How To Own The world. New fund

bowlhead99

gif1 wrote: »

The fund (seems to) offer similar performance (after charges and costs) to other multi-asset, but with far lower volatility.

The fund *claims* it can offer lower volatility and similar performance based on the back-testing they have done. They are only theoretical figures though, and they have not actually been running long enough to give them a track record in delivering the same returns at lower volatility.

With a full set of historic data anyone can design a model that gives the best result for that set of data. And then you can say that assuming this is how the markets work, I'll just keep plugging along with this plan and I'll get a great result going forwards because now I have 'learned' what to do based on the past, the interactions between data points in future are likely to be just the same as before, so I will just follow this model and great results will ensue.

Of course if the next crash (and recovery from the crash) does not work out the same way it did in 2000-2005 or 2007-2011 and the various asset classes don't interact in the same way or start from different relative levels or have different outside influences, you can't 'guarantee' a result. You can just say that the person promoting the product believes it will be worth paying the premium for his system.

It is the latter aspect I am interested. I guess anyone would settle for similar performance and lower volatility, all things being equals?

Yes, generalising we would all much prefer our overall results to be a smooth upwards line on a graph rather than a rollercoaster which you hope ends up higher than the start to compensate you for all the times it went through the floor, but can't see where it is going next.

People generally use active rather than passive management because either:

- they have a particular type of need that the passive funds don't address very well (they want access to a particular asset class; or a high level of natural income; or not to lose money in any one year, willingly sacrificing overall performance; or blah blah etc etc)

- they want to try to outperform the passive funds in certain market conditions (or most market conditions) through picking better underlying assets. They might accept worse volatility to get better performance overall.

- or they don't want the result of the market index because it is too volatile and want to achieve broadly similar results with lower volatility. There they are accepting potentially worse performance to get better volatility overall, the opposite of the one above.

If you can get better (lower) long-term overall volatility wthout really having to sacrifice much (or any) performance net of fees, great, that's what we'd all like.

When someone pops up and says they have a great system which achieves that holy grail of investing because they have a model that worked when they backtested it to see what they would have done in different scenarios... but they haven't actually got a track record of following that plan in real time with a real large fund and publishing the results as they go along for a couple of decades... the skeptics and cynics will pop up.

The skeptics and cynics will say "sure, right, pull the other one, I don't think your fund will be suitably clever enough to earn an extra percent every year good years and bad to cover your fee and my returns. Yes yes I can see what your model said you did in 1999 and 2007 and 2011, it is easy to build a model to say it would have done that, because if the model said do something else and it lost money, you would have changed the model until it didn't lose money, but that's easier to do with hindsight than with my investment going forward".

A reasonable does of skepticism is healthy when evaluating any opportunity marketed to you.

grey_gym_sock

gif1 wrote: »

Thank you for your answers, but my question was more like "Is 0.9% a premium worth paying to reduce the volatility next time a crash happens?". I see this like an "insurance" and was wondering whether the premium is fair. The fund (seems to) offer similar performance (after charges and costs) to other multi-asset, but with far lower volatility. It is the latter aspect I am interested. I guess anyone would settle for similar performance and lower volatility, all things being equals?

if i held this fund, i'd probably be worrying about whether it really will protect against losses in a crash. IMHO, it might well do. but have they designed the fund's rules as well as possible to achieve that? will the next crash be similar (enough) to the last few crashes that what worked (only in back-testing) will work again (this time, for real)?

i feel i'd just be exchanging 1 set of worries (a big crash) for a different set (using a sub-optimally designed trend-following strategy). personally, i'd rather stick with the risk of the big crash, and mitigate it by

1) training myself to get used to crashes, so i won't panic and sell out near the bottom; and

2) when it gets near to when i (might) want to withdraw some cash from investments, reduce my exposure to equities.

one thing i like to ask myself when adopting any strategy is: if it goes through a really bad patch, will i stick with it? because sticking with a strategy is even more important in investing than adopting the best strategy (so long as your strategy isn't completely daft - which i don't believe this fund is).

