DIY or IFA?

bowlhead99

BLB53 wrote: »

Surely as active funds account for 90% of the market and most underperform the index over the longer periods, it should follow that index funds will be higher than mid table.

Higher than the middle of a table stuffed with every fund in the planet? Or the the middle of a table containing funds of the same risk level and that a competent investor would reasonably be choosing between?

No point me reiterating dunstonh's sensible comments.

I had a quick look at Trustnet for the Vanguard Lifestrategy 5 yr performance and all are top quartile which makes sense to me.

Yes, it makes sense that they are top quartile given the way they're structured and the market conditions experienced since their launch.

For example when you looked at LS80 you compared it against other funds in the "mixed asset, 40-85% equities" category, right? That category contains funds covering a massive range of risk levels with LS80 at the top of the risk scale.

85% equity at a point in time is the highest that something in that sector could be, and many funds will vary their equity allocations to be way less than that for most or all of the time, or never approach that level.

Some funds will deliberately aim for way lower volatility in their asset mix, either through high level asset allocation or stock selection of more defensive industry sectors.

And a huge number of them won't have anything like 80% of their assets in equities.

And a huge number of them targeted at UK investors will have more than 25%of their equities in their home market of the UK (indeed, Vanguard LS did too, in the early days before reducing).

And when building the "UK equities" portion of their UK allocation, a huge number won't have it so heavily skewed to the largest ten companies in the FTSE which have a massive proportion of their incomes in foreign currency, such as USD.

And those that do have a high non-UK equities component might have way less than 60% of their non-UK equities in North America because that's a lot in one region.

And those that do have a similar proportion of non-equities in their portfolio will use a broad range (e.g. including property) rather than just bond indexes.

So, when you have a fund like Vanguard LS80, and it puts itself in a category of other funds which generally have anything from 40-85% equities, at a whole range of risk levels, but its strategy is "I am never going to fall below 80% equities, and I am going to invest at least 74% of my equities overseas, and 60% of my non-UK equities will be in North America, and my exposure to the UK stockmarkets will principally be in companies with massive overseas income, especially dollars, and my only non equity exposure will be bonds"...

...then clearly when equities go on a five year bull run from the 2011 dip, and sterling weakens so you only paid £100 for $159 in the first week of Feb 2012 but now $159 is worth £129 (almost 30% appreciation on your dollar investments and on your dollar revenues for your UK listed multinationals), and your other currencies like Euro appreciated too but only by 4-5% or so, and your bonds (the only non-equities component) have continued their strong bull run due to continuing QE all over the world and unprecedented low base rates with yields going negative in a number of countries...

Then you are going to make more return than average in the sector.

That is everything to do with being one of the very riskiest funds in your Trustnet "sector", during a period in which the allocations paid off big time (right place at the right time for the highly specific conditions that suited their holdings). And very little to do with the inherent efficiency of tracker-based investing. If over the five years equities had instead fallen, bonds did worse than commercial properties and commodities, GBP strengthened etc, dollar performed worse than Euro, etc they would be bottom of the pile.

So, don't confuse a risky multi asset fund with rigid allocation structure doing well during perfect market conditions, with "trackers inevitably float to the top". No - in a fair fight, trackers aim to be mid table of gross returns, but perhaps shaving a half percent a year off the operating costs, and saving on trading costs. Over half a decade that might be worth 5% total return, which can be compared to the potential outperformance at a gross level from potentially superior stock selection.

So, on returns which could be 100% in half a decade, a few percent fee advantage. If the tracker appears to have outperformed by a lot more than that it is likely that it's not being compared to a suitable set of fair comparatives from the active world.

The above comments were looking at the VLS80 where it is "top of the table". For VLS100 which is not top of the table, see Linton' s comments.

ColdIron

I'm not sure VLS is the best example to use as a 'world index fund', it does not try to replicate any particular world index. It's a fettered fund of other index funds with management decisions for their allocation

One problem with quartiles I guess is that there are 4 of them, there is no middle quartile. To find that most index funds consistently sit in the top, or for that matter the bottom, quartile would be quite unusual

In the last 10 years are so we have seen broadly rising markets. Index funds by definition track a market. During a downturn many managed funds can act to mitigate the worst effects of a falling market whereas an index fund can only slavishly follow it down which won't be reflected in the last 5 years performance

Most world index funds are better than mid table?

Without getting into the effects of surviorship bias, definitions of what constitutes the 'table' etc, what I was getting at was that 'Most world index funds are better' is a bit of a generalisation that could be misleading and won't always be true although I acknowledge that it was a question and not an assertion

MonroeM

bowlhead99 wrote: »

As others have said, fees is not the only thing to focus on. As an example take the First State Global Listed Infrastructure fund (I hold this myself). It costs 0.8%.

