Vanguard investing options in market downturn

BananaRepublic

Regarding the supposed superiority of index funds, I used the YouInvest fund comparison tool. Search European Large Caps Blend Equity + Acc, and you see 15 funds. Look at the performance over ten years. The Vanguard index funds are probably the best option. Now search European Large Caps Growth Equity + Acc, and you see 9 funds. Look at the performance. Surprised? 

Look at European Small Caps Equity + Acc. There’s no trackers.

Look at Europe ex-UK Small/Mid Caps + Acc. There’s no trackers. 

Michael121

BananaRepublic said:

Regarding the supposed superiority of index funds, I used the YouInvest fund comparison tool. Search European Large Caps Blend Equity + Acc, and you see 15 funds. Look at the performance over ten years. The Vanguard index funds are probably the best option. Now search European Large Caps Growth Equity + Acc, and you see 9 funds. Look at the performance. Surprised? 

Look at European Small Caps Equity + Acc. There’s no trackers.

Look at Europe ex-UK Small/Mid Caps + Acc. There’s no trackers. 

Im not saying passive funds are superior for all, my point was they maybe superior for someone that isn't an expert at picking funds, or knowing what to allocate where.

On that note i just looked at all those funds and clearly vanguard was blew out of the water, however if you look at the portfolio you will see that the managed funds have way more in mid cap/large cap and reduced the allocation to giants. It almost seems like it has to outperform the vanguard fund now im looking at it.

Small cap wins on the 10 year. Are the fund managers excellent stock pickers or are they just piling more money into riskier investments. Is it going to make much difference say buying managed euro/uk/asia/japan funds with passive US. I think that's what some are recommending vs buying vanguard global all cap index with extra weighting in small and mid caps. 

BananaRepublic

Michael121 said:

BananaRepublic said:

Regarding the supposed superiority of index funds, I used the YouInvest fund comparison tool. Search European Large Caps Blend Equity + Acc, and you see 15 funds. Look at the performance over ten years. The Vanguard index funds are probably the best option. Now search European Large Caps Growth Equity + Acc, and you see 9 funds. Look at the performance. Surprised? 

Look at European Small Caps Equity + Acc. There’s no trackers.

Look at Europe ex-UK Small/Mid Caps + Acc. There’s no trackers. 

Im not saying passive funds are superior for all, my point was they maybe superior for someone that isn't an expert at picking funds, or knowing what to allocate where.

On that note i just looked at all those funds and clearly vanguard was blew out of the water, however if you look at the portfolio you will see that the managed funds have way more in mid cap/large cap and reduced the allocation to giants. It almost seems like it has to outperform the vanguard fund now im looking at it.

Small cap wins on the 10 year. Are the fund managers excellent stock pickers or are they just piling more money into riskier investments. Is it going to make much difference say buying managed euro/uk/asia/japan funds with passive US. I think that's what some are recommending vs buying vanguard global all cap index with extra weighting in small and mid caps. 

Each choice has its arguments. Some argue for diversification reflecting market capitalisation, others argue for geographical diversification and so on. Each to their own. 

AnotherJoe

Thrugelmir said:

JohnWinder said:

Paying a fair price for the underlying stocks? 

Isn't that a fundamental principle when choosing investments. Appreciate it's rather an old fashioned concept that seems to have fallen by the wayside. 

Entirely depends on your definition of "fair".

For example I would say SMT, Tesla and Apple are fair, you'd probably say "wildly overvalued"

And I guess you would say Exxon, Shell and BP are fair, and I'd say "wildly overvalued".

AnotherJoe

BananaRepublic said:

JohnWinder said:

Unloved companies shunned by the masses will quickly be identified by the astute investors and gobbled up thus raising their price to appropriate levels.

I'm anticipating investing for another 40 years, with some bequest intentions beyond, so that's certainly my horizon.

It sounds like you accept the efficient market hypothesis. Many years ago I read some research that suggested that the EMH applied well in the US, consistent with trackers being the wise choice, but less well in other markets such as Japan. Since then more research has been done. I can’t remember the explanation but I think it’s because there is so much information available and so many financial companies in the US that it’s hard for a company to hide. There’s plenty of research that suggests the EMH does not apply well in Europe and Japan. It’s also possible it does not apply to small companies as well because there are so many, hence there is too much information available. 

Some fund managers have staff who visit companies and talk to their directors to get a better idea of their future. Pension funds and private investors don’t normally do that. I suspect many funds don’t do that ie the marketing shells that are commission vehicles. 

I cant recall where i saw it, but there was a recent article I read which i found very persuasive which argued that visiting companies, chatting to the directors, etc, didnt do anything but  give companies a chance to pull the wool over analysts eyes.

JohnWinder

The EMH is beyond my pay grade, but...it was 'proven' to be not the whole truth and nothing but the truth when some fellows won a Nobel price after showing one could still 'beat the market as a whole' by choosing value or small cap stocks, or better yet small cap value stocks. So we could invest in those now, selectively, except that the story's out and so those stocks get bid up. As well, some folk lost faith because small cap value stocks have underperformed the whole market for decade long periods before once again showing their mettle. Once again demonstrating that if you're going choose 'not the whole market' then you might need plenty of courage or belief to avoid selling out at the wrong time.

I think the EMH does not explain everything. If it did, the consequence is that no one can beat the market through research or charting; only through blind luck. Clearly some do beat the market through luck until their luck turns, the fund falls behind and gets shut down. Others beat it through skill, research, judgement.