so i'd ask yourself what you'd do if you bought this fund and then it failed to give much protection in a crash, but seriously underperformed when markets are rising. would you tell yourself: all strategies have bad patches; it's worth sticking with this one? or bail out? IMHO, if you'd bail out, perhaps you shouldn't buy into it in the first place.

bostonerimus

gif1 wrote: »

Thank you for your answers, but my question was more like "Is 0.9% a premium worth paying to reduce the volatility next time a crash happens?". I see this like an "insurance" and was wondering whether the premium is fair. The fund (seems to) offer similar performance (after charges and costs) to other multi-asset, but with far lower volatility. It is the latter aspect I am interested. I guess anyone would settle for similar performance and lower volatility, all things being equals?

You are not buying "insurance". You are buying into someone's algorithm and there is no guarantee that it will reduce volatility or give better returns. It might be instructive for you to look at how momentum following funds did recently, over the last year and decade etc and compare to a regular multi-asset fund......I haven't done that comparison myself, but if you are thinking about buying a trend following fund you should do it.

https://www.ft.com/content/b3b680e2-0bbf-11e8-8eb7-42f857ea9f09

bostonerimus

FYI after 6 months.
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vt-pef-global-multi-asset-accumulation/charts

gif1

What about its benchmark? We should try and be fair!

Malthusian

No explicit benchmark seems to be used in the literature, so we may as well compare with the forum favourite Vanguard Lifestrategy 60/40, as according to the portfolio breakdown there's about 40% in bonds and cash. (Blue = Vanguard, Orange = VET PEF)


Obviously past performance da da da, and I'm certainly not implying that this means the fund has failed in its objectives. That will only become clear in a complete economic cycle, when we're able to see a) whether the fund has achieved its goal of reducing falls during a market crash b) whether the fund delivers growth or just slithers along absolute-return-style.

While I was looking through the literature to see if the fund used a benchmark, I found this gem:

The chart below shows the maximum peak to trough loss you would have suffered as an investor since January 2001... The orange line shows a mixture of 70% world equities (shares) and 30% UK government bonds (gilts). This is the sort of combination of bonds and shares that many financial firms might recommend to you as a "growth" portfolio.

Firstly, what the orange line actually shows is 70% MSCI UK, which is not "world equities" by any stretch of the imagination (the MSCI UK is essentially the FTSE 100). Secondly, the assertion that many financial firms would advise anyone to invest in 70% FTSE 100 and 30% UK gilts is egregious rubbish.

This provides further evidence for my theory that if you see the word "backtesting" anywhere in an investment's literature, you should run away. Such elementary mistakes in a fund's literature never inspire confidence, which is significant when the entire raison d'etre of the fund requires you to buy in to the idea that the managers' algorithm will deliver superior returns.

bostonerimus

Here is an interesting paper where Andrew Clare, Steven Thomas and James Seaton (experts claimed to be connected to VET PEF) investigate the use of trend following in retirement portfolio management and spending. It's an interesting read and comes to some interesting conclusions. But we must always be careful if academics are financially invested in the results of their own research......and more importantly the academics must be careful themselves.

https://www.york.ac.uk/media/economics/documents/discussionpapers/2017/1706.pdf

rathernot

I'm more interested if fund managers are financially invested in the products they offer.
If the people who run funds have their own money (preferably lots of it) in the fund they run.

grey_gym_sock

rathernot wrote: »

I'm more interested if fund managers are financially invested in the products they offer.
If the people who run funds have their own money (preferably lots of it) in the fund they run.

that's all very well, but i wouldn't rely too much on it.

for one thing, if it's a niche fund, you can't expect the manager to put a large proportion of their money in it. OTOH, if a fund is presented as a "you could sensibly put all your capital except your own home + a little cash in this", then of course you'd like the fund manager to actually do that ... but then we don't know how rich the manager is; they might have what looks like a lot of money (to me or you) in the fund, but not that large a proportion of their total wealth.

also, a manager may not mind putting a fair proportion of their capital in their own fund, despite its mediocre performance (before fees) and excessive fees, if that helps build up the popularity of the fund. because they may gain a lot more in fees (on everybody's investment in the fund) than they lose on the mediocre performance of their own holding in the fund.