Decision: active v passive multi manager v nutmeg v DIY

bostonerimus

You don't need much skill to invest successfully; what you need is some knowledge, the ability to see through financial flim flam, and the courage to manage your money through bad times using some simple rules.

My approach is to DIY and use index trackers to keep costs down.

bostonerimus

justme111 wrote: »

my understanding that some small sectors would not have passive funds ( by the way is"tracker" the same as "passive fund:? )for them

Yes a passive fund is a tracker.
If there isn't an index for a sector then I feel that you've got down to a level where you shouldn't be investing. There will certainly be opportunities in such small markets - opportunities to both make and lose large amounts of money. So they are not diversified or stable enough for me to consider them as a single fund in my portfolio.

snowqueen555

TBC15 wrote: »

If you believe para 1 which is true, isn’t para 2 contradictory?

Not really. All my funds are passive, but I choose to weight my portfolio more towards tech than a normal tracker

e.g. For example, my portfolio could be
90% - Global Index Tracker
10% - Global Tech Tracker

Where I would disagree is to choose actively managed funds. They simply don't do as well.

bowlhead99

justme111 wrote: »

It is not a "dilema". "Dilema " is when there is a choice between 2 well defined options.

In modern day english, the 'di' referring to 'two' has taken on more generality over time, so that you may see a dilemma being defined as a situation in which a tricky or difficult choice has to be made between two (or more) alternatives; or more generally just a difficult situation or problem with a few potential solutions, none of which are immediately ideal.

Clearly, regardless of nitpicking the particular words used by the OP (or the spelling of them by you :-)), they are facing a crossroads of choices, whether there are two or three or five routes ahead, and they hope to favour one path or another after taking some guidance here and doing some more analysis.

TBC15 , my understanding that some small sectors would not have passive funds ( by the way is"tracker" the same as "passive fund:? )for them

A passive fund does not have a manager making decisions and choices on what to buy and hold within the portfolio because the operator of the fund will decide up front what published index he wishes to track, and publish that information so that investors can decide whether or not to invest, knowing what they are going to get.

So a passive fund will be a tracker fund because once it is set up it will be tracking passively some other model or index published by a different person/ entity - rather than taking inputs or active portfolio decisions on an ongoing basis from a manager. In reality there will usually be some tricks and tweaks to 'optimise' how it works efficiently: for example around the time of the index changes each quarter where new shares get promoted in or demoted out of the index; or where a 'representative sample' of the index components is used to save cost and effort without departing too far from the overall result. But the idea is that everyone buying the fund would expect its results to track along with the underlying index it's trying to passively track.

It is feasible to say that actively managed funds (as an overall collective of all the managed funds in the world) will not beat passive investing with exposure to the same sectors. But it is also valid to select active funds in certain areas where managers find it relatively easier to generate outperformance agains an index or where trackers don't really exist or are expensive, illiquid etc.

There are multimanager or single-manager 'funds-of-funds' available where you put your cash in and the manager will allocate your money to invest it in underlying passive fund products, with an active overlay by the product provider determining the mix of underlying products in which to invest and rebalancing to a target from time to time . This is not truly 'passive' investing (which would involve just picking a single index and following it with no work at all), but the underlying recipients of your cash can be passive vehicles without huge expense, getting you a somewhat balanced portfolio in one product rather than just a single asset class, with only half a percent or so (or less) of cost drag on the underlying gross performance, considering the platform fee and fund-of-funds operating costs and underlying fund costs.

Nutmeg would charge twice that "half a percent or so (or less)" for a product which allocates your money among index tracker funds, I guess they would say their active allocation among those indexes is generating a better return, or producing a lower volatility, or doing something better, for your particular risk profile, than you just buying a passive-based mixed asset fund for yourself off a mainstream platform or fund supermarket. However they don't really make any substantive claims that their allocation across asset classes for your risk profile pigeon-hole from time to time will be significantly better than if you just bought a multi-index fund from L&G or HSBC targeted at that particular risk profile.

One thing the Nutmegs of this world do is bring passive-based simple-risk-profiled investing to the masses, which is a valid service worth paying for if you would just otherwise be completely clueless and buy a fund at random from a fund supermarket because you don't have the time or aptitude to DIY properly, and you don't have £100k+ for it to be at all affordable to pay for an IFA's time to set you up with a tailored approach. However, for anyone who can read MSE forums and other financial blogs and literature and comprehend it, there seems to be no reason to pay 1% for Nutmeg when you can pay half for a passive based fund of funds or the same for a more active-based version.

If you have the time and confidence and cash to build your own bespoke portfolio with multiple funds selected yourself (whether active or passive funds) then that's fine and may allow you something more tailored for what you feel you really want, rather than leaving it to a fund of funds manager who assumes you'll want what everyone else in the product wants, and what he wants to deliver.

However with small values if you are using detailed granular building blocks for your self select portfolio it seems like unnecessary faff to have lots of funds, because they won't have much in each, when you could buy a multi-asset class fund or two yourself and let its manager sort the allocations and rebalancing. Especially if as per the OP you don't really trust your own judgement.

The OP's £60k might not sound like 'small values' but actually it's spread over 'mine and wife and mum's ISAs' and 'JISAs for both my kids'... so really there is five balanced portfolios going on and it seems likely that all of them could be catered for using something like a multi-asset fund targeted at a particular risk level. If passive building blocks are preferred, something like L&G Multi Index could be used for everyone in the family but some are in Multi Index 5 and some in Multi Index 7; or some in HSBC Global Strategy Dynamic and others in Balanced, etc.

