How To Own The world. New fund

username12345678

It is good of you to come on and reply personally Andy.

I haven't looked this fund but if it is trend following is it not using similar principles as many of the 'factor' ETF's available in the market?

And secondly, if your back-testing indicates that you'd have been 90% cash in 2008 then it does make me wonder how much whip-sawing there must be with such an aggressive trend (momentum factor?) system.

These aren't criticisms by the way, i'm genuinely interested in the theory and, as always, the more competition the better when it comes to the financial industry.

JohnRo

andyroocraig wrote: »

...how will you then decide when to sell it to avoid that 50% loss when the next dot.com / 2008-style crash comes?

andyroocraig wrote: »

I would argue that 0.9% of AMC is actually great value to protect against that and own and manage 24 different assets for you.

Until the next crash arrives, there's only your word for that. Is there any guarantee you won't lose 50% or whatever amount the markets decide various assets being held are now worth, along with everyone else?

Malthusian

You can absolutely copy the list of ETFs we use because we provide it - with total transparency - but how will you decide specifically when to buy and sell those underlying assets to avoid those 50% losses when the next dot.com / 2008-style crash comes? If you just copy our portfolio on a buy and hold basis you will not achieve anything like the performance we will.

No we won't. Market timing doesn't work, so by buying and holding you won't lose a bunch of money when the fund manager panics and cashes out (locking in any losses that he wasn't quick enough to avoid), and then doesn't buy back in when the market starts going back up (missing out on gains).

Remember that the bottom of a market only looks like the absolute best time to buy in hindsight. At the time, it feels like the absolute worst time to buy. At the time, everyone is talking about a recession lasting ten years and writing very convincing blogs about how the Baltic Dry Index points towards a total shutdown in world trade.

None of these people who claim that they'd fearlessly buy back into the market when everyone else is talking about a decade of pain actually do it. If they did, the market wouldn't have fallen that far in the first place.

Automated strategies that rely on algorithms from market data rather than the analysis of a manager also don't work, because by the time there is enough data to show it's time to get out of the market, most of the fall has already happened. And by the time there is enough data to show it's time to go back in, most of the recovery has already been missed. Since stockmarkets go up more than they go down, the lost gains from using an algorithm outweigh the avoided losses, and automated market timing strategies always fail.

Simulated backtesting is worthless; with the aid of hindsight it is trivial to generate any performance figure you want. If your strategy doesn't perform well enough in 2008, you just change it and run the simulation again. It's like playing chess against yourself, while cheating. The important question is how the fund actually performed in 2008 using the strategy it had in place at the time. It didn't exist? Ok then.

which means that when markets plummet as in years like 2000 and 2008, you can see very significant wealth destruction.

A buy and hold investor experienced no wealth destruction whatsoever in 2000 and 2008, unless they panicked and cashed in (perhaps thinking they could time the market), failed to diversify properly, or invested in ultra-high-risk investments such as individual shares or geared funds.

Someone who works in financial education should know the difference between paper losses and actual losses.

rathernot

Andy thanks, an interesting read and nice to see people "getting out there" as you do sometimes wonder whether the people who write books and do this for a living ever "do forums" and places like this

Superscrooge

aajax42 wrote: »

I have just finished reading How to Own the World and felt there were some very compelling suggestions for wealth management and creation within it. The author has now teamed with others and created a new fund based upon strategies proposed in the book. The fund is ' VT-PEF-Global-Multi-Asset-Fund'.
It is brand new, but I am leaning toward getting involved. Any thoughts you learned people?

I'll just continue to 'Own the World' with my low cost global tracker fund

John-K_3

bostonerimus wrote: »

FYI the backtested return for this new fund given in the fund brochure is an annualized 7.22% from 2001 to 2017. My simple passive approach has produced an annualized 8.78% return over the same period. So I see no reason why this fund would stand out from the crowd, as I surely don't - by design.

