Bespoke Portfolio vs VWRL or HMWO etc

ArchBair

I have mainly invest in IT's in my investment portfolio with some selected funds/OEIC's in my S&S ISA's to make a bespoke portfolio. However, in the past couple of years my wife decided to sell her portfolio and re-invest in VWRL for her pension and HMWO for her ISA.

Since she made this decision, at the moment her passive ETF's have performed just slightly better than my bespoke portfolio so I'm now thinking is it worth all the time, effort and decision making with a bespoke portfolio?

Has anybody else had a similar experience?

dunstonh

Is your bespoke portfolio fully active or a combination of active and passive funds?
Is your bespoke portfolio using researched and measured asset allocations or a bit random/made up?
are your portfolios at the same risk level?
what time period are you measuring this over? (every dog has its day - is the period showing sustained differences)

From my experience, the hybrid portfolios of mixed active and passive funds (picking whichever is best for the respective sectors) performs better than the fully passive or the fully active versions.

At the end of the day, you are going to have the pro-passive people tell you to go trackers and the pro active to tell you to stay active and the balanced tell you to use the best of both. None of them can tell you which will be best in the future.

talexuser

The trouble is you can pick almost any shortish period to prove one thing or the opposite (this is exactly what most adverts for fund do), the proof comes after a decade or two. I fancied a punt on active for many years and was convinced I did better than trackers over the years after charges. Lately we have the really cheap trackers and as your portfolio grows it becomes more difficult to find the top active funds without too much duplication and concentration of your assets, so I now have 3 Vanguard funds to compliment my active choices.

In the end it is your risk profile you have to satisfy. Trackers will never outperform but they will beat maybe 3/4 of active funds as a very general approximation. Personally I don't think it is that difficult to weed out the useless funds and managers with a little research and the rest is a punt you have to be happy with.

bowlhead99

ArchBair wrote: »

I have mainly invest in IT's in my investment portfolio with some selected funds/OEIC's in my S&S ISA's to make a bespoke portfolio. However, in the past couple of years my wife decided to sell her portfolio and re-invest in VWRL for her pension and HMWO for her ISA.

Since she made this decision, at the moment her passive ETF's have performed just slightly better than my bespoke portfolio so I'm now thinking is it worth all the time, effort and decision making with a bespoke portfolio?

Has anybody else had a similar experience?

You are only looking at a couple of years and it sounds like the overall returns were only slightly different. If the tracker slightly outperformed (but inevitably had a different underlying company allocation to your collection of funds and ITs, so it is unlikely to be just down to fees), it simply relates to how the tracker allocation happened to perform from the perspective of a UK investor in the particular economic conditions the world experienced in the last two years. Those conditions won't be exactly repeated in the next two years or the two years after that.

Yes you could pick any fund out of a hat with zero effort at random and might get the exact same results as your highly researched and planned portfolio over short time periods. That doesn't mean you were wasting your time to do the research. Because presumably what really matters to you is the return over long periods not short periods. Unfortunately you'll only be able to evaluate whether your portfolio did its job, after it did the job, i.e ten to twenty years' time.

If you have made a bespoke portfolio of OIECs and ITs it is presumably because you want a different asset mix to what you get from a tracker. The tracker will be weighted to different geographies, sectors and company types than the bespoke. So, learning that over a short period of time your portfolio happened to get the same result as the tracker, doesn't tell you that you were wrong to create your custom mix. You presumably built a portfolio that you were going to be happy with through the ups and downs of a variety of market conditions for the long term - at least, happier than you expected to be if riding a tracker through those market conditions, otherwise you would not have built the portfolio.

Basically it seems to short a time period to look at two numbers and decide to jack it all in. So the tracker slightly beat you during a period where Brexit was announced, Trump was voted in, sterling currency devalued, interest rates remained at all time lows in UK and negative in some countries while ticked slightly up in US, events ABC and XYZ happened around the world etc etc etc. If you think all those things will repeat every year then logic might dictate that you keep following the tracker which has a history of performance through those events... But of course they won't. Next two years we will have events DEF and UVW or 123 and 456 etc instead - and in your two years of observations you haven't seen the effect of them on the tracker vs them on the bespoke, because they didn't happen.

