Robo or VLS?

BLB53

One of the reasons why VLS does have such a heavy US bias, is because the US market is easier (and therefore cheaper) to passively manage

No, the reason is that the US market represents around 50% of global market cap. I think the weighting for VLS is less than this maybe ~40%.

There are no perfect allocations but I think one that roughly reflects most of the global markets will work out much better long term than one which has 75% of its allocation in a market which is less than 10% of global market cap.

gadgetmind

BLB53 wrote: »

No, the reason is that the US market represents around 50% of global market cap.

Well, quite, and the reason why for the global cap allocation is because there is then no need to rebalance, which avoids trading costs.

However, even Vanguard boost the UK allocation from the 8% a cap weighting would suggest to a dizzying 25%. Their reasons are explained on page 9 here.

https://www.vanguard.co.uk/documents/adv/literature/target-allocation-approach.pdf

A 75% UK allocation seems to be missing a lot of global opportunities to me.

BLB53

A 75% UK allocation seems to be missing a lot of global opportunities to me.

Agreed - I think this robo adviser is pretty clueless tbh.

grey_gym_sock

Al. wrote: »

VLS might be right for you. I think the turnover is somewhere in the region of 9/9.5%. Many managers confuse activity for progress, but VLS activity (or the lack of it) will be illuminating when the year is done.

but aren't turnover stats calculated in a misleading way? something like:

( sales + purchases ) / average_size_of_fund

when many the sales / purchases are made to handle redemption / creation of units. what you really want to know is: supposing i held N units throughout the year, how much of my capital would have be switched between different investments. but as it's calculated, a high turnover may just be indicative of a fund which is growing or shrinking rapidly.

masonic

BLB53 wrote: »

So, a digital adviser which is programmed to recommend 75% of the equity element of a portfolio should be allocated to the UK.

Surely it is in need of some serious re-programming - I think some human advisers may come unstuck with such a heavy UK bias.

Interestingly, when I went through the process it put me in risk grade 10 and suggested a portfolio that was only 25% UK, which was broadly in line with the home bias of VLS. Where it differed was that it allocated 35% to emerging markets, which is a little more than conventional wisdom might dictate. As it happened, I held around 30% in EM over the first 5 years of my investment journey, trimming it back to around 20% subsequently where it still lies today. Perhaps there is an argument for me to ratchet that back up now, or during the next period of carnage which may not be too far away.

My main area of disappointment was the lack of exposure to smaller companies. The holdings were all market cap weighted trackers, so the only exposure came from markets composed of somewhat smaller companies (such as EM). Replacing the FTSE All share tracker with a FTSE 250 tracker could go some way to addressing that (an idea I borrowed from a previous poster who claimed to be an actuary and use the 250 to replace UK active managed funds in his passive portfolios). I aim for about 30% smaller companies exposure at present.

There was obviously an underweight to the US (which I would be quite happy with at the present time) and Europe (which I'd be less happy about). Whether these are market valuation-based management decisions or simply the result of UK bias and strong EM overweight I don't know.

My question to Al based on what I have seen (albeit from a risk grade that is not within the bounds most people fall between) would be: Is there a strong commitment to stick with low cost trackers in order to keep the overall ongoing charge down, do you have a strongly held belief that a pure passive approach is best, or do you just believe at the present time a purely passive portfolio will deliver the best results and you would invest clients into active funds under different economic circumstances?

masonic

grey_gym_sock wrote: »

but aren't turnover stats calculated in a misleading way? something like:

( sales + purchases ) / average_size_of_fund

when many the sales / purchases are made to handle redemption / creation of units. what you really want to know is: supposing i held N units throughout the year, how much of my capital would have be switched between different investments. but as it's calculated, a high turnover may just be indicative of a fund which is growing or shrinking rapidly.

With a fund of funds like VLS, Vanguard presumably won't incur costs for trading in its own sub-funds, and turnover of the underlying holdings will be dictated by the composition of each index, net inflows/outflows (as you point out) and rebalancing insofar as this creates net inflows and outflows in the sub-funds.

Al.

grey_gym_sock wrote: »

but aren't turnover stats calculated in a misleading way? something like:

( sales + purchases ) / average_size_of_fund

when many the sales / purchases are made to handle redemption / creation of units. what you really want to know is: supposing i held N units throughout the year, how much of my capital would have be switched between different investments. but as it's calculated, a high turnover may just be indicative of a fund which is growing or shrinking rapidly.

