieve vary quite significantly across the platforms (with Funding Circle being the highest of the most popular ones I've looked at).

I think RateSetter and Funding Circle are very comparable ... Both set quite a high bar for borrowers, and have good track records

RateSetter should get you about 6.1%, but they use some of the money investors earn to sustain a group fund, so that when a borrower defaults on a loan, they can simply pay you back from that ... And this makes it feel very safe (Trustnet I think rate it a 1 risk rating, which is effectively as safe as money in the bank)

Funding Circle doesn't have this safety net, but lets you decide how much risk you expose yourself to ... I currently get about 10.5% from FC, but it estimates the long-term return will be closer to 7% (once you factor in debt defaults)


Some of the smaller firms offer much higher rates, but I think you'll always be moving up the risk/reward spectrum with them

The worst case scenario with P2P lending platforms are that default rates climb to unsustainable levels - in which case they just turn into platforms for giving away money ... One platform's already gone down with 100% default rates

Ryan_Futuristics

masonic wrote: »

50 different strategies would make my skin crawl. Anyway, my point is that these funds have looked like bond funds because that's what they have been primarily invested in. No point benchmarking them against the FTSE100.

And yes, I wouldn't advise anyone to put 100% into bond funds, nor 100% into a FTSE100 tracker. Diversification is key. But these absolute return funds don't seem to be benefiting much from their strategic asset allocation.

Think of them as a hedge against a future not yet known ... The risk of a low rates environment is you lose the diversification benefits between bonds and equities

Rates go up, and both may come crashing down a bit ... The same could be said for property (which has also soaked up a lot of QE money) ... So I don't think any investor would say it's an easy period we're moving into ... The demand for Alternatives is certainly on the rise

Here's a look at Yale's portfolio from recent years - average returns 15.6%, with bond-like volatility

masonic

masonic wrote: »

But these absolute return funds don't seem to be benefiting much from their strategic asset allocation.

On the subject of absolute return funds, I thought I'd go back and revisit one of the ghosts from my past: Blackrock UK Absolute Alpha. This was flavour of the month at HL and went solidly into their Wealth 150. If you zoom out to 10 years, you can see why. 45% returns in the first 3 years, giving equities a run for their money, and very little volatility. What's not to like?

Well, when the skies started to darken in 2008, I thought I'll have a piece of that. Well it didn't do me much harm at the time, and fortunately I switched it back into equities when I was cleaning up my ISA in April 2009 (luckily catching the bottom of the market). Over the last 5 years it has delivered 4.2%, or 0.8% annualised. I see it is no longer in the Wealth 150.

Ryan_Futuristics

masonic wrote: »

On the subject of absolute return funds, I thought I'd go back and revisit one of the ghosts from my past: Blackrock UK Absolute Alpha. This was flavour of the month at HL and went solidly into their Wealth 150. If you zoom out to 10 years, you can see why. 45% returns in the first 3 years, giving equities a run for their money, and very little volatility. What's not to like?

Well, when the skies started to darken in 2008, I thought I'll have a piece of that. Well it didn't do me much harm at the time, and fortunately I switched it back into equities when I was cleaning up my ISA in April 2009 (luckily catching the bottom of the market). Over the last 5 years it has delivered 4.2%, or 0.8% annualised. I see it is no longer in the Wealth 150.

Absolute Return is an utterly vague description ... Anything generating 45% returns is going to be exposed to more downside than something generating a steady 5% with a cash-like Sharpe ratio

If you are going to look into Absolute Return funds as a long-term capital preserver, I'd hold at least 3 or 4, and look for funds which have held up well through choppy market periods, and aren't too exposed to bonds or equities ... As part of an AR portfolio, that BlackRock fund would've held up fine

If I didn't mind 20-30% of my portfolio being in P2P lending, it would be much easier to choose it instead ... I'd see AR and P2P lending as part of a sensible Alternatives allocation

masonic

Ryan_Futuristics wrote: »

The demand for Alternatives is certainly on the rise

I can agree with you that there is certainly demand for alternatives. However, absolute return itself is a pure active management play. My post above illustrates how fortunes can so easily change... 45% over 3 years, down to 4% over 5. It wasn't just me and HL that didn't see that coming, Here's a Trustnet article from 2009 lauding that fund and showing how many multi-manager funds were using it. Well I bet it didn't do much for their returns since then.

masonic

Ryan_Futuristics wrote: »

Absolute Return is an utterly vague description ... Anything generating 45% returns is going to be exposed to more downside than something generating a steady 5% with a cash-like Sharpe ratio

I can get a steady 4% risk free. I'm not really interested in 5% with any potential downside.

Ryan_Futuristics

But with BlackRock you've got to give them credit for the good years too ... If you think that's unstable, you should see what Venture Capital funds often look like over periods shorter than 10 years - you wouldn't want to touch most of them with a bargepole

The question is what would these AR funds look like if we'd had the kind of market downturn Japan had in the 80s - which it took decades to recover from

If bonds, equities and real assets hit a rough patch, you may just appreciate having 10-20% of your portfolio running long/short strategies and trading currencies ... There's no reason they should do any worse even when other portfolio staples are in meltdown

masonic

Ryan_Futuristics wrote: »

But with BlackRock you've got to give them credit for the good years too ... If you think that's unstable, you should see what Venture Capital funds often look like over periods shorter than 10 years - you wouldn't want to touch most of them with a bargepole

I don't have to give them credit for the good years. They obviously got lucky for a short period. I don't think the fund is unstable, I think it's a dog. No wonder the lead manager left in disgrace recently. Essentially their short positions and hedging strategies have completely cancelled out the gains from their long positions over a sustained period of rising markets. What on earth were they thinking?

The question is what would these AR funds look like if we'd had the kind of market downturn Japan had in the 80s - which it took decades to recover from

If bonds, equities and real assets hit a rough patch, you may just appreciate having 10-20% of your portfolio running long/short strategies and trading currencies ... There's no reason they should do any worse even when other portfolio staples are in meltdown

Currency speculation and the like is a bit esoteric for me. Maybe the right fund would be able to navigate those choppy waters, but good luck identifying it in advance.