Vanguard investing options in market downturn

BananaRepublic

JohnWinder said:

BananaRepublic said:

You make a lot of assumptions that are not justified by the SPIVA data.

As to your last remarks, obviously you keep an eye on your funds. A market may underperform relative to others, Japan being a good example. Or a fund may underperform, perhaps because of fundamental changes in the management structure. 

You also ignore the fact that some markets do not have index funds. 

Thanks. I'm certainly making a lot of assumptions THAT the SPIVA data reflects the truth of the situation. And we need to factor in the uncertainty about the conclusions when taking action plans from them. But could you say what assumptions you have in mind that are not, or even might not be justified BY the data?

Second, yes, we keep an eye on our funds. We need our own investing plan, and I want to use someone else's that works better than indexing.  But what action do we take in response to what we see after keeping an eye? I need something actionable.

One of the, I suppose, unspoken aspects of index fund investing is diversification - one's best protection against idiosyncratic risk, leaving one at the mercy of just market risk. What markets did you have in mind that don't have an index? My guess is that the securities in those markets would be captured in an existing broader - diversified! - index.

You might think this pedantic, but when you say index, I think you mean index fund. This is confusing. 

I don’t argue with the figures in the SPIVA reports, it is very interesting and I appreciate you telling me about it, I argue with some of the statements you make which sometimes are not proven by the SPIVA reports. For example you say it’s very difficult to choose good active funds, and then say there is a 0.1% chance of picking a winner over 20 years (forgive me if I get your figures a bit wrong, it’s too hard to search the thread). 

I have explained my approach, and I fully understand that it’s not proven by research (though research does prove that a small number of active funds regularly outperform compared to chance), so yes I understand that you might prefer a more cautious approach eg use index funds. I don’t adopt a strategy because an internet stranger with a silly user name promotes it. We all have to live in our comfort zone. 

In terms of managing funds, I have ~20, and I just monitor them to make sure they don’t do a Woodford. I don’t often switch, I recently sold holdings in Lindsell Train UK, my gains of 9% / year over 5 years were okay, but performance over the last two years was poor, so I’m concerned that they were driven by luck. They are also in UK large caps, not the best index. I held Jupiter European even when experts said to sell it. 

The large caps indices usually have an index fund. I couldn’t see index funds for these Morningstar categories: 

1. UK small caps. 
2. Europe small cap equity. 
3. Europe mid cap equity. 

I’m sure there’s more. I have some funds in those categories. Of course it could be that you are 100% correct, and my funds in those categories underperform the index. However, they do very well so maybe the index itself performs very well. 

If you can find index funds that cover the above, and perform well, please share. 

ChilliBob

Just wanted to chip in that I've re read this entire thread again, really interesting hearing the different perspectives and picking out the recurring themes

Alongside my global index fund, ftse all world, I looked first to how I could add in small caps, globally, then specifically for UK. I did this with a vanguard fund for global, then a Malborough fund for UK. I could have stopped there but I tinkered a bit more. 

JohnWinder

BananaRepublic said:

You might think this pedantic, but when you say index, I think you mean index fund. This is confusing. 

I don’t argue with the figures in the SPIVA reports, it is very interesting and I appreciate you telling me about it, I argue with some of the statements you make which sometimes are not proven by the SPIVA reports. For example you say it’s very difficult to choose good active funds, and then say there is a 0.1% chance of picking a winner over 20 years (forgive me if I get your figures a bit wrong, it’s too hard to search the thread).
The large caps indices usually have an index fund. I couldn’t see index funds for these Morningstar categories: 

1. UK small caps. 
2. Europe small cap equity. 
3. Europe mid cap equity. 

I’m sure there’s more. I have some funds in those categories. Of course it could be that you are 100% correct, and my funds in those categories underperform the index. However, they do very well so maybe the index itself performs very well.

If I delete a word in a 'preview' of a posting I lose the whole draft. Unhappy face. So this draft will be short.

Not pedantic, you're right. Sorry.

I think I wrote '0.1' not 0.1%. Certainly meant to. Might you have misread it? I'm not going back either. Most accurately it should have been 17% but i was simplifying the maths.

