Current market carnage - anyone selling or buying?

redux

I've decided I like the random Scrabble method, as I may have unconsciously followed it.

Much of one of my pension funds is in JP Morgan investment trusts, usually including the letter J. And I also have a Jupiter trust, which has multiplied by about 8 in the time the FTSE 100 plus reinvested dividends would have made about 2.5 times.

Now I can't make up my mind between JDTZ and JZCZ, though it's a simpler decision since the end of JPZZ.

N1AK

Linton wrote: »

Only if you make questionable assumptions. Look at the 10 year data for the UK all companies sector. There isnt much evidence that the trackers are rising up the performance list. Suggest you try the following...

5) Search down the fund list to find the highest all-share tracker. The highest I could find was the Scot Mutual All-share tracker at 54%. There are quite a few all share tackers at 40-50% return.

Surely after 10 years there ought to be any inherent advantage of an all share tracker should have become apparent.

You really don't seem to get the point of passive investing. The core principle of following the market means its extraordinarily unlikely to to ever be at the top of performance tables, and that's fine because the point is to increase your chances of getting a good return by avoiding the risk of selecting under-performing active investments.

The method you are using is flawed. The fund selection you see is only active funds, any that failed during the 10 year period aren't in the comparison which distorts the figures. It also includes funds that have been running for short periods; the best performer is 5 years old which means it wasn't around during the crash.

Over long periods (and I would call 15-20 years the beginning of long) I'd expect to see market trackers approaching the top of performance tables.

Passive investing is about sacrificing the chance of huge returns for a high chance of good returns and a much lower chance of poor returns.

N1AK

bowlhead99 wrote: »

But something simple and cheap like "6 monthly rebalanced equal weight" is a reasonable concept IMHO for broad midcap exposure.

My issue with equal weight investing is that it seems even more arbitrary than cap weight investing. The logic appears to be that small companies perform better, and if someone really believed that would remain true then why not just invest in small caps and forget about large caps entirely.

masonic

N1AK wrote: »

My issue with equal weight investing is that it seems even more arbitrary than cap weight investing. The logic appears to be that small companies perform better, and if someone really believed that would remain true then why not just invest in small caps and forget about large caps entirely.

Well, if you are looking to apply some logic and believe that small caps are the place to invest, then, logically, the last thing you want to do is opt for a cap-weighted fund that invests the vast majority of the fund in the largest small caps.

The ideal case would be a balanced (by industry/sector) selection of small caps held with a LTBH strategy, where the weightings for each company have been arrived at rationally. This could be achieved by an equal weight index tracker, self select, or an active fund in which this strategy is employed. The tracker may not give you the balance that you require, in which case the more expensive options may be worth paying for.

Linton

N1AK wrote: »

My issue with equal weight investing is that it seems even more arbitrary than cap weight investing. The logic appears to be that small companies perform better, and if someone really believed that would remain true then why not just invest in small caps and forget about large caps entirely.

No - the logic is that there is no reason why a large company should perform better than a small company, if there was then cap weighted would be a no brainer. There is evidence to the contrary. Why not go completely to small cap (or completely large cap)? Easy - diversification. A small drug company is likely to be mainly into research. a large drug company more likely to make drugs. A small oil company is more likely to be focussed on exploration. a large company on supply. A small house builder probably goes for more up-market houses than a large one. A small software developer isnt a mini Microsoft and a small chain of shops isnt a mini Tesco.

As to whether the advantage of small caps remains true over extended periods - look at the evidence. Taking average funds (IA sector index) in each sector to avoid survival bias...

Europe:Small companies has beaten the wider market over 1,3,5, and 10 years and over 3 of the individual past 5 years. In the good years it has performed a lot better, in the bad years slightly worse.
UK: Ditto
Japan:Small companies beaten wider market over 1,3,5,10 years and over each of the individual past 5 years
US:Small companies win only at 10 years and in 2 of the past 5 years

Note that most academic results come from the US.

chucknorris

I've invested a little, but mostly I have been switching, to lock a loss in. I had to reverse my previous bed and breakfasting, so I didn't obtain any losses until I had offset my previous £11k of locked in gains, which of course would have been tax free.

bowlhead99

N1AK wrote: »

My issue with equal weight investing is that it seems even more arbitrary than cap weight investing. The logic appears to be that small companies perform better, and if someone really believed that would remain true then why not just invest in small caps and forget about large caps entirely.

