‘no one ever got fired for buying Neil Woodford’.

SallyG

http://www.ftadviser.com/2016/02/15/opinion/dan-jones/help-us-find-the-hidden-gems-of-the-funds-world-xJAFqDqfnz8pSjnktWThyL/article.html
"There is also an increasingly prominent school of thought that states that the best returns can be made at the beginning of a fund’s life
..............We’ll be attempting to unearth these hidden gems, and ultimately identify the best of them on a qualitative and quantitative basis. Some buyers may prefer to keep their fund secrets to themselves, and there’s no harm in that. But if readers have suggestions, I can be reached on dan.jones@ft.com.

Let’s shed some light on these unknown winners."

Malthusian

The saying being referred to is "No one ever got fired for buying IBM" (i.e. as a systems engineer in charge of buying computer hardware). Because at the time, IBM had a reputation for stability and reliability, and as they sold so many, if their products were duff you'd have heard about it.

Applying it to fund managers is nonsensical. Some do well, some do badly, and a few do very well, like Woodford. Saying "no one ever got fired for buying Neil Woodford" is no different from saying "no one ever got fired for buying a fund that went up". Which is self-evidently vacuous, a statement of the bleeding obvious.

It doesn't work because with a server mainframe, past performance is a guide to the future - if you know they rarely break down you can expect this to continue. With fund managers that's not the case.

If Dan Jones wants to know which smaller funds are going to do well over the next five years that's easy, all he has to do is wait five years.

SallyG

In any case - for fund picking we can safely disregard this lot?
http://www.dailymail.co.uk/money/investing/article-3442802/The-number-poorly-performing-funds-increases-market-volatility.html

Is it good practice to ignore any fund below the 2nd Quartile?

Eco_Miser

SallyG wrote: »

Is it good practice to ignore any fund below the 2nd Quartile?

That would mean ignoring half the funds, some of which are about to come good, and some aren't.
Conversely some funds in the 1st Quartile are about to crash.

I've no idea which are which.

BananaRepublic

There does seem to be a belief here that active funds are not worth buying as a fund manager cannot outperform the market except by chance. I have found that not to be the case, at least for 5 or 6 funds I invested in between 10 and 20 years ago. I suppose I could have been lucky in each case, but in that case I have been very very lucky. By chance the probability would be of the order of 3 in 100 or less. I did have one duff fund, the first I bought, and I did not research it properly, had I done so then past performance would have indicated that it was a dog. Thankfully I sold it after a few years.

Unfortunately performance figures only go back 10 years. But even then you can see that some funds consistently beat the market. If we assume they are no more than monkeys, as some claim, then the probability of beating the average is 50%. So the probability of beating the average two years in a row is 25%, where we assume no correlation between years. Over 10 years the probability is 0.5 to the power 10 which is about 0.001 or one in a thousand. And yet there are many funds that consistently beat the average. Okay, they might have a weak year, but the probability is still low, assuming no special powers on the part of the fund manager and her team. That very crude analysis ignores the degree by which some funds consistently beat the average.

Some online articles often say that if someone wins, someone has to lose, therefore not all active funds can win, so it's nonsense. Well yes, large numbers do poorly. But also ignores that many shares are held outside investment funds, or in funds that are sold to people who do not pay attention to the performance, or do not compare them to the average, and to tracker funds.

"It doesn't work because with a server mainframe, past performance is a guide to the future - if you know they rarely break down you can expect this to continue. With fund managers that's not the case."

It would be interesting to know the proof of that statement.

bowlhead99

SallyG wrote: »

Is it good practice to ignore any fund below the 2nd Quartile?

No, it is better to look at them to understand *why* they happened to be in the bottom half in their sector each of the last three years, rather than straight up dismissing them just because they did.

For example, in the strategic bond sector they note that funds to reject include Threadneedle's and they recommend Baillie Gifford Corporate Bond, which returned an extra 6 and a half percent over Threadneedle in the three years, doubling the former's performance. It also did about 4% better than my own holding in the sector, M&G Optimal Income.

If you lengthen the chart, to five years instead of three, the BG fund delivered 39% total return while my M&G only had 29% and Threadneedle only had 18%. So, case closed, right? BG is the fund to have.

https://www.trustnet.com/tools/Charting.aspx?typeCode=O_FJ670,O_FADISB,O_FBGCBBA

Or is it. Let's wind the clock back further, as far as we can go for a comparative graph because the M&G option was only born in December 2006. All three funds do about the same for the first year to December 2007 in a quiet bond market while most investors favour equities. Their returns for the year are in a tight range from about -1% to +2%. Then BOOM credit crunch.

