Investment Trusts

Rollinghome

masonic wrote: »

It's sometimes called 'diworsification'. By investing in several funds that pick stocks from the same markets, you are paying each fund manager a premium price for active management, but those active management decisions get watered down and what you end up with tends to be an expensive closet tracker, or worse, you end up over-concentrated in some minor constituents each fund manager coincidentally picked as a small part of the fund, but never intended to be a significant holding. If you are finding you need to buy three or more funds in the same sector to get sufficient diversification, it would probably be worth looking to see if there is an index tracker or ETF that will do the same job for a lower management charge.

I understand that because Witan has a multi manager setup it has a fairly large number of holdings (largest holding just 1.61%) with five of the management groups contracted (Lansdowne Partners, MFS, Tweedie Browne, Pzena and Veritas) all having a global mandate, and three (Lindsell Train, Heronbridge, and Artemis) all having a UK/FTSE all-share mandate.

But Witan's performance has considerable improved since adopting this approach, arguably not disimilar to an investor having several funds/ITs in the same sector, despite the risk of diworsification, and Alliance Trust intends to adopt a similar approach.

The idea of diworsification is pretty much accepted but I sometimes wonder if it's always quite such a problem with funds and ITs as assumed.

If you put the same sum into two funds/ITs: one holding 40% in company A, 30% in company B, 20% in company C, and 10% in company D. Your other fund holds 10% in company A and 30% in the other three.

You've now got 25% in company A, 30% in B, 25% in C and 20% in D which is a position midway between the views of the two managers instead of relying on the judgement of just one - which doesn't seem too much of a problem. If you'd just stuck to one fund/IT you'd simply have twice as much in the companies held.

By being willing to own more than one fairly similar ITs there may actually be a positive in that you could later increase your investment with more opportunity to buy whichever IT offers the most attractive discount, rather than sticking to the one IT and paying too much or having the cost of selling it.

You might also buy the F&C IT which last time I looked had over 500 holdings, which is unusually high. The result is it very closely follows world indices but is also a very steady fund that seems to suit many people. If you bought another investment with a similar number of holdings, if there is one, you are likely to get still closer to a tracker. Even then I suppose it could be argued that it's not just the companies a manager invests in but also those he avoids that gives him a chance of beating the index.

(I tend to think there's more chance of diworsification when an investor has direct holdings in companies and too many for him to properly research or track. I read in the F&C report that the manager intends to reduce the number of companies held which seems to be a fairly good idea.)

masonic

Rollinghome, those are very interesting comments, and I agree with you that it is not really a big problem, but I do think that it could be quite inefficient, especially in the case of open ended funds, where composition within a sector tends to be more uniform.

As you say, by combining a number of funds you get a position midway between the views of the managers concerned. If one manager shuns financials but loves technology, and the other thinks tech companies are all hype, but thinks the banks are due a recovery, what you end up with is something with not very much in the way of "active share" overall. If you are paying a premium price for active share, then that could be a problem. The outcome could be quite passive, but with a higher than necessary management cost.

I take your point on exploiting discounts on ITs. Although I would say it isn't necessary to start out with more than one to buy into another if your original choice becomes expensive relative to other options. In this case the effect of discount/premium movements can make it worth diluting an active investment strategy.

But I would make a distinction between a multi-manager approach, where managers tend to pick stocks based on a 'bigger picture' and likely within their own specialisations so that they don't tread on each others toes much, and the investor approach of having multiple investments in the same sector.

masonic

StellaN wrote: »

So basically, you feel I should also only have one fund in this sector instead of three and thinking of adding an additional IT as well? Makes sense to me I just can't understand my logic in holding three global funds in the first place when I only have 1,fund in every other sector?

I think you should have a reason for wanting a total of 4 global funds and you should understand what the combination of those funds looks like. Perhaps there is one fund that looks pretty much the same as the combination of all four, in which case, in the interest of keeping things simple, it might be better to opt for that fund instead. Similarly, your combination of funds might end up looking pretty much the same as Vanguard Lifestrategy 100%, in which case you could save yourself some management charges by simplifying. These are things to consider.

StellaN

masonic wrote: »

I think you should have a reason for wanting a total of 4 global funds and you should understand what the combination of those funds looks like. Perhaps there is one fund that looks pretty much the same as the combination of all four, in which case, in the interest of keeping things simple, it might be better to opt for that fund instead. Similarly, your combination of funds might end up looking pretty much the same as Vanguard Lifestrategy 100%, in which case you could save yourself some management charges by simplifying. These are things to consider.

