Share Dealing Discussion Area

THENOX

True true:

I meant (from my original post about it):

Quote:
No, they don't match with standard deviation. The tracker funds fluctuate MORE than the good managed funds in this sort of time because the good managed funds have downside protection that simply doesn't exist in trackers. The comparison is valid between managed and passive funds, in which case you could compare the alpha values for the various funds compared with the appropriate index to see a risk-adjusted performance measure for each type of fund. I would happily bet £10 of my own money that the risk-adjusted performance for index trackers tends to be lower than the funds managed by reputable investment houses in the same sector.
-That's a good very good argument (completely forgot about it as seen it only for a sec 3 mo somewhere)so it works like a mirror image of a classic PAR? -but everything has it's price -please tell honestly what is the price (as far as I reckon: losses still above the threshold are multiplied but when it will really plunge they are capped?). -if yes doesn't it average to zero -their costs of using it?

and from more recent one:

I'd like to only ask you to clarify the downside of PARing in actively managed funds as I'm sure that they also involve betting on the future direction of a market.

-Basically I'd like you to be objective enough to tell me about disadvantages (costs) of using downside protection and whether to do it one has to have a vision about (near) future market direction -if this is true.

THE NOX

Aegis

THENOX wrote: »

Basically I'd like you to be objective enough to tell me about disadvantages (costs) of using downside protection and whether to do it one has to have a vision about (near) future market direction -if this is true.

The only real disadvantage of using downside protection is that you have to pay the costs associated with a decent fund management team. If the team is experienced enough to pick decent stocks despite short- to medium-term market fluctuations, then you don't lose out in terms of gross performance in either hard times or easy times.

The actual investor doesn't need to know what the market is going to do, and technically neither do the fund management team. All they need to do is pick more stocks that will grow than stocks that will fall, and they'll turn a profit. Pick a lot more good stocks than bad and you'll end up with good long-term profit.

As an example, financials are currently in a downturn, and it's likely that in hard times like recessions, financials suffer somewhat due to bad debt increasing and less lending business being done, plus inflation eating away at the assets held there. As the FTSE 100 has a lot of financials, hard times will hit the FTSE 100 trackers harder than managed funds with large holdings of non-cyclical stocks.

In short, I don't think it's a matter of predicting where the market will go, but rather predicting what certain stocks will do in the mid- to long-term. It's certainly not an infallible method, but as I mentioned above, if you win more than you lose, you can get a profit, and if you win more than the index overall, you'll beat the index.

I hope that's an answer to what you were asking!

THENOX

So I understand that using downside protection 1) includes costs of doing so 2) requires a vision of what a particular stock or index will be doing in the near future (for the term of a contract note). -This means that it is a form of speculation (betting on future outcomes) as well. And I reckon that fund's 'detachment' from plunging index is a bright side (when they've got it right), but the dark side will be something like suppressed growth or paying the costs when they've got it wrong. Isn't it a 50/50 game of chance like tossing the coin? And if it reduces volatility (as I said: they've got it right it gets a bit more flat on the risk side, they've got it wrong on the return side) what a passive indexer can do (if his risk capacity requires it) just take a tracker of a less volatile asset class and be better off cause of the costs alone (ov parsing in this case but not to mention all the other).

Is it not the reality I am thinking of just now? :rolleyes: -I think so, but correct me if I goofed off to the Ideal World .

THE NOX

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The Bradley Model -Correlating Planetary Movement with the Stock Market...

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Aegis

THENOX wrote: »

So I understand that using downside protection 1) includes costs of doing so

Yes, but it's obviously the absolute return that the common investor is going to look at, rather than the costs of getting that return. Or at least it should be! Sites like the Motley Fool make the mistake of looking pretty much solely at the costs and concluding that trackers must do better because they're cheaper. It would be a good conclusion if the assets make-up and purchasing strategy were identical between an active fund and a passive one, but this is rarely the case, especially with funds from reputable companies. Bank funds might do something a bit like this, but they're excluded from this discussion because they're bank funds, and any sensible investor would avoid them like the plague

2) requires a vision of what a particular stock or index will be doing in the near future (for the term of a contract note). -This means that it is a form of speculation (betting on future outcomes) as well.

I think you have a different view on speculation to me. In my view, speculation is where you pick, say, a single stock with an extremely high potential change in value (in either direction) and essentially put your money on a coin toss. Investing would be picking stocks (and other assets) based on rigorous analysis of the fundamentals, detailed knowledge of the company aims and a little bit of predictive ability for working out how much business that company is likely to be doing over the investment period. As an example, one of my top UK funds has a fairly large holding in British/American Tobacco, and the prediction associated with that company is that even in recessions, people will find the money that allows them to buy cigarettes. They may barely be able to make all other ends meet, but they'll certainly buy those!

