SIPP portfolio

Pedro_S

DairyQueen wrote: »

It's taken me 20+ years of intermittent and risky dabbling to reach a point of engaging brain before investing . You are doing everything right at the tender age of 35.
Good luck.

Thank you for your thorough and very kind post, it is appreciated

BritishInvestor

DairyQueen wrote: »

For example, global passives are rightly focused on large caps and developed markets

This has both
https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-accumulation-shares

DairyQueen wrote: »

Emerging markets, small caps and lower grade fixed interest are arguably better managed by specialist fund managers

Very arguably!

DairyQueen

BritishInvestor wrote: »

This has both
https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-accumulation-shares


Very arguably!

So, you think that markets operate efficiently in these areas? The Vanguard global all-cap has a high weighing to the USA and USA 'small caps' are typically of a size defined as 'large caps' in most other markets. Also, US 'small caps' typically underperform, for example, UK small caps.

My best performing fund of the last year has been an Asian, managed, small-cap fund.

Hmmm... each to their own.

BritishInvestor

DairyQueen wrote: »

So, you think that markets operate efficiently in these areas? The Vanguard global all-cap has a high weighing to the USA and USA 'small caps' are typically of a size defined as 'large caps' in most other markets. Also, US 'small caps' typically underperform, for example, UK small caps.

My best performing fund of the last year has been an Asian, managed, small-cap fund.

Hmmm... each to their own.

In terms of market efficiency, not sure, but active managers seem to struggle irrespective of sector


https://www.etf.com/sections/index-investor-corner/swedroe-despite-opportunities-active-falls-short?nopaging=1


When you say Vanguard has a high weighting to the USA how are you defining "high"?


Not really sure of the relevance of UK vs US small cap performance when UK is 6% of global and UK small cap is a fraction of that (unless you have the ability to outsmart the market and pick outperforming sectors). Would be interested to see your data of risk adjusted performance of both though.


Not sure either of relevance of your Asian small cap managed fund?


Also not sure why you would have non IG bonds in your portfolio given their risk/return (fat tails) and also that bonds are traditionally the defensive part of a portfolio, and junk bonds behave like equity in times of market volatility.

dunstonh

In terms of market efficiency, not sure, but active managers seem to struggle irrespective of sector

Not in the UK. Some markets see managed woefully underperform. US investors are better off being in trackers. Norway was something like 95% of the funds offered there underperform. However, the UK fund managers have a much better record. It really muddies the waters are as a lot of tracker vs managed debate is based on US research covering the US market and taxation.

DairyQueen

BritishInvestor wrote: »

In terms of market efficiency, not sure, but active managers seem to struggle irrespective of sector

Large caps are well-researched and passives are able to exploit the pricing efficiency that results. There are too many small caps across the globe to allow that intensity of research and they are priced far less efficiently. The number of small caps is such that passives would need to hold hundreds of thousands, maybe millions, of companies to represent the sector.

A small cap's value is not necessarily reflected in its price. Active managers in this sector seek value in under-researched stocks. The same applies to regions such as India.

BritishInvestor wrote: »

When you say Vanguard has a high weighting to the USA how are you defining "high"?

By virtue of the size of US companies, Vanguard's choice of 'small caps' doesn't meet my definition of small companies. Take a look at some of those that feature in the MSCI Global Small Cap Index (tracked by Vanguard). These are not under-researched companies. Allocation by size of market therefore ensures that US (non) small caps are over-represented.

BritishInvestor wrote: »

Not really sure of the relevance of UK vs US small cap performance when UK is 6% of global and UK small cap is a fraction of that (unless you have the ability to outsmart the market and pick outperforming sectors).

I don't try to time the market nor try to pick sectors or regions likely to outperform. My aim is to diversify across as many sectors and regions as possible so I can capture outperformance simply by having some exposure to enough risers in that sector/market. With small caps you need more than general market exposure, you need exposure to enough companies whose value is unrealised before they capture the attention of the market. The sheer number of US small caps (i.e. those smaller than the $1.5-3 billion market value represented in the MSCI World Small Cap Index) is such that finding the gems is a much tougher exercise than in smaller regions.

BritishInvestor wrote: »

Not sure either of relevance of your Asian small cap managed fund?

It's an example of how diversification captures outperformance. It's an example of how diversification into emerging markets and small caps captures outperformance. It's an example of how diversification into inefficient markets captures outperformance. It's also an example of how active fund managers can outperform passives.

BritishInvestor wrote: »

Also not sure why you would have non IG bonds in your portfolio given their risk/return (fat tails) and also that bonds are traditionally the defensive part of a portfolio, and junk bonds behave like equity in times of market volatility.

IG bonds are not currently priced with their historic inverse correlation to equities. I therefore hold IG bonds for diversification and to defend against the downside of equity volatility. There is little upside in IG bonds right now. Non-IG are more risky but there is more potential upside and, again, I invest in these to diversify my portfolio as much as possible.

Non-IG is another sector of the market that I believe benefits from active management.

So I don't try to pick outperforming sectors or regions for non-core holdings, I try to pick an outperforming fund manager in each sector/region.

Each of these satellite investments represents a small %age of my portfolio but they provide exposure to sectors/regions not represented in the core holdings - i.e global passives. I would not suggest diversifying from global passives until a portfolio reaches six figures. Nor would I suggest that new investors should diversify from global passives.

I have only recently looked closely at small caps. I took on-board the points made by expert forum members, carried out some research, and concluded that I preferred the active management route for satellites for all of the above reasons.

BritishInvestor

dunstonh wrote: »

Not in the UK. Some markets see managed woefully underperform. US investors are better off being in trackers. Norway was something like 95% of the funds offered there underperform. However, the UK fund managers have a much better record. It really muddies the waters are as a lot of tracker vs managed debate is based on US research covering the US market and taxation.