The nature of utilities and infrastructure being what they are, defensive companies with solid revenues (demand is somewhat price-inelastic) it is unlikely to face as severe a downturn as other more volatile types of equities in a market recession. So even though it has performed very well in recent four or five years as investors have been on a quest for yield, it shouldn't be compared with, for example, a standard 'global tracker' fund - as it is doing a different job.

You could perhaps compare it to a sector-specialist niche index fund focussed on global infrastructure only. However, because that is a niche, you don't get the super-cheap index funds like the 0.1% you pay for the highly volatile S&P 500. Instead you would pay quite a bit more for an index focussing on that sector, due to it being niche and low demand. Blackrock's LGIM Infrastructure index, which has been going for a little less than two years so does not have much track record, but at least could bear comparison as a benchmark, charges 0.6%. So if FS Global Listed Infrastructure costs 0.8% it will be worse and should be rejected, right?

No, not necessarily - because over the period the Blackrock index fund was available, it has been outperformed by the active First State one: over the last 12 months for example, First State cost 0.2% more in fees but delivered 4.9% better net return after fees. The index beat the sector average by half a percent and the First State fund beat the index by almost 5% more.

Similarly, what is the suitable index comparator for a strategic bond fund. Or for that Architas real assets fund? What are they bringing to the table? Well, in the first case, moderation of the overall volatility versus following a bond index; in the second, a big bag of diversification which is difficult to access through indices.

GLG Japan is a decent fund. If you looked exclusively at the fees (some 0.75 of AMC, 0.9% of OCF) and you were following the 'passive is best' mantra, you would think a simple Japan tracker is maybe a better way to go due to the fee advantage. But over three and five years the Man GLG fund is top quartile. Over three years its net total return is 15% better than the IA sector average. Over the last twelve months, 20% better, and over five, more. Over ten, 153% vs 67% for the IA Japan average. Since the end of 2000, 190% vs about 60%. Still, that followed a crash. Go back to the end of 1999 and the return to now is only 100%. Still, the IA sector average was only 15% total return over that timescale, nowhere near the 100% that the GLG fund delivered.

I expect if you look at the fee on its own, and see you can get a Japan equity tracker for 0.2%, you wouldn't go anywhere near GLG Japan because it's so expensive and it's better to just rely on the solid mid-table performance available with the tracker. Still, over a year, 3 years, 5 years, 10 years, 15 years and all the way back to inception, GLG has outperformed the index.

So, starting at fees and maybe never going further than looking at fees; and assuming the fund manager can't add anything; and that the IFA can't change your return profile to be more suitable than the return profile of a global index - is the wrong way to go about it.

Certainly doing the evaluation yourself in full will help you find out that the IFA portfolio is not a load of rubbish, rather than relying on the word of the IFA. However if you are not experienced in investing, you could perhaps benefit by speaking to an IFA to understand why those funds are better than an arbitrary pile of trackers ; what do they 'bring to the table' in terms of potential outperformance or what changes do they bring to the potential profile of returns in different economic conditions.
Cheers fj, good fun to have your misguided pro-tracker and anti-IFA posts back, despite your other accounts getting banned.

I agree it shouldn't be totally about fees etc, I was just asking dunstonh out of curiosity really as to which funds he thought in his opinion were 'good' funds!

I already knew about Fundsmith, CF Lindsell Train, Stewart Asia Pacific Leaders, and Jupiter European and Artemis strategic bond. Thank you for the info on First State Global Infrastructure, GLG Japan and Architas Real Assets.

Its always interesting to hear people's views about certain funds so its good to discuss the IFA's list and how he chose these funds especially as the OP said they were selected for her friend because she didn't really want any personal input?

bowlhead99

MonroeM wrote: »

so its good to discuss the IFA's list and how he chose these funds especially as the OP said they were selected for her friend because she didn't really want any personal input?

Of course, it isn't really possible to discuss "how the IFA chose these funds" because the IFA isn't here to tell you how he did or didn't do it.

However, you can see that:

- some have been strong performers in particular sectors for extended periods of time;

- some like the strategic bond ones have dynamic allocations which can help reduce volatility and avoid tracking the markets down in a downturn (or at least avoid the lopsided risk/reward profile you get from long dated gilts in markets where inflation and interest rate rises are returning);

- some are asset classes for which few index funds exist, are expensive, or are likely to be less useful due to imperfect markets. And so on.

There are all sorts of reasons for using such funds in an overall allocation model, but without the model and the IFA's rationale to hand, we can only speculate as to what he is aiming for and why. He and the investment platform don't get paid by number of funds held, so having twenty funds rather than twelve to fifteen to meet the particular target allocation might be more than others prefer, but does not imply incompetence or expense.