With a lot of non-cyclical stocks, you can apparently hold value better than most of the rest of the market in economic bad times, while they're likely to surge upwards less in the good times. As such, holding on to some cyclical stocks while buying in to non-cyclicals (i.e. using something akin to pound-cost averaging while the price slips) you can take advantage of the downside protection offered by the non-cyclicals and also take advantage of the growth prospects of the cyclicals because of the added breathing room offered through that protection.

Of course, this is still my interpretation, so don't treat iut as gospel or anything!

And I reckon that fund's 'detachment' from plunging index is a bright side (when they've got it right), but the dark side will be something like suppressed growth or paying the costs when they've got it wrong.

Indeed, which is why you want an experienced management team with a track record of adding value above the index in all market conditions for which figures were available. The best fund managers will outperform the index in downturn or growth periods.

Isn't it a 50/50 game of chance like tossing the coin?

Not really. Just because there are two possible outcomes doesn't make it 50/50. I think the odds are definitely skewed in favour for outperforming the index for almost any given timeframe for almost all of my managed funds (I hold about 14 at the moment).

And if it reduces volatility (as I said: they've got it right it gets a bit more flat on the risk side, they've got it wrong on the return side) what a passive indexer can do (if his risk capacity requires it) just take a tracker of a less volatile asset class and be better off cause of the costs alone (ov parsing in this case but not to mention all the other).

I think in technical terms what the managed funds with decent teams do is offer increased alpha and reduced beta compared with the index. i.e. lower volatility but higher returns when that volatility is accounted for.

Yes, someone with trackers can reduce volatility by taking a less risky sector to track, but that loses them the growth prospects and will also generally underperform against the good managed funds in that sector too. So you could end up losing in two sectors rather than just one.

Is it not the reality I am thinking of just now? :rolleyes: -I think so, but correct me if I goofed off to the Ideal World .

THE NOX

I think you're making the mistake of thinking that volatility always means extra potential for growth. In beginner's guides, this is generally stated, but it's not necessarily true when comparing collective investments. If you're comparing a single stock, or possibly even an index, then it is much more likely to be the case, but with a managed fund the stocks are constantly being switched in their proportions to reduce volatility while adding better overall growth potential. As such, it becomes very tricky to apply this sort of generalisation to them.

THENOX

I think you're making the mistake of thinking that volatility always means extra potential for growth. In beginner's guides, this is generally stated, but it's not necessarily true when comparing collective investments. If you're comparing a single stock, or possibly even an index, then it is much more likely to be the case, but with a managed fund the stocks are constantly being switched in their proportions to reduce volatility while adding better overall growth potential.

Yes, this is exactly what I can't get (and Academics are backing my view up): there is no other source of returns as risk (no free lunch -ha? ) risk and return is nothing more than standard deviation (volatility): swinging up we call return, swinging down we call loss. There is no way to increase the potential (good word) for growth without accepting potential for loss (choosing the vehicle with higher standard deviation). -Otherwise it would be real Magic, something for nothing, Act of Creation...

Do you accept Fama and French model of stock market return? If yes there is no way for returns not to come from the source of: market risk (risk) + value (more distressed =more risky =more volatility =more standard deviation =more (hopefully) it swinging the other way = return)m + size (smaller =more risky =rest same as in value).

This model explains 96% of expected returns -there really is no space for significant alpha.

Where that reduced volatility and higher potential for growth (the right part of SD swing) comes from?

THE NOX

Aegis

THENOX wrote: »

Yes, this is exactly what I can't get (and Academics are backing my view up): there is no other source of returns as risk (no free lunch -ha? ) risk and return is nothing more than standard deviation (volatility): swinging up we call return, swinging down we call loss. There is no way to increase the potential (good word) for growth without accepting potential for loss (choosing the vehicle with higher standard deviation). -Otherwise it would be real Magic, something for nothing, Act of Creation...

It's not really something for nothing, though, it's something gained through rigorous research and a lot of experience. I know one guy who makes his living out of picking good stocks with good growth potential. He doesn't see everything, and he makes bad calls as well as good ones, but with a stop-loss in place and enough diversification, he makes better money than I do with significantly less commuting required! I imagine that fund management teams are much the same: they pick a handful of stocks with good growth potential and get more right than wrong, selling the wrong ones before they can ruin the overall performance too much.

Do you accept Fama and French model of stock market return? If yes there is no way for returns not to come from the source of: market risk (risk) + value (more distressed =more risky =more volatility =more standard deviation =more (hopefully) it swinging the other way = return)m + size (smaller =more risky =rest same as in value).

I have no idea what that model is, all I know is what I've seen in the UK. I don't believe that risk is the only factor for growth, but I don't know enough about the specifics of stock picking to know exactly what else there would be.

This model explains 96% of expected returns -there really is no space for significant alpha.

Surely even that model leaves an additional 4% growth over the index available?

