Current market carnage - anyone selling or buying?

N1AK

masonic wrote: »

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.

I agree completely that cap-weighting is antithetical to a strategy based on small cap smart beta. My issue was that equal-weighting on the same index is just a less bad way of doing it.

I guess I also find it odd that with equal weighting you'd be continuously selling off stock of a small company that did well and grew in value (to maintain equal weighting) while pumping money into Tesco, for the sake of example) while its valued tanked. We're talking about markets, so I appreciate that almost anything could be true, but that just sounds so bizarre as an intended strategy.

Linton

N1AK wrote: »

.......

I guess I also find it odd that with equal weighting you'd be continuously selling off stock of a small company that did well and grew in value (to maintain equal weighting) while pumping money into Tesco, for the sake of example) while its valued tanked. We're talking about markets, so I appreciate that almost anything could be true, but that just sounds so bizarre as an intended strategy.

Isnt that an argument against any balanced portfolio eg VLS or the multi asset fiunds?

In your example a cap weighted fund would have held far fewer shares in the small company and so any benefit to the fund as a whole of that company doing well would be far less than with an equal weighted fund. Conversely when a major company declines the effect on the overall fund is much less significant than with a cap weighted fund.

masonic

N1AK wrote: »

I guess I also find it odd that with equal weighting you'd be continuously selling off stock of a small company that did well and grew in value (to maintain equal weighting) while pumping money into Tesco, for the sake of example) while its valued tanked. We're talking about markets, so I appreciate that almost anything could be true, but that just sounds so bizarre as an intended strategy.

It might seem bizarre, but holding investments in defined weightings and rebalancing to a target asset allocation is what many people (even passive investors) do using a top down approach, and the principles of doing so with individual stocks are the same. If you want to explore those principles in more detail, I'll direct you to bowlhead's 'post of the month' from last year:
https://forums.moneysavingexpert.com/discussion/5208032

bowlhead99

N1AK wrote: »

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.

That's true, it's only a common sense theory backed up by research and may not hold true forever - much like other scientific theories, better ones may come along.

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.

Sorry, to clarify: a large company is large because it grew from something. It demonstrated historic performance. This in itself does not imply anything positive about future performance relative to other investments which now exist in your investment universe. The growth to make it a large company, happened when it was small and mid!

As such, the fact that it has at some point successfully now grown to be large or mega-cap, doesn't mean it is the best thing to invest in now (e.g. skew your portfolio outrageously to put 20%+ of your FTSE all-share money into the top 5 companies, 60% into the next 95, and only 20% across all of the next 500).

What I was saying was, it's big because it grew, it doesn't mean that it will grow because it's big. The size now doesn't imply that it will grow well now.

And as you point out, in fact my contention is that it will grow less well. So I am saying size is a factor in the rest of my post. In this sentence I'm just highlighting that large does not equal better, from a long term performance perspective. Later I will go on to say small does equal better, so inherently large does equal worse, and size does matter :-)

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?

Actually, dedicated allocations to smaller companies is generally what I do. But if you were looking to just use one fund, I was just noting that the premise of cap weighting your basket of stocks resulting in very minimal allocations to small companies is the exact opposite thing you would want to do to maximise long term performance. Instead, you could perhaps use an equal weight index to ensure you got 1/3rd big, 1/3rd medium and 1/3rd small.

You don't know that Exxon is going to give a better return than Tesco so you don't need to put 18x as much money into it, just like you don't know which will be the best supermarket so you don't need to put 50% more in Tesco than in Sainsbury and Morrison combined. And in any case, more of the growth will probably come from the energy and retail companies of tomorrow rather than the big ones now. So keeping a decent allocation to big caps (stability, low volatility, perhaps higher dividends) while also having a decent allocation to mid- and small-caps (more volatile but more growth) seems to be something that is better achieved with an equal weight All-Share rather than a cap-weighted All-Share

The downside of using an equal weight index vs an easy cap weight index is that it is not practical to retain the equal weights day in day out so you have to pick a rebalance period and then bear the administration costs of rebalancing at that frequency. But rebalancing can get you to a decent overall result without ever having too many eggs in one basket - and so is something people who do not try to have 'one tracker fits all' portfolios will be quite familiar with paying for.

SallyG

http://www.telegraph.co.uk/finance/personalfinance/investing/funds/12114992/Which-funds-best-protected-investors-as-the-FTSE-100-fell-into-a-bear-market.html
reports BlackRock 100 UK Equity, one the cheapest trackers, costing 0.07pc a year, has virtually matched the market’s loss. It is down 18pc since April 27 2015.
The ten worst performers during the bear market are highlighted below.
Fund name Performance since April 27, 2015
Standard Life Investments UK Equity Recovery - 27.7pc
Dimensional UK Value -24.8pc
Schroder Recovery -23.2pc
M&G Recovery -22.6pc
Scottish Widows UK Select Growth -22pc
UBS UK Equity Income -21.6pc
Aberdeen UK Equity -21.4pc
UBS UK Opportunities -21.4pc
Cavendish UK Select -21.4pc
Aberdeen Global UK Equity -21.3pc "

Not closet trackers then..............

bowlhead99

One would think 'recovery' funds are more useful at certain parts of an economic cycle than others. As you might presume, their pickings are likely to be slimmer when the capital value of the market is at an all-time high and there are fewer companies in distress or heavily downgraded. So the 20%+ loss when FTSE only lost <20% is not much of a surprise, though most investors are probably not using them.

You're right, doesn't look like any of those 'ten worst' funds are trackers in disguise, otherwise they would only have lost what the trackers lost.

tg99

bowlhead99 wrote: »

One would think 'recovery' funds are more useful at certain parts of an economic cycle than others. As you might presume, their pickings are likely to be slimmer when the capital value of the market is at an all-time high and there are fewer companies in distress or heavily downgraded. So the 20%+ loss when FTSE only lost <20% is not much of a surprise, though most investors are probably not using them.

You're right, doesn't look like any of those 'ten worst' funds are trackers in disguise, otherwise they would only have lost what the trackers lost.

Yep 'recovery' funds will typically struggle in relative terms when value is underperforming growth as has been the case over recent years. A decent chunk of the underperformance is also likely to be due to recovery funds being overweight in commodities at this point in the cycle - though whether such recovery plays turn out to be value traps or not awaits to be seen!

Sam_J12

It has taken all of three and a half weeks for my portfolio to recover to its previous high point. So much for the "carnage" people were talking about.

JohnRo

Good for you, I doubt many can say the same though.

Most of the major market indexes are still 8-15% off their recent peak. Obviously that has little to do with portfolio bottom line for many but you seem to imply the turmoil is over which I disagree with.

Sam_J12

I disagree with that. For example, the Vanguard Lifestrategy 60% fund that is popular here is no lower than 3 months ago, and if you want to include the August "carnage" is only very slightly lower than 6 months ago. People just massively overreact when there is volatility - I think a lot of the doom-mongers look quite silly. It looks like the Chinese market has corrected itself from the bubble and people are not much worse off (if any). Lots of positive aspects to the global economy to go with the negatives - Asian stocks looking cheap, Japanese government managing economy well, European QE etc.