Ten months later, end of October 2008, M&G has dropped 7.5%; Threadneedle and BG are down 17% and 19% respectively.

Five months after that, what has happened?

Well, M&G recovered entirely by Friday 27 March 2009, back to +2% since its Dec 2006 launch, pretty much same spot as Dec 2007.

Threadneedle was still around the -20% mark where it had been for a while. It's down, but down a lot less than your typical equities fund.

Baillie Gifford Corporate Bond was down 33%. Yes that's right, you lost a third of your money in 27 months. Even FTSE 100 was only down -30% from the same start point.

So when sitting there in tax season 2009 rejigging your assets, the M&G investor is OK because while his equities plummeted, his choice of strategic bond fund saved the day -it didn't lose anything and he can let some of it go to rebalance back to his old ratio of equities to bonds, buying a ton of equities at the cheapest point of the decade, which will double or treble in value over the next six years (depending whether you buy FTSE100 or 250).

The Threadneedle investor is not quite so happy because his bonds are down 20% but it's not as bad as the equities are down. He will still sell out of bonds to top up equities.

But the BG investor is screwed. His lovely reliable bond fund where the bonds managers know exactly how to handle a range of market conditions with a strategic approach, kinda screwed up. His bonds are worth less than his equities. No rebalancing for you. No using your bond-heavy allocation to top up an equities-light allocation at the bottom of an equities crash.

Fast forward back to present day and M&G is now up 90% since Dec '06, BG is up 60% and Threadneedle is up just over 40%. Clearly just looking at the nine year totals, BG did fine, even if not the best. Cherry picking just the return since the dark days of March/April 2009, it actually gave a stellar result, beating the return of the FTSE 100. So, well done on those last six years. But would you have seriously bought it back then, seeing what had just happened and how it completely failed to preserve your wealth in an equities crash?

When the return profile is more volatile than equities in a serious downturn, it is probably not the type of "sterling strategic bond fund" that should be in a portfolio for widows or orphans. I expect if This Is Money and Chelsea Financial Services had looked at its three year performance to March 2009, they would have outed it as a RED ZONE fund, one of the real dogs of the index, something that has failed in its function, and something that had "underperformed is sector average by the largest amount in the three years", leading them to say *dump this fund at all costs, if you have any common sense whatsoever*. It's in the Drop Zone and you should get rid of such funds.

As such, by following their advice, you would have never got back up to the +60% in the nine years to today. You would have bailed at -33% and permanently damaged your wealth.

This is why you DON'T blindly follow tips and focus on short term measures to ignore half of the funds that are out there. It can result in you getting into a totally inappropriate fund (one with a track record of exhibiting equity like volatility and losing a third of it's value in a steep downturn) and it can also result in you dumping a fund that had come across hard times but was about to deliver an outrageously positive result for five years straight.

No, if you are going to review funds against your objectives you have to know your own objectives and their objectives and look at the big picture and not some three year league table.

talexuser

BananaRepublic wrote: »

, at least for 5 or 6 funds I invested in between 10 and 20 years ago.

Which funds were the star performers ?

mgdavid

BananaRepublic wrote: »

............."It doesn't work because with a server mainframe, past performance is a guide to the future - if you know they rarely break down you can expect this to continue. With fund managers that's not the case."

It would be interesting to know the proof of that statement.

Does every statement have a proof?
Any IT professional active in the last three decades of the last century will understand it; the others probably won't.

BananaRepublic

mgdavid wrote: »

Does every statement have a proof?
Any IT professional active in the last three decades of the last century will understand it; the others probably won't.

If someone says that past performance is not a guide to future performance - the implication being that the two are unconnected - it would be nice to know if that was opinion, or backed up by research.

Sam_J12

BananaRepublic wrote: »

If someone says that past performance is not a guide to future performance - the implication being that the two are unconnected - it would be nice to know if that was opinion, or backed up by research.

I would say that statement is clearly false. Here are two examples. The "momentum" effect - where recent share performance in the last 3-12 months predicts short term future performance - is backed up by masses of academic literature and is an clear example of past performance being a guide to future performance. Another example is of a fund like Manek Growth - http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR04RQG - where the fund manager has a return of -45% since the fund's inception in 1997. Can anyone claim with a straight face that past performance is not a guide to future performance here?

BananaRepublic

talexuser wrote: »

Which funds were the star performers ?

Many platforms such as You invest have fund comparison tools. My funds were mostly Europe excluding UK. The ones I can remember are Jupiter European, Henderson European Selected Opportunities and Threadneedle European Select.