I wouldn't calculate it like that. I'd determine the portfolio NAV and divisible into trading activity (less sales or purchases). Bear in mind that trading costs don't apply anyway; that cost is already padded in.

I don't think I fully understand your final point, although I think we'd both agree that trading can be a sign of light verses heat, especially as we approach bonus season.

I downplayed the point earlier because of that very reason, and didn't see the need to get involved in a 'my managed portfolio is better than yours' bunfight. A fund manager may have sold the crown jewels to make him/herself look good but be left with two cars in the drive as a consequence and not much in the fridge.

I'm sure you've looked at the Alpha, Beta etc.. any thoughts on that? I like the L+G Multi Asset funds too, 7IM, BlackRock Consensus - VLS seems to have captured the moment though. I'm not averse to using any of them (and VLS) - and do.

In the context of Fiver a Day, I decided against it. They didn't offer the functionality I need to offer the service at a price that's serviceable, viable, attractive and reasonably profitable.

masonic

BLB53 wrote: »

Agreed - I think this robo adviser is pretty clueless tbh.

In the context of 80% being invested outside of equities, I found the 1% allocation to Japan and 2% to Europe a little more comical. Is there any point? Will the performance of a 1-2% allocation be material to overall portfolio returns?

Al.

masonic wrote: »

Interestingly, when I went through the process it put me in risk grade 10 and suggested a portfolio that was only 25% UK, which was broadly in line with the home bias of VLS. Where it differed was that it allocated 35% to emerging markets, which is a little more than conventional wisdom might dictate. As it happened, I held around 30% in EM over the first 5 years of my investment journey, trimming it back to around 20% subsequently where it still lies today. Perhaps there is an argument for me to ratchet that back up now, or during the next period of carnage which may not be too far away.

My main area of disappointment was the lack of exposure to smaller companies. The holdings were all market cap weighted trackers, so the only exposure came from markets composed of somewhat smaller companies (such as EM). Replacing the FTSE All share tracker with a FTSE 250 tracker could go some way to addressing that (an idea I borrowed from a previous poster who claimed to be an actuary and use the 250 to replace UK active managed funds in his passive portfolios). I aim for about 30% smaller companies exposure at present.

There was obviously an underweight to the US (which I would be quite happy with at the present time) and Europe (which I'd be less happy about). Whether these are market valuation-based management decisions or simply the result of UK bias and strong EM overweight I don't know.

My question to Al based on what I have seen (albeit from a risk grade that is not within the bounds most people fall between) would be: Is there a strong commitment to stick with low cost trackers in order to keep the overall ongoing charge down, do you have a strongly held belief that a pure passive approach is best, or do you just believe at the present time a purely passive portfolio will deliver the best results and you would invest clients into active funds under different economic circumstances?

A good post. The exposure to EM was ratcheted up relatively recently. I see in a mailshot that Hargreaves Lansdown in pushing the First State Asia fund like mad at the moment too. Because a sector or region is out of favour, it doesn't mean it's a bad fund. Do you have a Lipper subscription? Go there and have a look where the money is going. It makes for interesting analysis.

You make a good point about the cap weighting. Do you think that small mid caps have seen the decent growth in value though, that they're gong to see, for a while? Again, and I didn't want to get into a spat about the US issue, you're right about the US loading. VLS will make for interesting reading at the end of Q4.

Your final point is prescient. I'm a long term convert of Passives, but not in any circumstance. I hope to offer an active/passive option in Feb/Spring next year. My one big reservation is that I started Fiver a Day with a view to achieving simplicity and affordability. I'd dilute that ethos if I went into Active.

On a conventional level, I am not averse to Actives. In summary, and not wanting to dodge the question, I am not oblivious to the faults of Passives (I love smart Beta) but for Fiver a Day, it's the most ideal solution. It captures what I'm trying to achieve - less outgoings in costs, more for compounding and critical mass.

Notwithstanding your opinion of the service (I appreciate your earlier constructive criticism), what was your view of the mechanics of the process?

Al.

masonic wrote: »

In the context of 80% being invested outside of equities, I found the 1% allocation to Japan and 2% to Europe a little more comical. Is there any point? Will the performance of a 1-2% allocation be material to overall portfolio returns?

You wouldn't have exposure to that much Alpha/Jensen - or not at all, or far more? Bear in mind that it's a principle that's being applied, and the principle applies to portfolios across the risk spectrum. Just as it also might, to fixed interest.