If the OP's friend wishes to be hands off and doesn't want much personal input other than outlining her goals and needs and risk tolerance and risk capacity etc (none of which we're privy to), then she can leave it in the IFA's capable hands.

If the OP, by contrast, wants to control her own destiny and use an asset allocation plan she made up with her own judgement and some online research, that's fine, assuming she has assessed her own needs and understands the properties of each of the products in which she's investing (beyond just the running cost per year and the last five year's performance stats).

It is not really possible sitting here today to say that she will get a better or worse result (in terms of eventual suitability for her needs and overall performance, which are linked but separate concepts) than paying a professional. So all you can do is talk around the subject and if none of the ensuing discussion surprises, worries or inspires the OP, then she'll probably be fine.

BananaRepublic

MonroeM wrote: »

I agree it shouldn't be totally about fees etc, I was just asking dunstonh out of curiosity really as to which funds he thought in his opinion were 'good' funds!

I already knew about Fundsmith, CF Lindsell Train, Stewart Asia Pacific Leaders, and Jupiter European and Artemis strategic bond. Thank you for the info on First State Global Infrastructure, GLG Japan and Architas Real Assets.

Its always interesting to hear people's views about certain funds so its good to discuss the IFA's list and how he chose these funds especially as the OP said they were selected for her friend because she didn't really want any personal input?

If you think about it an IFA is not going to carefully research each fund, and come to conclusions. They will instead have access to a database which contains the relevant information, namely the performance over various periods, the market sector, the volatility and so on. That will allow them to filter out according to the risk profile of the client. And I bet that much of the leg work is done for them using software. This is something you can do too, albeit you'll have to do the analysis manually, using data from online sources such as You Invest etc. It is educational to look at historical charts for various markets, sectors, and funds.

Of course it helps to have some understanding of the underlying influences on funds. Thus some of my active funds took a hit from the Brexit vote: most of them appear to have backed the wrong horse, so in that case index funds were the winners. And back in the great crash, many of my active funds did much better than index funds, because they were able to respond more intelligently.

bowlhead99

BananaRepublic wrote: »

Of course it helps to have some understanding of the underlying influences on funds. Thus some of my active funds took a hit from the Brexit vote: most of them appear to have backed the wrong horse, so in that case index funds were the winners.

To be honest I haven't seen much in the way of crashing values of active funds post-referendum.

I've certainly seen UK cap-weighted indices do well. But a lot of that is due to highly dollar-exposed revenue streams in the FTSE100 (something like 75% in foreign currency) and the fact that the dollar's worth 30% more pounds than it was worth half a decade ago; Shell and BP investors from UK are happy that a barrel of oil sold in dollars is 10% more than last June, but even more happy with what that looks like in sterling.

You could say that your active funds "backed the wrong horse" but presumably the UK active managers that didn't get the same growth as the UK passive trackers, only missed out because they assumed their investors weren't particularly looking to be massively exposed to multinationals in a limited range of sectors with heavy foreign currency exposure that just happen to be listed on the London exchange. If the fx rates and oil prices has gone the other way and the global economy cooled off, many investors would be quite happy not to have the crazy exposure of the ftse100.

In other words the trackers' strong performance is more about being in the right place at the right time than some inherent efficiency of tracking techniques for asset allocation.

StellaN

bowlhead99 wrote: »

Of course, it isn't really possible to discuss "how the IFA chose these funds" because the IFA isn't here to tell you how he did or didn't do it.

However, you can see that:

- some have been strong performers in particular sectors for extended periods of time;

- some like the strategic bond ones have dynamic allocations which can help reduce volatility and avoid tracking the markets down in a downturn (or at least avoid the lopsided risk/reward profile you get from long dated gilts in markets where inflation and interest rate rises are returning);

- some are asset classes for which few index funds exist, are expensive, or are likely to be less useful due to imperfect markets. And so on.

There are all sorts of reasons for using such funds in an overall allocation model, but without the model and the IFA's rationale to hand, we can only speculate as to what he is aiming for and why. He and the investment platform don't get paid by number of funds held, so having twenty funds rather than twelve to fifteen to meet the particular target allocation might be more than others prefer, but does not imply incompetence or expense.

If the OP's friend wishes to be hands off and doesn't want much personal input other than outlining her goals and needs and risk tolerance and risk capacity etc (none of which we're privy to), then she can leave it in the IFA's capable hands.

If the OP, by contrast, wants to control her own destiny and use an asset allocation plan she made up with her own judgement and some online research, that's fine, assuming she has assessed her own needs and understands the properties of each of the products in which she's investing (beyond just the running cost per year and the last five year's performance stats).