Small companies DO generally perform better over the long term, albeit with greater volatility. In the booms they can grow faster (a company that already has 60% market share cannot double its market share) but in the busts they are more vulnerable.

Long term, markets go up more than down hence investors in small and mid sized companies get to play that advantage. Most people are not up for putting all their money in mid caps and small caps and fledgling and venture because the risk and volatility is higher, despite the long term return prospects. But they will gladly weight their profile to give a decent allocation to a sector with such strong long term prospects. As the researchers noted in the links above, "size factor" plays an important role in returns.

The volatility from year to year (and the chance of being wrong long term after all, due to the research assumptions falling down) is why people will of course diversify and include larger companies in their portfolio and not just small ones. As Linton said, different company types exist in the two universes, when looking within sectors. Typically an investor will include more larger companies than smaller companies because they're easier/cheaper to invest in and may be perceived as more 'reliable'. The latter is perhaps 'risk/reward trade-off'. But if you're looking long long term, established small companies do perform better than larger ones.

This is not to say that Apple didn't get to where it is today by being a strong performer or that ABCXYZ small company that went bust wouldn't have taken longer to go bust if it was bigger. But academic results seem to support the case for investing in smaller companies, which is why things like 'smart beta' index funds are starting to exist. As an attempt to fix the flaws in investing via 'cap weighted' indices which give overly high allocations to megacaps and large caps based on size alone. Large size is an indicator of historic performance and not future performance.

george4064

One thing I'd like to add regarding smaller companies, particularly UK smaller companies.

Many of these smaller companies ride out these so called 'bear' markets better than larger companies, because relatively a lot of their earnings and business interests are much more concentrated to within the UK.. Whereas a lot of larger companies have interests and generate a lot of revenue from abroad, which explains why they can get so caught up in these volatile markets.

bowlhead99

But that's the same with any sized company and the argument can be flipped on its head. Yes if you are a UK focussed company with no imports or exports you will be less likely to be wiped out by issues which are broadly international. You will be more likely to be wiped out by local issues. If you are an internationally- focussed company you will be less affected by local issues and more likely to be hit by broad international themes.

So if we accept the generalisation that smaller companies are more locally focussed then its true that one particular type of issue will help or hinder them. If there are ten broad regions in the world and they all take turns to be on top and on bottom, then once every ten years they will have a great time and once every ten years they will have a bad time when it's that country's turn to have a great time or a bad time.

The internationally focussed company will have 1/10th exposure to a good year from one region and 1/10th exposure to a bad year from another region and 8/10th average years from the other regions. So each year it will have a broadly reasonable time.

Yes I know major markets are correlated with each other so you do get periods of good and bad which drag out a long time internationally. It's just an example.

So, as far as the theory goes, yes smaller companies can be more insulated from international issues but it puts them in a riskier and more volatile position because they are not taking the average result of the planet, they have to take the local boom or bust whatever it may be. I don't think you can say this is better because they hide from the international issues as if that makes them less volatile. It makes them many times more exposed to local volatility instead.

N1AK

bowlhead99 wrote: »

Small companies DO generally perform better over the long term, albeit with greater volatility...

Large size is an indicator of historic performance and not future performance.

Small companies have generally performed better, they may well be likely to continue to do so but it isn't a known fact that they will. As to your second point, the rest of your post is actually saying large size is an indicator of future performance: You're saying they will perform less well than smaller cap companies.

I don't have a view on small caps and performance, I'm happy to accept they have done better previously and am open the idea they will do so in future.

My point was that if someone believed small companies were going to outperform then why not pick funds focused on small companies for the proportion you want to invest in them rather than the arbitrary allocation of the same amount to each company in an index like the FTSE All-Share?