I accept there are no index funds for those indices. For a lot of us it wouldn't matter. Firstly, you get those shares with a broad index fund. Secondly, you'd have to have large holdings in those special areas, rather than just the broad index fund, to move the needle much in terms of your returns. Thirdly, a small cap index funds can be expected to outperform the broad market index fund, but they'll cost more because fewer customers will choose them (or for whatever reason, but they are more expensive in markets where they're available). Fourthly, will they do any better than the only 17% (on average) of active GBP funds that can beat their index over 10 years?

Linton

JohnWinder said:

BananaRepublic said:

You might think this pedantic, but when you say index, I think you mean index fund. This is confusing. 

I don’t argue with the figures in the SPIVA reports, it is very interesting and I appreciate you telling me about it, I argue with some of the statements you make which sometimes are not proven by the SPIVA reports. For example you say it’s very difficult to choose good active funds, and then say there is a 0.1% chance of picking a winner over 20 years (forgive me if I get your figures a bit wrong, it’s too hard to search the thread).
The large caps indices usually have an index fund. I couldn’t see index funds for these Morningstar categories: 

1. UK small caps. 
2. Europe small cap equity. 
3. Europe mid cap equity. 

I’m sure there’s more. I have some funds in those categories. Of course it could be that you are 100% correct, and my funds in those categories underperform the index. However, they do very well so maybe the index itself performs very well.

.......

I accept there are no index funds for those indices. For a lot of us it wouldn't matter. Firstly, you get those shares with a broad index fund. Secondly, you'd have to have large holdings in those special areas, rather than just the broad index fund, to move the needle much in terms of your returns. Thirdly, a small cap index funds can be expected to outperform the broad market index fund, but they'll cost more because fewer customers will choose them (or for whatever reason, but they are more expensive in markets where they're available). Fourthly, will they do any better than the only 17% (on average) of active GBP funds that can beat their index over 10 years?

1) You get very few small company shares in the broad indexes, my growth portfolio is based on 50% large, 50% small/medium
2) If fund A outperforms fund B the costs are irrelevent - fund costs are included in performance figures
3) If there isnt an index fund in a small company sector does it matter if a fund doesnt beat the index? However....
4) The 2020 Spiva report shows average UK funds outperforming the relevent S&P Index in 6 out of the 10 listed sectors over 10 years. Sadly the only small company sector in the SPIVA list is UK small companies. 

JohnWinder

I do accept those constraints with certain platforms, wrappers, and funds from Vanguard, iShares, Fidelity et al which don't include micro caps or even small caps in their offerings. They might come as more people move to indexing. We are on a global discussion forum with a .com domain name but I recognise most folk are UK-interested. Sorry.

If you're obliged to take an active fund in an unrepresented index, then I'd feel it has to do better than the broad index fund which is the closest alternative, unless for some reason it had less risk.

Is one of us mis-reading the SPIVA report? You better post a link. The 2020 mid-year report for Europe has 11 categories for Euro funds and 8 for GBP funds. And it reports % of active funds 'outperformed' by the index, not the other way around. Hope I got this right.

Linton

JohnWinder said:

I do accept those constraints with certain platforms, wrappers, and funds from Vanguard, iShares, Fidelity et al which don't include micro caps or even small caps in their offerings. They might come as more people move to indexing. We are on a global discussion forum with a .com domain name but I recognise most folk are UK-interested. Sorry.

If you're obliged to take an active fund in an unrepresented index, then I'd feel it has to do better than the broad index fund which is the closest alternative, unless for some reason it had less risk.

Is one of us mis-reading the SPIVA report? You better post a link. The 2020 mid-year report for Europe has 11 categories for Euro funds and 8 for GBP funds. And it reports % of active funds 'outperformed' by the index, not the other way around. Hope I got this right.

My mistake, its 5 out of 8.
See https://www.spglobal.com/spdji/en/documents/spiva/spiva-europe-mid-year-2020.pdf Page 12 "British pound Sterling Denominated Funds" where it presents the data using the cap weighted average fund as opposed to the number of funds.

It seems odd that  S&P, an index producing company, decided to publicise their headline data in terms of number of funds rather than a cap weighted average.  Perhaps the latter gives the "wrong" result. 

BananaRepublic

JohnWinder said:

I think I wrote '0.1' not 0.1%. Certainly meant to. Might you have misread it? I'm not going back either. Most accurately it should have been 17% but i was simplifying the maths.

Okay my mistake, I didn’t realise that by 0.1 you meant one in ten. Your maths was fine then. Yes, assuming active funds are picked randomly, the chance of picking many that beat the index is very low. Obviously my funds are not picked randomly. 

