Whats your Process/Method/Criteria for choosing funds from the thousands available?

masonic

purple_rose wrote: »

This says indexes win. right?

It says the S&P500 index wins over (presumably) American active funds held by American investors. But the tax regime is different in the USA, which creates a further advantage for index trackers.

Best to look for some UK-centric data, of which there is plenty available.

Prism

BritishInvestor wrote: »

Not sure what this tells you. If, for example the last 10 years has suited a manager's style - e.g. large cap growth, this doesn't really tell you much, as at some point this style will go out of favour.

I don't pay much attention to the particular style category as the same stocks can flip between them and sometimes be classed as both value and growth. Most of my portfolio is in blended if that matters. I think we all have to accept periods of lower returns as long as things work out in the long run

If you look at fund performance vs the returns a typical investor achieves by investing in these funds it's quite sobering.


https://seekingalpha.com/article/4108688-investor-returns-vs-market-returns-failure-endures

Yup, too many investors buy and sell at the wrong times. Best plan is not to do it

bowlhead99

purple_rose wrote: »

BritishInvestor wrote: »

I start with a global equity fund (developed and emerging market, large, medium and small cap) and a global bond fund (all investment grade and hedged to GBP). I then check how this has performed against all the DFM offerings (with their ability to continuously adjust asset allocation, geography and pick winning funds) on a risk adjusted basis, and smile.

Thanks.
Where do you source the data on the "DFM offerings", aren't they private?

He is probably just making an assumption that the DFM will only be able to achieve returns on your money commensurate with the risks taken from time to time. And following that through, if the DFM makes decisions on allocating and reallocating your capital among investment funds/ asset classes throughout the year - but charges you some level of fee for doing so - the blended result from the DFM's allocation to the various funds is not going to be better overall than what BritishInvestor achieves (once you've adjusted for the change in risk profile).

On that basis, he doesn't need to know what their actual returns were for a typical client, because it can't be any good, so he can smile happily to himself that his money is better off being invested (at low total cost of investment) than being spent on DFM fees.

DFMs are not particularly well-loved on this forum (which is, after all, a money saving site). Employing your own active manager rather than DIY'ing the investments or simply having a financial adviser advise you on an overall approach and due diligence on fund selection, is something that costs extra money - and so if you don't have a huge amount of money, you probably can't justify the fees of a DFM portfolio, which is a service typically pitched at people with higher 'net worth'. And if you do have a huge amount of money and are cost averse, you can probably afford to ride out the ups and downs of the market and just take the result you get from slapping all your money into a tracker or two, so again you can't justify the fees of a DFM.

So a DFM service is only something used by a small demographic. If you were to ask the DFMs, they would of course say that they provide a value-adding service with better gross returns or better volatility or some other thing you would appreciate, through their approach.



In the ongoing debate about whether to be primarily a passive or active investor, DFM is a choice of the 'extreme' end of active management and expense ; you are paying them a fee to use their discretion to allocate your capital to produce a good result, and in doing so they will allocate your money among collective investment funds which themselves cost money to operate and manage. At the other end of the scale a passive investor buys an index tracker and just waits.

Some passive investors will buy trackers for multiple indexes and rebalance among them to their target model (diluting the passive-ness a bit) and some active investors will make their portfolio out of building blocks which include passive trackers within their targe model(diluting their active-ness a bit). Each of those investor types need to have, as you say, a "process/ method/ criteria for choosing funds from the thousands available".

If you are in the more passive camp looking for a single global tracker for your equities, you would have not have thousands to choose from and so you are really just deciding what particular index to track and which manager you trust to track it well at low cost.. But if you depart from that you have the whole investment universe to choose from which is why some people would just ask a discretionary fund manager to discretionarily deploy their funds and not have to worry about fund choices. Of course they still have to choose between DFMs, so there is no escape from taking decisions at some level...

BritishInvestor

purple_rose wrote: »

This says indexes win. right?

The evidence I've seen suggests that those that buy and hold something like an multi-asset fund underperform far less (there was still some underperformance as there was still some "meddling" by some of the holders) than those that try and pick winning funds (which investors tend to buy when they are high, and sell when they are low).

BritishInvestor

bowlhead99 wrote: »

He is probably just making an assumption that the DFM will only be able to achieve returns on your money commensurate with the risks taken from time to time. And following that through, if the DFM makes decisions on allocating and reallocating your capital among investment funds/ asset classes throughout the year - but charges you some level of fee for doing so - the blended result from the DFM's allocation to the various funds is not going to be better overall than what BritishInvestor achieves (once you've adjusted for the change in risk profile).

On that basis, he doesn't need to know what their actual returns were for a typical client, because it can't be any good, so he can smile happily to himself that his money is better off being invested (at low total cost of investment) than being spent on DFM fees.

DFMs are not particularly well-loved on this forum (which is, after all, a money saving site). Employing your own active manager rather than DIY'ing the investments or simply having a financial adviser advise you on an overall approach and due diligence on fund selection, is something that costs extra money - and so if you don't have a huge amount of money, you probably can't justify the fees of a DFM portfolio, which is a service typically pitched at people with higher 'net worth'. And if you do have a huge amount of money and are cost averse, you can probably afford to ride out the ups and downs of the market and just take the result you get from slapping all your money into a tracker or two, so again you can't justify the fees of a DFM.

So a DFM service is only something used by a small demographic. If you were to ask the DFMs, they would of course say that they provide a value-adding service with better gross returns or better volatility or some other thing you would appreciate, through their approach.



In the ongoing debate about whether to be primarily a passive or active investor, DFM is a choice of the 'extreme' end of active management and expense ; you are paying them a fee to use their discretion to allocate your capital to produce a good result, and in doing so they will allocate your money among collective investment funds which themselves cost money to operate and manage. At the other end of the scale a passive investor buys an index tracker and just waits.

Some passive investors will buy trackers for multiple indexes and rebalance among them to their target model (diluting the passive-ness a bit) and some active investors will make their portfolio out of building blocks which include passive trackers within their targe model(diluting their active-ness a bit). Each of those investor types need to have, as you say, a "process/ method/ criteria for choosing funds from the thousands available".

If you are in the more passive camp looking for a single global tracker for your equities, you would have not have thousands to choose from and so you are really just deciding what particular index to track and which manager you trust to track it well at low cost.. But if you depart from that you have the whole investment universe to choose from which is why some people would just ask a discretionary fund manager to discretionarily deploy their funds and not have to worry about fund choices. Of course they still have to choose between DFMs, so there is no escape from taking decisions at some level...

Thanks for summing up!:beer:

purple_rose

bowlhead99 wrote: »

Some passive investors will buy trackers for multiple indexes and rebalance among them to their target model (diluting the passive-ness a bit) and some active investors will make their portfolio out of building blocks which include passive trackers within their targe model(diluting their active-ness a bit). Each of those investor types need to have, as you say, a "process/ method/ criteria for choosing funds from the thousands available".

If you are in the more passive camp looking for a single global tracker for your equities, you would have not have thousands to choose from and so you are really just deciding what particular index to track and which manager you trust to track it well at low cost.. But if you depart from that you have the whole investment universe to choose from .....there is no escape from taking decisions at some level...

Yes thanks for your post. I will modify the example so the ratio is 50/50 active passive. As you rightly say- more work will be needed in choosing the funds in the active portion of the portfolio.