Where that reduced volatility and higher potential for growth (the right part of SD swing) comes from?

Diversification of stocks with strong potential and stop losses.

THENOX

It's not really something for nothing, though, it's something gained through rigorous research and a lot of experience. I know one guy who makes his living out of picking good stocks with good growth potential. He doesn't see everything, and he makes bad calls as well as good ones, but with a stop-loss in place and enough diversification, he makes better money than I do with significantly less commuting required! I imagine that fund management teams are much the same: they pick a handful of stocks with good growth potential and get more right than wrong, selling the wrong ones before they can ruin the overall performance too much.

-Just out of interest how many percent (roughly if needed) he scored in the last year when markets started being crazy and years of obvious growth were over?

I have no idea what that model is, all I know is what I've seen in the UK.

Here is a systematic statistical academic study of a UK market on a quite wide time sample. Quite a solid read and well sobering :

http://www.ifa.com/library/Support/Articles/Scholarly/files/Performanceof%20UK%20EquityUnitTrust.pdf

Surely even that model leaves an additional 4% growth over the index available?

Luckily I see the smiley at the end so know that you are joking :rolleyes: otherwise I would ask are you prepared to pay 1,5%pa for alfa as big as 2% on top of standard risk - return trade-off. (2% cause the other two will be error+noise+the unknown+whatever).

Quote:
Where that reduced volatility and higher potential for growth (the right part of SD swing) comes from?

Diversification of stocks with strong potential and stop losses.

-only index provides perfect diversification of stocks in an index (active managers take diversified risk by picking sth from an index). Strong potential comes from strong anty-potential (standard deviation = volatility), stop loss = trading costs and risking missing a spectacular bounce-back leaving someone with unnecessary loss instead of a gain.

Aegis

THENOX wrote: »

-Just out of interest how many percent (roughly if needed) he scored in the last year when markets started being crazy and years of obvious growth were over?

No idea. I DO know that all of my managed funds are still beating their respective indices thought, even in these turbulent times.

Here is a systematic statistical academic study of a UK market on a quite wide time sample. Quite a solid read and well sobering :

http://www.ifa.com/library/Support/Articles/Scholarly/files/Performanceof%20UK%20EquityUnitTrust.pdf

Ok, read it. I believe now that their study was as bad as any other analysis I've read on the subject. As always, the majority of their analysis failed to focus in on the difference between a good management company and a bad management company, and instead lumped all of the unit trusts together in a big pile. In the sole section where they focused on the top performers, they set up a ridiculous system where you'd constantly buy and sell your units so that you had an equal amount of the top 10 performers of the previous year, therefore wasting a lot of money on buying and selling and artificailly shifting the results again.

In modern times with the buy-sell spread effectively eliminated in a lot of cases, their study would generate different results, and I imagine would shown even more different results if you picked, say, the top 5 performers over 10 years and the top 5 over 5 years as your sample rather than what they did.

All in all, I'm not particularly impressed with the level of detail they actually bothered to go into in this study. The difference between Invesco Perpetual's offerings into the UK All Companies sector compared with Halifax's are apparently to even a novice investor, and yet this difference has been ignored. Eliminate the bank shares from the statistical set and I don't doubt that you would have a higher alpha than the pretty much zero value that appeared for the best portfolios they selected, coupled with the lower beta that seemed to appear all the time anyway.

Luckily I see the smiley at the end so know that you are joking :rolleyes: otherwise I would ask are you prepared to pay 1,5%pa for alfa as big as 2% on top of standard risk - return trade-off. (2% cause the other two will be error+noise+the unknown+whatever).

I just don't accept the 96% figure in the first place, I'm afraid.

Quote:
Where that reduced volatility and higher potential for growth (the right part of SD swing) comes from?

-only index provides perfect diversification of stocks in an index (active managers take diversified risk by picking sth from an index). Strong potential comes from strong anty-potential (standard deviation = volatility), stop loss = trading costs and risking missing a spectacular bounce-back leaving someone with unnecessary loss instead of a gain.

Perfect diversification isn't what fund managers are looking for. They're looking for appropriate diversification. For example, if you were looking at 100 stocks and believed that 30 of them were likely to rise, you might want to diversify across, say, all 30 of the risers plus another 20 likely to hold their value in all conditions. There would undoubtedly be some stocks in there that you just wanted to stay away from, as you might be nearly certain that they would drop soon (like with financials in the recent turmoil: a lot of fund managers have chosen to stay well clear and have therefore not dropped as much as the index).

As I mentioned, it's about appropriate diversification across stocks with plenty of growth potential, and the limitation of exposure to stocks with a high likelihood of dropping significantly in the mid-term.

wednesday2212

If a company that i have shares in is bought by another company, what happens to my shares?

sabretoothtigger

Alliance and Leicester had this recently and they will receive Santana shares instead afaik