It is not really possible sitting here today to say that she will get a better or worse result (in terms of eventual suitability for her needs and overall performance, which are linked but separate concepts) than paying a professional. So all you can do is talk around the subject and if none of the ensuing discussion surprises, worries or inspires the OP, then she'll probably be fine.

I think MonroeM could have possibly chosen her wording better but I don't think she meant to be critical of the IFA in any way or his choice of funds. On the contrary, I thought she was asking us our opinions or experiences on the 'good' funds that are in the list (out of curiosity) rather than having a dig at the list in general.

bowlhead99

I didn't think she was particularly having a dig either. My observation is just that we can't have great in depth discussion about why a particular bit of the portfolio was being used for what purpose, and what the goals and risk levels were supposed to be, because the person who was paid to construct it, and the person who he/she was making it for and explained it to, isn't here.

So all we can do is look at it and note some of the reasons why certain holdings might be in there, and comment that there is some broad structure to it. As I mentioned earlier, it has some sort of structure, and isn't a simple tracker, so I surmise that it's been put together with some objectives in mind, which means it's maybe more likely to meet those objectives than just grabbing a world tracker and one or two non-equity funds.

This isn't likely to convince the OP, who is pretty happy with her tracker and doesn't feel she needs to go and buy advice, to go and buy advice. The person who bought this portfolio isn't going to act as a great saleswoman or ambassador for it, because she may not care what's in it or why, as long as it broadly works. And, it's not our job to try to sell someone else's product.

But I'm quite happy to sit here and make general comments on why people might use funds like these under an IFA plan, rather than just getting a cheap global tracker. The principal reason to do that is where you don't want to get the result of a cheap global tracker

BLB53

Suggest you look again. From Trustnet data for the global equity sector over the past 5 years VLS100 is at position 99 out of 197 of those funds with data going back 5 years - that looks pretty middling to me.

Looking at the multi asset returns
https://www.trustnet.com/Investments/MultiManagerMixedAsset.aspx?univ=O
LS100 is currently 14/713
LS40 is 25/144
LS60 is 26/137 and
LS20 currently 9/57

So all top quartile performers over the past 5 years and I would suggest likely to remain so going forward.

I will stick with my VLS60.

grey_gym_sock

bigadaj wrote: »

And survivorship bias.

i didn't stop to think about this 1 yesterday, but ... this is going to make passive funds look less good than they really are. since it's mostly underperforming active funds which are closed down, leaving just the survivors in the table, with which passive funds can be compared. by itself, this effect would tend to make passive funds move slowly down from the middle of the table as you look at longer periods.

and yet they actually tend to move slowly up. presumably because the cumulative effect of lower charges makes more difference than the cumulative effect of survivorship bias.

but this implies that performance tables themselves are a bit biased against passive funds. because charges are a real effect, whereas survivorship bias is a performance measurement issue.

ColdIron wrote: »

In the last 10 years are so we have seen broadly rising markets. Index funds by definition track a market. During a downturn many managed funds can act to mitigate the worst effects of a falling market whereas an index fund can only slavishly follow it down which won't be reflected in the last 5 years performance

i think that's true in a sense. not in the sense that active managers know how to time the market (there's little evidence that anybody can), but in the sense that active funds can choose to be less than fully invested (i.e. keep a bit in cash), but can't easily invest more than 100% of their assets (because open-ended funds can't generally borrow money - so this argument doesn't apply to active investment trusts, which can). without supposing managers have any special insight into market timing, it's therefore a reasonable bet that, at any one time, some of them are fully invested, others less than fully invested, and therefore on average they are always a bit less than fully invested. as a result, they are on average likely to underperform in a rising market, and outperform in a falling market.

but this is no reason to favour active funds, unless you believe they can pick the right times to be fully or less fully invested. if you just want to be permanently not quite fully invested (to reduce volatility marginally), you could keep (say) 5% in cash yourself and invest the other 95% in a fund which is permanently fully invested. which is far more efficient than paying higher fees for active management on 100% of your investment (if active fees are only 0.5% p.a. higher, that is 10% p.a. of the cash held!). you can probably also get a higher interest rate on cash as an individual than a manager can on a fund's cash.

and if you don't want the lower volatility of a cash float, than you'd be better off permanently fully invested. since we expect market to go up more than they go down.

so i agree that rising markets are likely to make the relative performance of passive funds, compared to active funds, look a bit more favourable than it would over a more representative period, included both rising and falling markets (but with more rises than falls). however, passive funds' lack of "cash drag" is still a net positive factor for them over the more representative period, albeit a smaller net positive.