I don’t believe I am extraordinarily lucky, so I’d be interested to know if anyone else has regular long term success with active funds, and if so, what strategies they use to choose funds. Or if anyone did badly (less easy to own up to). 

As said above, a broad index fund won’t give you much from these indices.  

Prism

BananaRepublic said:

JohnWinder said:

I think I wrote '0.1' not 0.1%. Certainly meant to. Might you have misread it? I'm not going back either. Most accurately it should have been 17% but i was simplifying the maths.

Okay my mistake, I didn’t realise that by 0.1 you meant one in ten. Your maths was fine then. Yes, assuming active funds are picked randomly, the chance of picking many that beat the index is very low. Obviously my funds are not picked randomly. 

I don’t believe I am extraordinarily lucky, so I’d be interested to know if anyone else has regular long term success with active funds, and if so, what strategies they use to choose funds. Or if anyone did badly (less easy to own up to). 

As said above, a broad index fund won’t give you much from these indices.  

I wouldn't say it is just you. Over the last 7 years or so I have only selected one fund out of maybe 10 which has slightly disappointed and even then only by a small amount. Most were high conviction growth funds.

JohnWinder

Good result.

Shot across the bows of anyone else taking up the challenge:

BananaRepublic said:

.. I’d be interested to know if anyone else has regular long term success with active funds, and if so, what strategies they use to choose funds.

We who want better returns than an index tracker, risk comparable and after costs, need to hear what the actionable strategy is to allow us to pick the active funds. And to give us confidence it will work from now on, we'd like the strategy to have been described 10 years ago and shown that it plays out for 10 years - ideally 30 years ago since some of us have 30 years investing ahead of us. We're less confident that choosing some great past performers now, and then trying to identify their characteristics, will predict future performance as well as it has accounted for past performance because those characteristics might be markers of some other factors not recognised.

And yes, we want to hear from those who've failed with active funds to describe their strategy in a clear actionable way so that we can avoid that strategy.

JohnWinder

Linton said:

JohnWinder said:

Prism said:

One thing I look for is a team of the fund manager and analysts that do their own research and do not buy the data in. That is the only way that they can ensure they are looking at things differently. An individual analyst might be able to keep track of around 5-10 companies this way so it tends to suggest funds that hold a fairly low number of stocks - high conviction. There a several examples of fund houses that I use (and some that I don't) that work this way - Fundsmith, Lindsell Train, Montanaro, Blue Whale, Baillie Gifford and Merian. 

....

Separately, I don't think we should start with: 'which funds have done better in the past; now what were their management approaches?',  and believe that that gives us as reliable information as: 'what management approaches do we think will work; now let's see how it plays out over the next 10 years?'.  Any model has to be tested, not simply developed to fit the existing data and believe that it will serve as well in the future, I think.

If one cannot use data from the past how do you propose to test alternative strategies? With any test inconvenient results could be dismissed by saying that there is no proof that there would be the same outcome under future economic circumstances.

Challenging topic. One can use past data, I just don't think it's as safe from bias as future data which one could use after proposing a strategy. After all, that's happened with the 4% SWR Trinity and Bergen ideas from the 1990's - they've been tested up to 2020.

I don’t think that identifying the 3 factors, earlier proposed, being associated with over performance is enough; they need to be contributory, and ideally in a major way. Adulthood is associated with lung cancer in a way very unlike childhood is, but it’s not adulthood that is contributory, it’s that adults smoke. Association is not always causation.

Secondly, we have the 3 factors associated with those several funds outperforming. Do other funds similarly outperform if they have the same three characteristics? We'd have more confidence knowing that.  Have any other outperforming funds beside those listed been checked for the factors? If any outperforming funds don’t have those three factors, then we’ve missed something that explains outperformance.  Have underperforming funds been checked to see if they have the factors but didn’t outperform? Has this been done on many such funds so we can have an estimate of the percentage of funds with the 3 factors that will outperform or underperform?

If the 3 factors helped us choose funds over the last 10 years, might the economic conditions and market movements be so different in the next decade that the 3 factors no longer ensure outperformance?

Wouldn’t it be better to propose a fund selection strategy, and then test it over several different ten year periods (from the one that showed us the strategy), even if they are past periods and some of them are overlapping periods eg 1990-2000, 1995-2005 etc.

Better yet, you could test the strategy going forward with future returns. It's not simple.