Actually, I say "you haven't seen the effects" but you say you have done some research in coming up with your portfolio, it is not just banged together haphazardly. So presumably you have an idea what sort of outcomes you might expect and a rationale for why over the long term you would prefer a multi-fund portfolio that you manage and rebalance time to time rather than just riding the tracker. It seems unlikely that all that research has now been invalidated from watching your wife happen to get a similar result with a passive holding.

But of course, your research could have been terribly flawed. If you just picked based on liking the name of the fund or looking at their recent 3-year performance then it might give you quite random results and give you crazy volatility and the fact that it broadly kept up with the tracker for a couple of years does not attest to it being a sound portfolio for the longer term. So, I'm not saying keep it. If you want to justify keeping the portfolio you just need to evaluate what your goals are, how your goals will be met by your portfolio, and why a tracker would not meet those same goals with the same sort of risk level.

If your wife is going passive and you are going well-researched and planned and monitored active, then your overall household result will be a blend between the two. There is no particular need for you to dive into her way of doing things or she yours. Of course, if you think your objectives will be met with a single-tracker-fund approach - or that they will be almost-as-well met over the long term and you save a lot of work for yourself - then by all means drop your current approach.

Linton

Investing isn't just about performance, but rather getting sufficient performance for the risks your are prepared to accept. This means that simple comparisons are very difficult. Are you really comparing like with
Iike? Making comparisons since memories of the 2008/2009 crash have begun to fade has been particularly difficult as there have been no major falls that would clearly identify the significant areas of risk.

If you go for trackers, unless you use some esoteric ETFs, the only control over risk you have is basically equity vs bonds. Active funds give you more options. This may or may not be important to you.

Another factor is the size of your portfolio. If you are investing say £10K then one could argue that the effort of building a bespoke portfolio is hard to justify if it will only make say 1%, £100/year difference. If you have a portfolio of £500K you might be inclined to take a closer interest.

For some people running a bespoke portfolio is of interest as an intellectual activity. Other people have what they consider better ways of spending their time.

ArchBair

bowlhead99 wrote: »

You are only looking at a couple of years and it sounds like the overall returns were only slightly different. If the tracker slightly outperformed (but inevitably had a different underlying company allocation to your collection of funds and ITs, so it is unlikely to be just down to fees), it simply relates to how the tracker allocation happened to perform from the perspective of a UK investor in the particular economic conditions the world experienced in the last two years. Those conditions won't be exactly repeated in the next two years or the two years after that.

Yes you could pick any fund out of a hat with zero effort at random and might get the exact same results as your highly researched and planned portfolio over short time periods. That doesn't mean you were wasting your time to do the research. Because presumably what really matters to you is the return over long periods not short periods. Unfortunately you'll only be able to evaluate whether your portfolio did its job, after it did the job, i.e ten to twenty years' time.

If you have made a bespoke portfolio of OIECs and ITs it is presumably because you want a different asset mix to what you get from a tracker. The tracker will be weighted to different geographies, sectors and company types than the bespoke. So, learning that over a short period of time your portfolio happened to get the same result as the tracker, doesn't tell you that you were wrong to create your custom mix. You presumably built a portfolio that you were going to be happy with through the ups and downs of a variety of market conditions for the long term - at least, happier than you expected to be if riding a tracker through those market conditions, otherwise you would not have built the portfolio.

Basically it seems to short a time period to look at two numbers and decide to jack it all in. So the tracker slightly beat you during a period where Brexit was announced, Trump was voted in, sterling currency devalued, interest rates remained at all time lows in UK and negative in some countries while ticked slightly up in US, events ABC and XYZ happened around the world etc etc etc. If you think all those things will repeat every year then logic might dictate that you keep following the tracker which has a history of performance through those events... But of course they won't. Next two years we will have events DEF and UVW or 123 and 456 etc instead - and in your two years of observations you haven't seen the effect of them on the tracker vs them on the bespoke, because they didn't happen.

Actually, I say "you haven't seen the effects" but you say you have done some research in coming up with your portfolio, it is not just banged together haphazardly. So presumably you have an idea what sort of outcomes you might expect and a rationale for why over the long term you would prefer a multi-fund portfolio that you manage and rebalance time to time rather than just riding the tracker. It seems unlikely that all that research has now been invalidated from watching your wife happen to get a similar result with a passive holding.