And of course, a backtested result is worthless, as the rules can just be picked today to have always been long the winners and short the losers over any period that you like.

bostonerimus

I generally like Andrew Craig's mantra of DIY investing and any attempt to demystify money management. However, being a personal finance guru and selling financial products means there are going to be conflicts of interest, particularly when you are invested in these "fortune telling" algorithms.

andyroocraig

Good afternoon all. I posted a response to this thread on Monday but then deleted it:
a) Because it seemed to be riddled with some sort of annoying bug that inserted loads of random characters in it and made it hard to read (!!825%)**^%$ etc...).
b) Because we are regulated and authorised by the FCA and I just wanted to 100% check with our compliance folks that what I wrote was OK. You can never be too careful, particularly post MIFID2 which many of you will know about... Anyway... Below is the original post again as apparently it is fine. I hope it helps... Also - I have come back to a few specific comments from some of you above what I wrote (I hope you won't mind):

Malthusian - Much of what you say in your comment I agree with (particularly on missing out by being out of the market) but basic "market timing" can absolutely work as long as it is rules based and not 'shooting from the hip' on a whim / on a fund manager's ego. I would invite you to look at how basic trend following applied to the S&P improved returns by no less than 2% p. annum and reduced volatility by more than 4% (and max drawdown by more than 30%) from 1872 to the present day (see evidence on p. 10 of our Fund Overview document) - with an enormous impact on aggregate performance and how the same basic approach has worked across various uncorrelated markets. You might also check out the academic papers that support the analysis that we reference on p. 29 of the same document.

"Drawdown" (notional loss) is also actually very important for all but the most committed buy and hold investors. You may be "made of stone" and have the psychological strength to ride out a 50% fall in your shareholding through a 2000 or 2008 by holding and / or simply investing regularly no matter what (something I have written about a great deal and advocate by the way) but you and I are rare. Very rare. This is particularly hard for retirees where a 40% down year on your entire pension pot is clearly extremely problematic / potentially catastrophic / life changing.

John-K - there is a great deal of bad back-testing out there to be sure but I'd hope that if you read what I have written about why I think ours is entirely sensible (p. 15 of our Overview document: Basically it is a fixed set of assets which are all huge and liquid markets, we use 4x higher trading costs in the model than reality and it is entirely rules based and unchanging - i.e. you really can't 'cherry pick' to make numbers look better - else I wouldn't be marketing 'only 7.22% - ;-) ) you will see why ours (and others being similarly sensible and conservative) might have some validity.

Username 12345678 - there is no 'whipsawing' as the strategy moves very slowly indeed. Please take a look at p. 14 of our document and you'll see how long it took to move out of the various assets and end up in 90% cash and how long it then took to get back in. Many months. Trading costs low. No whipsawing.

bostonerimus - I'm delighted your approach has produced 8.78% over the same time period and genuinely interested in how your volatility and max drawdown numbers look else you are not comparing apples with apples. UK small caps have produced over 15% annualised since 1955 (Dimson and Marsh) but have had drawdowns of more than 50% several times - which tend to scare people out of their position.

JohnRo - There is never any guarantee, you are correct but the application of basic, rules-based trend following - looking at data as far back as 1872 - does significantly increase the chance you protect the downside - as does the diversification across uncorrelated assets. It is all explained in the Overview document.

I hope that is useful...

THE ORIGINAL COMMENT FROM EARLIER IN THE WEEK

Hello everyone. I’m not sure if this answer will be permitted on to the forum as I’m not sure what the rules are around someone like me being permitted to post. To explain – I am the author of the book in question, the founder of Plain English Finance and one of the investment managers of the fund. I hope those who have been critical of the costs won’t mind my answering those criticisms?

Assuming not – all I would say is that I know it is perhaps a bit of a cliche, but I do believe that the idea that there is a difference between cost and value is relevant here.
I think the main thing that folk seem to have missed here is the trend following element and how this has significantly reduced volatility. You do not get trend following when you buy a cheap basket of ETFs – which means that when markets plummet as in 2000 and 2008, you can see very significant falls. 7.22% annualised performance with low volatility is also far better than 7.22% annualised performance with high volatility – where you might regularly endure big down years which might panic you out of your position – or which are disastrous for folks in retirement who are in the draw-down phase.

You don’t get trend following, nor such a wide range of assets by buying ultra-cheap ETFs. I would argue that 0.9% is a pretty fair price to remove the significant administrative and trading hassle of owning no less than 24 underlying assets and to benefit from all the back-testing work (on 97 assets as it happens) to get to those 24 in the first place. (To a certain extent you’re ‘paying’ for a huge amount of analytical / optimising work to get to the right portfolio that should work through the economic cycle).
You can absolutely copy the list of ETFs because we provide it - with total transparency - but how will you decide specifically when to buy and sell those underlying assets to avoid those 50% losses when the next dot.com / 2008-style crash comes? If you just copy our portfolio on a buy and hold basis it is highly likely you will not achieve anything like the performance we will.

Without the trend following, that mixture of assets fell 26% in 2008, with it, our strategy – investing in the same universe - fell only 6.6% because it had gone 90% cash thanks to the trend following (and these numbers were assuming 20bps for trading costs when we actually pay 5bps in the real world – so I would argue that our back-tested numbers are sufficiently conservative to be sensible – I’ve written more on this in our Fund Overview document someone has reference above).