I may be looking at different data to you. Agreed in short term a majority do outperform in some sectors, but over 5 and 10 years much fewer do (and I'm not sure the results are adjusted to take into account the various factors the funds are tilted to - some have very questionable benchmarks!).


I can't see how it can be any other way - after fees how can the majority outperform the market - punters make up such a small percentage (I'll come on those in my next post) that the funds effectively are the market.


https://us.spindices.com/documents/spiva/spiva-europe-year-end-2017.pdf

BritishInvestor

DairyQueen wrote: »

Large caps are well-researched and passives are able to exploit the pricing efficiency that results. There are too many small caps across the globe to allow that intensity of research and they are priced far less efficiently. The number of small caps is such that passives would need to hold hundreds of thousands, maybe millions, of companies to represent the sector.

A small cap's value is not necessarily reflected in its price. Active managers in this sector seek value in under-researched stocks. The same applies to regions such as India.


By virtue of the size of US companies, Vanguard's choice of 'small caps' doesn't meet my definition of small companies. Take a look at some of those that feature in the MSCI Global Small Cap Index (tracked by Vanguard). These are not under-researched companies. Allocation by size of market therefore ensures that US (non) small caps are over-represented.


I don't try to time the market nor try to pick sectors or regions likely to outperform. My aim is to diversify across as many sectors and regions as possible so I can capture outperformance simply by having some exposure to enough risers in that sector/market. With small caps you need more than general market exposure, you need exposure to enough companies whose value is unrealised before they capture the attention of the market. The sheer number of US small caps (i.e. those smaller than the $1.5-3 billion market value represented in the MSCI World Small Cap Index) is such that finding the gems is a much tougher exercise than in smaller regions.


It's an example of how diversification captures outperformance. It's an example of how diversification into emerging markets and small caps captures outperformance. It's an example of how diversification into inefficient markets captures outperformance. It's also an example of how active fund managers can outperform passives.


IG bonds are not currently priced with their historic inverse correlation to equities. I therefore hold IG bonds for diversification and to defend against the downside of equity volatility. There is little upside in IG bonds right now. Non-IG are more risky but there is more potential upside and, again, I invest in these to diversify my portfolio as much as possible.

Non-IG is another sector of the market that I believe benefits from active management.

So I don't try to pick outperforming sectors or regions for non-core holdings, I try to pick an outperforming fund manager in each sector/region.

Each of these satellite investments represents a small %age of my portfolio but they provide exposure to sectors/regions not represented in the core holdings - i.e global passives. I would not suggest diversifying from global passives until a portfolio reaches six figures. Nor would I suggest that new investors should diversify from global passives.

I have only recently looked closely at small caps. I took on-board the points made by expert forum members, carried out some research, and concluded that I preferred the active management route for satellites for all of the above reasons.

A few observations


I think it's pretty much been proven that the theory of active fund managers having an edge (after costs) in less efficient markets in incorrect. (properly functioning - maybe not in times of market stress) Markets are broadly efficient. Hedge funds are out there scooping up inefficiencies in the vast majority of markets


https://famafrench.dimensional.com/famafrench/questions-answers/qa-seeking-the-inefficient-asset-class.aspx


I'm not sure about your reference to emerging markets and small cap gives outperformance. On a risk adjusted basis, you are (potentially) taking on more risk for a (potentially) greater return - I don't consider this outperformance


It may be worth you considering why firms such as Dimensional do not use non-IG bonds in their funds.


I'm genuinely not sure how you are able to pick outperforming funds!!


But I think my main observation is private investors in general tend to underperform their relevant benchmarks, and those that try and pick hot/outperforming funds tend to be the worst underperformers


https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519

dunstonh

I'm genuinely not sure how you are able to pick outperforming funds!!

it's not that difficult. I have found for a very long time that on a model portfolio of 10-12 funds, you get 1-3 funds that typically underperform in the short term and the rest are top half.

Indeed, looking at our model portfolio from 12 months ago to where it is today (so no hindsight pickings here). There are 13 funds in the portfolio. 7 are in quartile 1, 5 are quartile 2, none are quartile 3 and 1 is quartile 4. Ironically, the one that is quartile 4 is a vanguard tracker.

Looking at our model portfolio from 3 years ago (again to avoid hindsight), 7 are quartile 1, 3 are in quartile 2, none in quartile 3 and 2 in quartile 4. One of those in quartile 4 was a propery fund in bricks and mortar. So, Q4 is expected. The other was a different vanguard tracker to the earlier one.

So, in the case of real portfolios running without any hindsight picking, two of the funds were underperforming and both were trackers. I dont class the bricks and mortar fund as undperforming as the property sector includes property share and that means in growth period, bricks and mortar underperforms property share. This is about to be resolved as the property sector is being split into two sectors to cater for property share and physical property..

When investing in single sector funds, I believe that it is quite easy to find to funds that offer increased potential in some fo the sectors. (although 6 of the 13 in our model are currently passive). I am not so confident about active with multi-asset funds though. Not any more.

There are plenty of DIY investors on this site doing just as well on single sector fund investing by making their own management decisions.

bostonerimus

dunstonh wrote: »

There are plenty of DIY investors on this site doing just as well on single sector fund investing by making their own management decisions.

...and plenty doing poorly (along with some professionals) that you don't hear from. People are quick to mention success and slow to come forward with failure....this is why I discount anecdotal evidence in this area. Go to the studies and choose your poison. For example I think there is something to overweighting small cap like Dimensional Funds does, but I'm not a Nobel Prize winner (although I have worked with a couple ) and so I don't attempt it and won't pay to get behind Dimension's pay wall. So I DIY with a simple cap weighted portfolio safe and sure in my averageness.