Luck could help the active managers for a year or three, but beating the index over 10 years could be luck for some that do it but for most of them achieving that it would be skill (and an inefficient market).

What to do? EMH is flawed, to our potential advantage. Individuals will rarely do research as well as the professionals, to find the inefficiencies, so we need to use fund managers. SPIVA tells us that only about 20% can beat an index over ten years, for a few of whom it's likely luck. How do we identify the other skillful ones at the beginning of that 10 year period? No one knows how to with certainty, and if they did, how much longer will that manager/team stick together (or branch out on their own, Nick?) because most of us need 40 years of investing, not 15.

Market inefficiencies are no doubt there, but how can we, the people, exploit them? Only by risking below market returns. Some are happy to do that, others are happy to accept market returns and unhappy not to get what's rightfully theirs when they invest in the market.

We can speculate on the advantage gained by fund managers visiting small companies' tea rooms, or being fluent in Japanese helpng to invest in Japan, or that European companies are opaque unless you dig like crazy; but the data shows what the data shows: beating the market through skill is hard, and identifying those who'll do it at the beginning of the next period we're interested in (often 40 years) is even harder if possible. Or do we invest for 8 five year periods, would that work?

BananaRepublic

JohnWinder said:

Market inefficiencies are no doubt there, but how can we, the people, exploit them? Only by risking below market returns. Some are happy to do that, others are happy to accept market returns and unhappy not to get what's rightfully theirs when they invest in the market.

We can speculate on the advantage gained by fund managers visiting small companies' tea rooms, or being fluent in Japanese helpng to invest in Japan, or that European companies are opaque unless you dig like crazy; but the data shows what the data shows: beating the market through skill is hard, and identifying those who'll do it at the beginning of the next period we're interested in (often 40 years) is even harder if possible. Or do we invest for 8 five year periods, would that work?

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. 

BananaRepublic

AnotherJoe said:

BananaRepublic said:

JohnWinder said:

Unloved companies shunned by the masses will quickly be identified by the astute investors and gobbled up thus raising their price to appropriate levels.

I'm anticipating investing for another 40 years, with some bequest intentions beyond, so that's certainly my horizon.

It sounds like you accept the efficient market hypothesis. Many years ago I read some research that suggested that the EMH applied well in the US, consistent with trackers being the wise choice, but less well in other markets such as Japan. Since then more research has been done. I can’t remember the explanation but I think it’s because there is so much information available and so many financial companies in the US that it’s hard for a company to hide. There’s plenty of research that suggests the EMH does not apply well in Europe and Japan. It’s also possible it does not apply to small companies as well because there are so many, hence there is too much information available. 

Some fund managers have staff who visit companies and talk to their directors to get a better idea of their future. Pension funds and private investors don’t normally do that. I suspect many funds don’t do that ie the marketing shells that are commission vehicles. 

I cant recall where i saw it, but there was a recent article I read which i found very persuasive which argued that visiting companies, chatting to the directors, etc, didnt do anything but  give companies a chance to pull the wool over analysts eyes.

Was it in the Economist or the Beano? Without a source no-one can judge the quality of the argument. 

Prism

JohnWinder said:

What to do? EMH is flawed, to our potential advantage. Individuals will rarely do research as well as the professionals, to find the inefficiencies, so we need to use fund managers. SPIVA tells us that only about 20% can beat an index over ten years, for a few of whom it's likely luck. How do we identify the other skillful ones at the beginning of that 10 year period? No one knows how to with certainty, and if they did, how much longer will that manager/team stick together (or branch out on their own, Nick?) because most of us need 40 years of investing, not 15.

Market inefficiencies are no doubt there, but how can we, the people, exploit them? Only by risking below market returns. Some are happy to do that, others are happy to accept market returns and unhappy not to get what's rightfully theirs when they invest in the market.

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. 

Baillie Gifford is a good example of a company that has grown this approach so they have analysts on different sectors and regions and then share those ideas between fund managers. It works very well to a point but you need to be careful that the ideas don't become diluted as it grows. You also need to accept that the core investment approach is likely to be very similar across many of their funds. 

AnotherJoe

BananaRepublic said:

AnotherJoe said:

BananaRepublic said:

JohnWinder said:

Unloved companies shunned by the masses will quickly be identified by the astute investors and gobbled up thus raising their price to appropriate levels.

I'm anticipating investing for another 40 years, with some bequest intentions beyond, so that's certainly my horizon.

It sounds like you accept the efficient market hypothesis. Many years ago I read some research that suggested that the EMH applied well in the US, consistent with trackers being the wise choice, but less well in other markets such as Japan. Since then more research has been done. I can’t remember the explanation but I think it’s because there is so much information available and so many financial companies in the US that it’s hard for a company to hide. There’s plenty of research that suggests the EMH does not apply well in Europe and Japan. It’s also possible it does not apply to small companies as well because there are so many, hence there is too much information available. 

Some fund managers have staff who visit companies and talk to their directors to get a better idea of their future. Pension funds and private investors don’t normally do that. I suspect many funds don’t do that ie the marketing shells that are commission vehicles. 

I cant recall where i saw it, but there was a recent article I read which i found very persuasive which argued that visiting companies, chatting to the directors, etc, didnt do anything but  give companies a chance to pull the wool over analysts eyes.

Was it in the Economist or the Beano? Without a source no-one can judge the quality of the argument. 

Or without the article, take it on its own merits, since it coudl be equally likely to be good which of those it was in, there's plenty of rubbish in the economist. If I ever come across it again I'll post.