How much to invest in conviction funds

David_Evans

Aminatidi wrote: »

If Woodford or Terry Smith drop dead tomorrow just sell your holding.

I'd probably wait for the drop in price and then buy the fund (if it fell low enough).

bostonerimus

Prism wrote: »

To be honest I imagine most people do yes. When i first decided to take control of my pension by moving to a SIPP, I researched Smith, Woodford, Train (and others) and made my decision based on their investment style rather than just performance - although it would be fair to say that all three had good track records. I decided that I didn't agree/understand Woodfords style regardless of that recent performance. I liked the style of Smith and Train (and from there read up on Buffett). Its really as simple as that for me. It has proven a good decision (so far). I have no reason to doubt that only investing in good quality companies won't do reasonably well long term, even with greater single company risks along the way

For reference my best performing (80% gain in 2 years), high conviction fund over the last few years was a passive one - L&G global technology. I sold out when I invested in Scottish Mortgage last year and when Fundsmith invested in Facebook (to much overlap). I am not against using passive funds and ETFs in an 'active' way.

Momentum investing has advocates and when it's implemented with solid buy and sell criteria there are studies that show it doing well. What worries me about portfolios that use retail conviction funds is that the investor then takes a passive approach to the portfolio and after 3 years of inactivity ends up posting on Money Saving Expert asking if they should sell Woodford Equity Income. Another concern I have is people sitting on large gains in something like Fundsmith because they don't have any strategy for taking some profits and rebalancing, but that's not momentum is it.

Conviction investing implemented in a passive way is dangerous.

Aminatidi

David_Evans wrote: »

I'd probably wait for the drop in price and then buy the fund (if it fell low enough).

Why would the funds value drop because the manager died?

David_Evans

Aminatidi wrote: »

Why would the funds value drop because the manager died?

Due to the ''cult of personality'' present among those who buy them.
Maybe.

masonic

David_Evans wrote: »

Due to the ''cult of personality'' present among those who buy them.
Maybe.

That might be true of an investment trust, which can trade at a discount or premium, but an open ended fund is valued based only on the underlying holdings.

Aminatidi

David_Evans wrote: »

Due to the ''cult of personality'' present among those who buy them.
Maybe.

Nope.

Taking Fundsmith as an example it's value is that of its holdings.

You won't wake up tomorrow to find it costs more or less because of something Terry Smith has done other than the stuff that's in it.

Investment Trusts are likely to be subject to the issue you describe.

David_Evans

Aminatidi wrote: »

Nope.

Taking Fundsmith as an example it's value is that of its holdings.

You won't wake up tomorrow to find it costs more or less because of something Terry Smith has done other than the stuff that's in it.

Investment Trusts are likely to be subject to the issue you describe.

Sorry, I'd assumed they were ITs.
I didn't realise they were open-ended.

I guess in that case the fund would have to hold a large proportion of a particular company in order to cause the price of that stock to fall...

Aminatidi

David_Evans wrote: »

Sorry, I'd assumed they were ITs.
I didn't realise they were open-ended.

I guess in that case the fund would have to hold a large proportion of a particular company in order to cause the price of that stock to fall...

Smithson is as is the Lindsell Train Investment Trust are ITs so are subject to premium/discount impact.

Fundsmith and Lindsell Train Global Equity are open ended so their value is simply what they hold.

There's a chart somewhere that aims to demonstrate that once you go above a certain number of holdings the reduction of risk from holding more is almost non-existent.

The number is something like 12 or a very low number.

Prism

bostonerimus wrote: »

Momentum investing has advocates and when it's implemented with solid buy and sell criteria there are studies that show it doing well. What worries me about portfolios that use retail conviction funds is that the investor then takes a passive approach to the portfolio and after 3 years of inactivity ends up posting on Money Saving Expert asking if they should sell Woodford Equity Income. Another concern I have is people sitting on large gains in something like Fundsmith because they don't have any strategy for taking some profits and rebalancing, but that's not momentum is it.

Momentum investing is typically very active - much more than I am. However I wouldn't call investing in popular active funds momentum based in the true sense. Most of the momentum based funds seem to be ETFs and are fairly high conviction due to their focus on certain sectors and regions. Tech has been doing well so buy into a tech ETF, just after the peak then swap into a consumer staples ETF until it peaks - rinse/repeat

I have no plans to take profits or rebalance my Fundsmith holding since it is in my pension and I won't be touching it for at least 10 years. Unless something fundamentally changes with the investment style or the world that it invests in then I will let it continue to grow (or fall) at its natural pace

bostonerimus

Prism wrote: »

Momentum investing is typically very active - much more than I am. However I wouldn't call investing in popular active funds momentum based in the true sense. Most of the momentum based funds seem to be ETFs and are fairly high conviction due to their focus on certain sectors and regions. Tech has been doing well so buy into a tech ETF, just after the peak then swap into a consumer staples ETF until it peaks - rinse/repeat

I have no plans to take profits or rebalance my Fundsmith holding since it is in my pension and I won't be touching it for at least 10 years. Unless something fundamentally changes with the investment style or the world that it invests in then I will let it continue to grow (or fall) at its natural pace

Buying Fundsmith etc is momentum only is as much as people buy the hot properties ie those with the strategies that are working now or have been working for the past few years according to the industry tables. I don't think most people who own Fundsmith know much about the underlying strategy or that it has only 30 stocks and then they sit on it and don't have a strategy to deal with volatility. If people are going to include conviction funds in a portfolio then they need to be proactive in managing it rather than waiting a few years and then reacting in panic. I can easily see people who bought Woodford Equity Income a while back selling at a loss and moving to Fundsmith because it's doing well...what happens it Fundsmith stagnates for the next 5 years?

You obviously have a well considered plan and understand the risks and I imagine will deal with them well, but most people don't which is why I'm dubious about conviction funds for the average investor and would prefer to see them in a multi-asset fund made up of index trackers.