Index vs managed funds the great war

Linton

sixpence. wrote: »

If you had to choose a sector to be overweight in what would you choose and why? Many of the funds I am looking at tend to favour banks/software which is sort of annoying. I am looking to diversify as much as possible.

In my case it’s more a matter of avoiding too high a % in any sector in the portfolio as a whole. Anything above 15% worries me.

Also sectors are divided into categories eg defensive, growth, cyclical. Again I try to avoid over dependence in any category.

I am getting a strong sense reading this that a lot posters simply pick a group of diverse, active funds which have preformed the best over the last ten years? This all seems a bit too simple. Are there any other ways of picking? I know with shares it is important to read through annual reports and listen to conference calls, in order to get a sense of where the stock may be going, is there any such meticulous selection process for managed funds?

Has anyone said this? Simple period performance is a factor but certainly not the only one.

There is fundamental data to justify (or not) share prices. Things such as profit or loss, size of company, level of debt etc that is readily available. This I find more useful than annual reports or analysts views. There isn’t anything equivalent for funds, the price is simply determined by the shares the fund holds. That is what is important, in some cases the particular shares but mainly the split between geographies, sectors.and company sizes.

There are “conviction” funds where the manager has strong over riding views on the shares that should be held eg Fundsmith. With these ones the manager’s views and predictions are important. However I tend to avoid such funds as they are often unbalanced and it’s difficult to see how they fit into a wider portfolio.

k6chris

Linton wrote: »

In my case it’s more a matter of avoiding too high a % in any sector in the portfolio as a whole. Anything above 15% worries me.

Linton, how do you work your overall allocation out? Is there a tool that you can input your funds into and will work allocation / risk etc out for you, or is it a manual process? Thanks.

TheTracker

sixpence. wrote: »

I am getting a strong sense reading this that a lot posters simply pick a group of diverse, active funds which have preformed the best over the last ten years? This all seems a bit too simple. Are there any other ways of picking? I know with shares it is important to read through annual reports and listen to conference calls, in order to get a sense of where the stock may be going, is there any such meticulous selection process for managed funds?

I found this interesting http://www.lloydsbankinggroup.com/globalassets/documents/media/press-releases/halifax/2013/1406_hsdl_markettracker.pdf

Asked what the most influential filter was when selecting funds, c60% said past performance or yield.

Linton

k6chris wrote: »

Linton, how do you work your overall allocation out? Is there a tool that you can input your funds into and will work allocation / risk etc out for you, or is it a manual process? Thanks.

Morningstar portfolio Xray. Trustnet portfolio and some of the platforms have similar though not so comprehensive facilities.

Linton

TheTracker wrote: »

I found this interesting http://www.lloydsbankinggroup.com/globalassets/documents/media/press-releases/halifax/2013/1406_hsdl_markettracker.pdf

Asked what the most influential filter was when selecting funds, c60% said past performance or yield.

Yield is of course important if you are after income. It is far more consistent over time than relative performance. Yield is a different criterion to performance - you cant regard them as one.

sixpence.

Linton wrote: »

In my case it’s more a matter of avoiding too high a % in any sector in the portfolio as a whole. Anything above 15% worries me.

Okay so, inspired by this thread, I have crunched out some numbers re my portfolio plan (featured in the original post) and I can see that it's going to about 16.6% tech and computer software overall and 10.3% banks and financials. Is that too much for the two dominating sectors? It's because I have a global tech tracker in there and the VLS 60 already has quite a bit of tech.

Note: with the VLS 60 it is obviously 28% bonds. Most of the tech is based in the USA but some in Asia.

Linton

sixpence. wrote: »

Okay so, inspired by this thread, I have crunched out some numbers re my portfolio plan (featured in the original post) and I can see that it's going to about 16.6% tech and computer software overall and 10.3% banks and financials. Is that too much for the two dominating sectors? It's because I have a global tech tracker in there and the VLS 60 already has quite a bit of tech.

I would treat the equity part of your portfolio completely separately to the bond part. If your % refers to the equity part then there isnt any obvious problem - my %s in those 2 sectors are a bit higher. I wouldnt seek to increase the overall tech % but would look elsewhere for future investments. However you may be willing to take greater risk if you feel the prospective return justifies it.

If the 16.6% tech refers to the overall portfolio, as I guess it does, then holding extra tech alongside a tracker which already includes significant tech is more open to question. I am not saying it's wrong, but rather it's something you should be able to justify to yourself.

Looking at allocations is more about enabling one to focus on potential issues rather than obeying hard and fast rules.

Prism

sixpence. wrote: »

Okay so, inspired by this thread, I have crunched out some numbers re my portfolio plan (featured in the original post) and I can see that it's going to about 16.6% tech and computer software overall and 10.3% banks and financials. .

The MCSI world index is 18.1% financials and 16.8% technology if that helps

bowlhead99

Linton wrote: »

Looking at allocations is more about enabling one to focus on potential issues rather than obeying hard and fast rules.

I tend to agree with that.

When building a portfolio out of multiple funds to cover all the areas you want to cover, it would be very tricky to say I am targeting exactly x.x% in this sector. You could spend hours fiddling to tweak it, and ultimately who is to say that x.x% is the 'correct' figure.

Really what you are trying to do is to say this portfolio doesn't work for me because it has y% in [sector A] and that seems like too much for me based on my view of issue [whatever], or of the prospective volatility of [a sector or region or currency]. Or, it doesn't work for me because it only has z% in [sector A] and that doesn't seem like anywhere near enough exposure to such businesses or regions or asset classes. Once you fix both of those problems (being definitely too high or too low) you will be in a range where that sector, or that region, or that asset class, is 'fine with me'.

For example, 30% tech might be too much for me and 1% might be not enough. I can tell you both of those things more easily and definitively than I can tell you that I want 16.4827% tech, because the latter is just going to be some arbitrary made up number.

So it's more about stopping a portfolio being unattractive - a process which will make it more suitable/acceptable for your needs... rather than saying how do I go all Weird Science and build a perfect ten, from scratch.

But there are various sectors and regions and asset classes you have to get happy with, so the task can become complex; when adding or removing a fund that contains a bit more A or a bit less A will also change the amount of B.

ivormonee

If active fund investors are delving into a level of detail that includes their consideration of how much of which sectors, whether large, mid or small caps, value orientated or growth, currency exposure, volatilty, etc. then really aren't they doing the job of the manager of the active fund, by definition of making a choice to populate their self-determined portfolio asset alloactions, who should be doing that very job for them?