The trend-following overlay comes from arguably two of the world’s leading experts on the subject. A very talented amateur investor, with the right tools and, arguably more important, the time and inclination to deal with the administrative pain of doing all of this (lots of work to say the least) will quite possibly be able to run a similar strategy – but this describes a tiny minority of the population with lots of time on their hands.

For everyone else, I would argue that the fund is perfectly good value and going to become even more so if I can make it happen as we grow.

Someone above has suggested that L&G multi index will do a ‘similar job’ and cost 0.31%. I would argue they most certainly do not. I would also ask - which one of the sixty or more of them are you going to pick that are available to do that ‘similar job’ by the way?

Similarly, folk have criticised our costs and then suggested personal assets trust – which has an OCF of 0.95% and Capital Gearing Trust – which costs 0.86% - neither of which seem that far off our 1.14% and certainly not v. far off our goal of 1% - which I hope to get to in the next year or so and reduce as we grow (if you do the maths on how much we make from 0.6% of £10m – you will see how we will need to grow before we can pass on cost reductions to our investors. I very much hope we will be able to in time)… (I'd make the same point about factor ETFs that someone suggested - but I'm sure some of them are v. good).

For now - sure, someone can buy an S&P ETF from Vanguard for 6bps (as we are of course – that is the one we own for our ‘US equities’ silo) but how will you then decide when to sell it to avoid that 50% loss when the next dot.com / 2008-style crash comes? Arguably more importantly - how much time will you have to spend monitoring that? Do you have the skill set required or the time and desire? I would argue that 0.9% of AMC is actually great value to protect against that AND own 24 different assets for you.

I hope that helps. Full details of all the arguments in more detail and why we think our back-testing is sufficiently conservative can be downloaded from the funds section of our website. Very best wishes. Andy Craig.

grey_gym_sock

andyroocraig wrote: »

basic "market timing" can absolutely work as long as it is rules based and not 'shooting from the hip' on a whim / on a fund manager's ego.

the problem is that a "rules based" system, when it has only be validated by back-testing, may not be valid at all. there is a huge risk of data mining - even if you are making an honest effort to avoid that. i am sure you will admit that, had the rules you tested not given good results in back tests, you'd have tried out some slightly different rules (or gone for some completely different strategy instead).

i agree that keeping your rules as simple as possible can help to reduce the risk of data mining. but not to eliminate it.

to combat data mining more effectively, it would help to have things like: out-of-sample testing, and an economic explanation of why a strategy should work.

i've read about tests of some broadly similar systems (i.e. systems in which you hold an equities index when the "trend" is in your favour, and go to cash when it's against you). and often the claim is that you might get similar returns to a simple buy-and-hold strategy, but with lower volatility. so i'm more sceptical about your claim of higher returns than buy-and-hold. similar returns and lower volatility seems more plausible.

and if returns were only similar to buy-and-hold, what's the point in paying your higher fees?

in any case, i'm put off by the complexity of this strategy, compared to buy-and-hold. there's a lot more intuitive logic in "owning a small slice of all the businesses it's possible to own a slice of" than in "sometimes owning a small slice of ...".

and the more complicated a strategy is, the more there is to go wrong. it may well matter a lot precisely how a trend-following strategy is implemented. so even if trend-following were something i wanted to do, i'd have to decide who (if anybody) has a good implementation of it.

in short, i think there are probably far worse ideas out there than your fund. but it's not an obvious win. one should not be mesmerized by back tests.

bostonerimus

Here is an excellent discussion on "trend following" over at Bogleheads.com. There will probably be some bias there, but it does have links to all the academic papers referenced by Andrew Craig and some good observations. Of course this sort of moving average approach has been around for ages so Mr. Craig isn't selling anything new. For my part I do the opposite by selling things that have gone up and buying things that have gone down to keep my allocation constant, which was hard in 2008, but worked out well enough. I keep my indexes large so that they are fairly efficient and then fall into the warm arms of market averages. My portfolio and approach is just one solution in a space of almost infinite solutions and, like many others would have done, it's brought me to a very comfortable place. The trick isn't to maximize return it's to maximize the probability of getting to one of those nice comfortable peaks in the solution space. I have no need to win or beat anything, just meet the numbers in my plan.

https://personal.vanguard.com/us/funds/snapshot?FundId=0521&FundIntExt=INT&funds_disable_redirect=true