I fully take your point because Newton Global Income has Microsoft and Philip Morris in its top 10 holdings but so has Fundsmith so I'm doubling up on these companies so realistically I think I should sell Newton even though its done well. However, Artemis Global Income seem to invest in different companies and some geographical sectors so would it not be reasonable to hold both a Global fund like Fundsmith and a Global Income Fund such as Artemis?

coyrls

You seem to be doing a lot of buying and selling. A better approach would be to decide on your strategy, decide which funds, or Investment Trusts or ETFs best support that strategy and only then make any purchases.

StellaN

coyrls wrote: »

You seem to be doing a lot of buying and selling. A better approach would be to decide on your strategy, decide which funds, or Investment Trusts or ETFs best support that strategy and only then make any purchases.

I'm pretty happy with the strategy for the rest of my portfolio. As I mentioned I only hold one fund in each of my other sectors, UK, Europe, EM, Asia Pacific Ex Japan, Japan, Property all active funds and 2 trackers US and Global Small Companies.

It's just my Global funds I need to address as Masonic mentioned "Perhaps there is one fund that looks pretty much the same as the combination of all four, in which case, in the interest of keeping things simple, it might be better to opt for that fund instead".

Therefore, I need to do further research to find the one Global Fund I would be most happy with in their asset allocation and this may well be one of the three global funds I already hold or I go with a global IT.

Rollinghome

masonic wrote: »

Rollinghome, those are very interesting comments, and I agree with you that it is not really a big problem, but I do think that it could be quite inefficient, especially in the case of open ended funds, where composition within a sector tends to be more uniform.

I'd in part agree with that and I was mainly commenting on ITs because that's the subject of the thread. I made the point because it's sometimes accepted as a given that any possiblility of overlap or duplication leads to "diworsification" so must always be bad without the possibility of any benefit. There's likely to be greater benefit, both for funds and ITs, if the investments chosen have different styles (although the less duplication there is then the more likely you are to have something like a tracker, not less.) Different combinations of ITs will have both different advantages and disadvantages.

I take your point on exploiting discounts on ITs. Although I would say it isn't necessary to start out with more than one to buy into another if your original choice becomes expensive relative to other options. In this case the effect of discount/premium movements can make it worth diluting an active investment strategy.

No I wouldn't suggest that. I am suggesting that if someone wants to put more into a global IT then they shouldn't feel they must add only to the IT they have or risk suffering from the dreaded diworsification. There shouldn't be a rule that you can only have one IT per sector. You can either sell the original holding, with the costs and possibly liabity for CGT, or you can add a second. Every investment should be bought with an idea of how it fits into a pf. The problem of diworsification seems to be an idea that tends to be routinely accepted but possibly exaggerated.

I've also spoken to several investors who've put a huge sum,virtually everything they have, into a single IT, usually one of the large, popular globals, which I'd suggest has a higher risk of being problematic. There's also the opposite where investors have so many holdings that they can't keep track but that's a different problem from the idea of diworsification.

But I would make a distinction between a multi-manager approach, where managers tend to pick stocks based on a 'bigger picture' and likely within their own specialisations so that they don't tread on each others toes much, and the investor approach of having multiple investments in the same sector.

As mentioned before, five of the ten fund management companies contracted to Witan have a global mandate plus another for global emerging markets, three a UK mandate and one for Asia. They'll all have been selected for different styles but they won't act in co-ordination or as a commitee and over-laps are inevitable. Nonetheless, seems to have worked for Witan to the extent that Alliance is now to copy the approach.

JohnRo

I've chosen to take a 'three of each' approach in my global income IT with the view that it mitigates any potential disasters at any one of the three.

It also generates some category asymmetry for rebalancing and that may in turn help to capture some value longer term. I don't worry about overlap because I honestly don't think it matters much, if at all.

StellaN

JohnRo wrote: »

I've chosen to take a 'three of each' approach in my global income IT with the view that it mitigates any potential disasters at any one of the three.

It also generates some category asymmetry for rebalancing and that may in turn help to capture some value longer term. I don't worry about overlap because I honestly don't think it matters much, if at all.

Thanks for that JohnRo, it makes me feel a little better than somebody else has invested in more than one global fund although I think I will now look into this sector in more detail to see if I can clean it up a little! This forum is so good to get other people's views!

masonic

StellaN wrote: »

I fully take your point because Newton Global Income has Microsoft and Philip Morris in its top 10 holdings but so has Fundsmith so I'm doubling up on these companies so realistically I think I should sell Newton even though its done well. However, Artemis Global Income seem to invest in different companies and some geographical sectors so would it not be reasonable to hold both a Global fund like Fundsmith and a Global Income Fund such as Artemis?

I would not class Fundsmith and Artemis Global Income as being in the same sector, although they are both picking shares from the same markets, their selection criteria are quite different.