I would steer well clear of the HL ready made portfolios given that to access them you have to be on the most expensive platform in town (0.45% is almost £300/yr on £60k). As mentioned the combined cost of that platform and funds solution is approaching 2% which seems a lot to let them sell you what you want to sell you and you aren't even getting any tailored personalised financial advice which you could get from an IFA for less.

aroominyork

The HL ready-mades might seem that they will manage your money well (albeit for a high price) but they have some gaping flaws. Consider this: the Master Portfolio is the product which suggests a range of funds and % allocations and you then move the sliders to increase/decrease the allocations from HL's default suggestion. So tell it you want to invest £100,000 in the Adventurous (ie equities only) product and it comes up with this:

10% in Stewart Investors Asia Pacific Leaders
10% in JPM Emerging Markets
15% in Threadneedle Europe Select
20% in Axa Framlington WF UK
15% in Man GLG Japan CoreAlpha
15% in Marlborough UK Micro-Cap Growth
15% in Standard Life Inv Global Smaller Companies.

So that all looks like a nice bunch of names, doesn't it? But hang on... we have Asia and Emerging Markets, we have Japan, the UK and Europe... but what about the world's biggest economy, the USA? The Standard Life smaller companies fund is invested 43% on the USA so a mere 6.45% of your portfolio will be in the USA and all of it in smaller companies!

I phoned HL and asked them why. Call centre chap went to have a word with his colleague and then told me that it's because active funds cannot easily beat the index in the USA. Now you often hear that... the market is fully researched... you can't find value or beat the index etc., but is the answer to avoid the USA altogether? Since this HL product only uses actively managed funds it seems the answer is Yes, we'll just leave the USA out altogether! Perhaps they figure you will recognise this gap and keep a chunk of your capital aside to invest in a USA index fund.

So beware, beware, and then beware some more.

masonic

aroominyork wrote: »

I phoned HL and asked them why. Call centre chap went to have a word with his colleague and then told me that it's because active funds cannot easily beats the index in the USA. Now you often hear that... the market is fully researched... you can't find value or beat the market etc., but is the answer to avoid the USA altogether? Since this HL product only uses actively managed funds it seems the answer is Yes, we'll just leave the USA out altogether! Presumably they figure you will recognise this gap and keep a chunk of your capital aside to invest in a USA index fund.

That's a rather odd explanation. And if nothing else it should be pointed out if that's really their thinking. Of course one could make a reasoned decision to underweight the USA on the basis of valuation, but having no large-cap US exposure at all seems a little extreme.

A_T

It could be that HL have some sort of deal with funds if they include them in their ready-made portfolios. The S&P 500 trackers are all from huge names like HSBC, Blackrock, Fidelity who probably aren't interested in paying HL to put their fund in the portfolio. Certainly it makes no sense to me to leave out most of the biggest companies in the world.

Audaxer

dunstonh wrote: »

We find our model option beats VLS but you have to be aware of your knowledge and ability. We buy in data, research and analysis and know our limitations. You could easily underperform VLS if you fail in that area. A lot of DIY investors self select their portfolio and beat VLS. But you have to put the effort in and follow the economic cycle.

Hi dunstonh, I respect your opinion and have seen you mention following the economic cycle before. Can you advise me how we know where we are in the economic cycle? As we have not had a big equity crash for 10 years, does that mean we are near the end of the economic cycle? If we are do you tend to advise clients to have a lower percentage in equities at this time and/or more defensive funds? I would have hoped that if you pick a good diversified portfolio of funds/ITs for income in retirement these could be buy and hold for the long term no matter what was happening in the markets. Is that not the case?

dunstonh

Audaxer wrote: »

Hi dunstonh, I respect your opinion and have seen you mention following the economic cycle before. Can you advise me how we know where we are in the economic cycle? As we have not had a big equity crash for 10 years, does that mean we are near the end of the economic cycle? If we are do you tend to advise clients to have a lower percentage in equities at this time and/or more defensive funds? I would have hoped that if you pick a good diversified portfolio of funds/ITs for income in retirement these could be buy and hold for the long term no matter what was happening in the markets. Is that not the case?

It depends on what funds you use within your portfolio. If you focus on a style of investing, then you need to be aware that style will not necessarily work throughout the whole economic cycle. Recovery/Spec Sits, equity income, small cos etc tend to favour certain stages of the economic cycle and can go out of favour in other parts. More general equity funds dont suffer with that as much.

If you are building yours with more general single sector funds rather than focused/niche single sector funds then you dont need to worry about it much.

Audaxer

dunstonh wrote: »

It depends on what funds you use within your portfolio. If you focus on a style of investing, then you need to be aware that style will not necessarily work throughout the whole economic cycle. Recovery/Spec Sits, equity income, small cos etc tend to favour certain stages of the economic cycle and can go out of favour in other parts. More general equity funds dont suffer with that as much.

If you are building yours with more general single sector funds rather than focused/niche single sector funds then you dont need to worry about it much.

Thanks, that's good to know. The active funds I have gone for so far are mostly equity income funds (UK, Global and Asia), and a few strategic bonds/fixed interest funds. I don't think any are particularly focused or niche funds, so I intend to stick with them, reinvesting the dividends until I need to take them.

Edit: just noticed you have included equity income funds in the ones that you say may be affected by the economic cycle. I would have thought funds like Royal London UK Equity Income, Fidelity Global Dividend, MI Chelverton UK Equity Income, which I hold could be classed as fairly general equity funds?