But of course, your research could have been terribly flawed. If you just picked based on liking the name of the fund or looking at their recent 3-year performance then it might give you quite random results and give you crazy volatility and the fact that it broadly kept up with the tracker for a couple of years does not attest to it being a sound portfolio for the longer term. So, I'm not saying keep it. If you want to justify keeping the portfolio you just need to evaluate what your goals are, how your goals will be met by your portfolio, and why a tracker would not meet those same goals with the same sort of risk level.

If your wife is going passive and you are going well-researched and planned and monitored active, then your overall household result will be a blend between the two. There is no particular need for you to dive into her way of doing things or she yours. Of course, if you think your objectives will be met with a single-tracker-fund approach - or that they will be almost-as-well met over the long term and you save a lot of work for yourself - then by all means drop your current approach.

Thanks for your post, you have confirmed very much what I was thinking so maybe I was just seeking some reassurance of my particular views, I do intend to stick with my active portfolio and really enjoy the research. I am quite hopeful that in the long term my portfolio will do well so I will monitor it accordingly.

Also, as you rightly pointed out the "overall household result will be a blend between the two". Our overall combined investments are just in excess of £500K so a mix of the two will keep us both happy and give me a 'hobby' in my retirement.

cloud_dog

Something to consider.... In addition to sites like Trustnet, etc, for monitoring performance, I set up a dummy portfolio of passive funds/trackers as mirrors for the active funds I hold so as to easily track variations in performance between the two types.

bostonerimus

ArchBair wrote: »

I have mainly invest in IT's in my investment portfolio with some selected funds/OEIC's in my S&S ISA's to make a bespoke portfolio. However, in the past couple of years my wife decided to sell her portfolio and re-invest in VWRL for her pension and HMWO for her ISA.

Since she made this decision, at the moment her passive ETF's have performed just slightly better than my bespoke portfolio so I'm now thinking is it worth all the time, effort and decision making with a bespoke portfolio?

Has anybody else had a similar experience?

VWRL and HMWO do not make a portfolio IMHO (that's not a fund), unless you're going for 100% equities for some reason. As others have pointed out comparisons between portfolios can be tricky as you often end up comparing apples to oranges. So your out performance might be because you are comparing 100% equities to a bespoke portfolio with 60% equities. Also ITs are very different from funds like VWRL or even active open ended funds....I think of ITs a bit like the Wizard of Oz; who knows what's happening behind the curtain.

It's easy to come up with a "bespoke portfolio" that will serve you well using trackers by adding some fixed income to something like VWRL. In short you could come up with a bespoke tracker portfolio that is probably far simpler to manage than your IT portfolio. The future returns can't be known, but you will save on expenses and probably have a bit more free time.

TheTracker

bostonerimus wrote: »

VWRL and HMWO do not make a portfolio IMHO

Ah yes IMHO. The active investor's favourite ETF!

ArchBair

bostonerimus wrote: »

VWRL and HMWO do not make a portfolio IMHO (that's not a fund), unless you're going for 100% equities for some reason.

We are 100% equities in both of our portfolio's mainly because we prefer to have a very decent cash buffer in preference to investing in bonds/gilts etc

grey_gym_sock

this is not surprising. as others have said, different portfolios will be ahead in different periods. and in the long term, who knows - though the odds are more in your favour if you cut costs to the bone, which is practice usually means being at least mostly passive.

i set up a perhaps over-complex, though mostly passive, portfolio in a SIPP a few years ago. and after a couple of years, it was fractionally behind what i'd have got by just buying a global tracker. there are some reasons to believe the more complex portfolio might do better eventually. but no guarantees. at least managing a more complex portfolio keeps me off the streets.

part of it is down to: do you want an investing hobby? if you do, a bit of complexity may be OK. but if you would rather be hands-off, a simple strategy will probably do the job just as well.

dunstonh wrote: »

Is your bespoke portfolio using researched and measured asset allocations or a bit random/made up?

research is 1 thing. but measurement is a bit spurious when it comes designing portfolios. because that is based on measuring past volatilities and co-variances of components of the portfolio, and assuming they'll be the same in the future. but volatilities and co-variances change all the time. saying "25% in X looks about right" is just as good as saying "22.78% in X because that's what the software tells me".