investment trusts

bostonerimus

Prism wrote: »

I do like ITs and I in fact hold some Scottish Mortgage. I am just never quite sure why some people seem to focus just on ITs and others just on unit trusts. Just treat them as a collection of funds to pick from.

For me ITs are out not just because they are active, but also because they can borrow to invest. That's just something I don't like doing. It's more a philosophical stance rather than worry about the potential magnification of the down side.

Thrugelmir

bostonerimus wrote: »

For me ITs are out not just because they are active, but also because they can borrow to invest. That's just something I don't like doing. It's more a philosophical stance rather than worry about the potential magnification of the down side.

Companies borrow. US companies are borrowing to repurchase their shares and pay dividends. Thereby enhancing EPS.

Like IT's, companies are able to use the interest to reduce tax liabilities by offsetting the interest.

Linton

Thrugelmir wrote: »

How did stock markets in general react in that period?

How much money did global trackers lose with the demise of the banks? Those not so heavily invested in finance would have performed much better.

From the one tracker I have been able to find which was around during the 2008/2009 crash: about 40%.

StellaN

Rather than go into the active vs passive scenario, I think it’s still more about the long term investment strategy. If you invest in an IT such as SMT then surely it is a long term investment so you have to ride out really bad dips such as - 65% in 2008. If you are not a long term investor you should steer well clear of SMT or any other equivalalents.

Thrugelmir

StellaN wrote: »

Rather than go into the active vs passive scenario, I think it’s still more about the long term investment strategy.

It's not a question of active vs passive. Active funds will be investing in unquoted investments (for example) that's the point at issue. Facebook was funded well before it listed. If one is a long term investor. The real money is made by investing on the ground floor. Not when the lift is already on the 112th floor, and the company's market capitalisation is big enough for Vanguard/ Blackrock etc to start buying a holding. On the back of private investors clamouring for a piece of the action.

A good portfolio needs many constituent parts. As the real art is for a portfolio to return a net positive overall performance every year.

For the record Apple dipped 50% between June and December 2008. Imagine the impact if that were to happen now. Though one must keep in mind the events of the that period. When no one knew what would happen. The after effects of which are far from certain. With the US Feds balance sheet growing from $250 billion to $4.5 trillion.

bowlhead99

Linton wrote: »

Thrugelmir wrote: »

How did stock markets in general react in that period?

How much money did global trackers lose with the demise of the banks? Those not so heavily invested in finance would have performed much better.

From the one tracker I have been able to find which was around during the 2008/2009 crash: about 40%.

As you've probably seen me mention here several times before, the peak to trough drawdown for FTSE All-World between late 2007 and early 2009 was 57.9% in US dollar terms - factsheet here

That's not directly comparable with SMT's loss quoted further up the thread which was in pounds, and investors measuring their returns in pounds fared better than investors measuring their returns in dollars because dollars strengthened from their relative weakness becoming worth more pounds over the period ; while pound, euro and yen assets became worth fewer dollars creating a larger loss for indexes measuring their returns in dollars.

So, depending on your currency of measurement, a global cap-weighted index can drop more than 40 to 50%. At least three- fifths. We saw it drop 57.9% and so 60% is not at all unimaginable.

Those thinking "well that was dollars, the indexes didn't fall so hard for sterling investors" need to simply consider that the loss was harder for dollar investors because dollars were starting from a position of weakness and got stronger at the same time as the crash; and looking at today's markets, pounds are starting from a position of relative weakness and if they strengthen, losses on international investments will be magnified. Plus, global governments do not currently have the 'drop interest rates by several percent' tool in their armoury to stem the asset value losses. A peak-to-trough loss on a global index for a UK investor could therefore reasonably exceed 60%.

Linton, I appreciate your point was that SMT is as concentrated conviction-driven fund which can produce a bigger loss than a global index, which is of course true.

However, your comment "this fund could lose over 60% - should we really be recommending such funds to inexperienced investors" is very pertinent. Many threads have people (who appear themselves to be relatively inexperienced investors) recommending global equity trackers - and shunning multi-asset funds because either 'bonds are overpriced" or because they don't like the 'heavy UK bias' of investing any more than 6% of their equities in the UK markets, guided by the % share of a global free float cap weighted index that the FTSE UK all-share represents.

As we know a global crash combined with your home currency strengthening can cause a global equity index to shed 60%, it would seem bonkers to recommend putting 95% of one's money in overseas equities to someone with anything other than the strongest of cast-iron constitutions, because as StellaN says, they would have to hold their nerve and ride out such dips. But I see people taking about buying global equity trackers all the time, because they are cheaper than managed multi asset funds and the high equity content gives greater long term potential, if you can see it through to the long term. For many it is a car crash waiting to happen.

Thrugelmir wrote: »

It's not a question of active vs passive.

A good portfolio needs many constituent parts.

Agreed.

Linton

Thanks Bowlhead. Excellent point that UK investors benefited significantly from currency movements during the Great Crash. They may not be so favourable next time.



Of course as you say that applied equally, or more so, to SMT, which currently only has 2.6% UK. There is the further risk factor with all ITs of the premium/discount price. Unfortunately I have no data on what that was, but I guess that a significant part of the very large drop arose from that.


Where I would disagree is that putting 95% abroad is therefore bonkers. Using a UK tracker would not help a lot because the large companies that account for the majority of the FTSE100 are effectively priced in $s. The FTSE100s fall was not a lot more than that of the FTSE World even with the reduced currency effect and so presumably would not have provided a lot of protection had the currencies moved the other way.

Brown_Bear

bowlhead99 wrote: »

As you've probably seen me mention here several times before, the peak to trough drawdown for FTSE All-World between late 2007 and early 2009 was 57.9% in US dollar terms - factsheet here

That's not directly comparable with SMT's loss quoted further up the thread which was in pounds, and investors measuring their returns in pounds fared better than investors measuring their returns in dollars because dollars strengthened from their relative weakness becoming worth more pounds over the period ; while pound, euro and yen assets became worth fewer dollars creating a larger loss for indexes measuring their returns in dollars.

So, depending on your currency of measurement, a global cap-weighted index can drop more than 40 to 50%. At least three- fifths. We saw it drop 57.9% and so 60% is not at all unimaginable.

Those thinking "well that was dollars, the indexes didn't fall so hard for sterling investors" need to simply consider that the loss was harder for dollar investors because dollars were starting from a position of weakness and got stronger at the same time as the crash; and looking at today's markets, pounds are starting from a position of relative weakness and if they strengthen, losses on international investments will be magnified. Plus, global governments do not currently have the 'drop interest rates by several percent' tool in their armoury to stem the asset value losses. A peak-to-trough loss on a global index for a UK investor could therefore reasonably exceed 60%.

Linton, I appreciate your point was that SMT is as concentrated conviction-driven fund which can produce a bigger loss than a global index, which is of course true.

However, your comment "this fund could lose over 60% - should we really be recommending such funds to inexperienced investors" is very pertinent. Many threads have people (who appear themselves to be relatively inexperienced investors) recommending global equity trackers - and shunning multi-asset funds because either 'bonds are overpriced" or because they don't like the 'heavy UK bias' of investing any more than 6% of their equities in the UK markets, guided by the % share of a global free float cap weighted index that the FTSE UK all-share represents.

As we know a global crash combined with your home currency strengthening can cause a global equity index to shed 60%, it would seem bonkers to recommend putting 95% of one's money in overseas equities to someone with anything other than the strongest of cast-iron constitutions, because as StellaN says, they would have to hold their nerve and ride out such dips. But I see people taking about buying global equity trackers all the time, because they are cheaper than managed multi asset funds and the high equity content gives greater long term potential, if you can see it through to the long term. For many it is a car crash waiting to happen.

.

What's your opinion on Harry Browne's Permanent Portfolio?
Do you think that would perform well in any upcoming crash?

Brown_Bear

Thrugelmir wrote: »

Companies borrow. US companies are borrowing to repurchase their shares and pay dividends. Thereby enhancing EPS.

Like IT's, companies are able to use the interest to reduce tax liabilities by offsetting the interest.

What makes me cautious is when ITs use debt to buy companies that are themselves using debt. So the risks to the IT buyer are magnified.

atush

Prism wrote: »

Why investment trusts rather than funds (unit trusts)? I only use ITs for certain areas, like Brown Bear says, illiquid assets. So small caps, REITs, unlisted equity etc

Many of the best performing global funds are unit trusts

I started investing in ITs thru their in house savings plans- cheaper to buy than funds, and funds back then werent so discounted re charges as theya re now with broker competition.

They also are a bit more liquid, as the shars are sold into t he market and they dint suffer like funds do when they have tos ell underlying investments to pay out to those cashing in.