Enhanced Index Fund vs Index Fund

talexuser

This reminds me somewhat of the fashion for absolute return funds which promised to protect downsides more than normal for giving up a little of upsides. Now after they've been going for some years there are none that have actually been shown to be worth investing in, since no manager is clever enough to see into the future of the next downside.

Thus the "clever" trackers seem to be marketed as different from an active fund when the whole purpose of an active fund is for the manager not to invest in the dud companies on their way down.

They may be less "active" if still having many more companies than a concentrated portfolio active fund but I remain somewhat sceptical of the latest fad, which just may be an attempt to get a few more fees than total passive when the trend is increasingly passive as more people realise just how many fees are not worth it.

A_T

talexuser wrote: »

This reminds me somewhat of the fashion for absolute return funds which promised to protect downsides more than normal for giving up a little of upsides. Now after they've been going for some years there are none that have actually been shown to be worth investing in, since no manager is clever enough to see into the future of the next downside.

Personal Assets/Troy Trojan and Capital Gearing have both done well

talexuser

I have all three and regard them as long term capital preservation funds, not the relatively recent trend of "absolute return" marketing.

chrisgg

Correct, they are more like flexible multi-asset strategies which are great investments.

Very different to the dogs like SL Gars, Invesco Targeted Returns etc. They're exhibit A of why something that sounds clever with nice marketing isn't necessarily anything other than a heap of crap.

talexuser

That brings back memories... I had SL Gars in the early days when it actually performed. Then it just flatlined so I jumped after a couple of years. As you say by today it has become a true "dog" and why some argue it can regain the losses already there is beyond me. The second IFA here gets my vote.

https://citywire.co.uk/new-model-adviser/news/ifas-explain-why-they-have-sold-or-stuck-with-gars/a1212006

[Deleted User]

Thanks all
I made the mistake in my initial post of thinking that the individual stocks of the index, eg Apple and Micirosoft would be sold/bought when the index was rebalanced. But I now realise they rebalance automatically without the need for selling/buying as their share price goes and down. Share price = market cap = % of weighting. I think this is right anyway, although obviously the fund manager would need to buy/sell the stocks at the lower weightings which were being relegated (and buy the promotions).


Anyone here a fan of the Equal weight, value, momentum, liquidity strategies? I already have a EW Ftse 100 and thinking of doing same with the SP500. Although when the rebalancing time comes, the fund manager would sell a stock which was doing well, eg in the FTSE 100, every one would have a 1% weighting, but say Tesco went up to 2% through it's rise in share price, then the fund manager would sell it to bring it back down to 1%, so they would be selling a stock that was doing well which seems crazy. And simultaneously buy more of a stock which was falling (to bring it's percentage of the fund back to equal weight).

DrSyn

newbinvestor wrote: »

Anyone here a fan of the Equal weight, value, momentum, liquidity strategies?

As I understand it, when these factors where academically investigated only about three or four where identified to work.

From what I can remember these were:-
Momentum
Size (small companies)
Value (low PE)

The investment industry of course saw a marketing opportunity. They started selling Index Funds with these factors, which of course they implied should beat a normal index fund.

Their advertising departments came up with different buzz words among them "Smart Beta".

These companies also suddenly found other such factors and marketed those as well.

All of the Index Funds with these supposed advantages are relatively new.

Only in the long term will we know if they do beat a normal Index Fund consistently.

To me it does sounds like the same old record being played. It's just that they have stuck a new label on it.

bowlhead99

newbinvestor wrote: »

Although when the rebalancing time comes, the fund manager would sell a stock which was doing well, eg in the FTSE 100, every one would have a 1% weighting, but say Tesco went up to 2% through it's rise in share price, then the fund manager would sell it to bring it back down to 1%, so they would be selling a stock that was doing well which seems crazy

A standard principle of risk management is to periodically balance back to allocations with which you are more comfortable. Whether that is 60% equity, 30% bonds, 10% property, or 1% Shell, 1% BP, 1% HSBC, 1% Apple, 1% Microsoft, 1% Alphabet etc.

If you buy and hold a tech stock that goes up to 5-10x its price in a dotcom bubble and then loses 80-90% in a crash, you haven't actually made any money and will be kicking yourself for not banking profits. If ASOS or Fevertree has grown 20-200x their original value, a portfolio that had originally included them at equal weight will have become heavily geared to their fortunes. To take profits out as you go along and spread them to the rest of the portfolio will not allow you to get the absolute maximum profit from that one stock that you'd have if your whole portfolio was invested in it - but the whole idea of investing in collective investment vehicles with a portfolio approach is not to get the absolute maximum profit or loss that occurs from one particular stock; instead to participate in the growth from different parts of the market concurrently.

The idea of 'running your winners' to get compounding gains is nice, which is why people do not rebalance their portfolio daily to grab an initial gain when they see something has gone up a few percent. Simplistically if a stock's price was reporting a 3% rise per day for a week, you would bank 15% profits by taking it out daily, but if you let it all compound you would have 1.03 x 1.03 x 1.03 x 1.03 x 1.03 which is 1.16 instead of 1.15. So, a really early cut-off for rebalancing (daily or weekly) may miss out potential gains of that high-performing stock; whereas 6-monthly or every year or two is probably fine.

Remember that your gains will still 'compound' if you take the 3% profit from company A in month 1 and put it into company B which also goes up 3% in month 2. Your money doesn't need to stay in the same company over time to achieve 'compounding gains'. You don't really get all the benefits of diversification if you never exit any of the holdings at premium prices or buy stocks at relatively low prices. Sell high, buy low - seems like the right way round as a natural consequence of rebalancing ; even if the purpose of rebalancing is to control risk by avoiding a concentrated portfolio.

It is difficult to say without hindsight how frequently the rebalancing should be, because you are not trying to just look at one share price rising and one other share price falling (or rising less), but a whole portfolio of hundreds of stocks. Practically speaking, if building an 'equal weight' investment product you won't wait a couple of years between rebalancing because people buying in later in the cycle would not be getting a very 'equal' allocation; but they are not going to rebalance weekly because transaction costs would go through the roof. Both MSCI and FTSE have equal-weighted indices that rebalance 6-monthly.

Anyone here a fan of the Equal weight, value, momentum, liquidity strategies? I already have a EW Ftse 100 and thinking of doing same with the SP500.

There are not really any credible equal-weight FTSE 100 trackers, as far as I can see. DWS (DB) launched their xtrackers version, which is perhaps the one you have, in 2015. Four years later the fund size is £16 million. Compare to Vanguard's regular cap weighted tracker ETF, at 2.7 billion.

A mere £16m is buttons for a mainstream investment manager's investment fund. It is a niche strategy which nobody really wants. Sure, investors are quite happy to depart from the FTSE100 index and get a different result for their UK allocation, because they know that the cap-weighting skews the performance to focus on oil, big pharma and financials and the index mix has been a long term underperformer. But they will typically get around this by using more comprehensive active management - if you are going to decide not to go for the index result by holding a massive proportion of Shell and BP and HSBC in your portfolio, you also start questioning whether you really want things like M&S or Micro Focus or others instead of what is available in the broader UK all-share with better growth or dividend potential.

The fact that retail investors and institutions alike have ignored DWS's fund (e.g. no investment house with a large fund-of-funds or institutional pension scheme is putting money through it for their UK allocation) since the initial press releases in summer 2015, means that it is only there to make up the numbers in DWS's product range from a marketing perspective - their management fee revenue on £16m will be under £25k a year. A product of that size is at risk of being shuttered, which would be annoying and costly for investors caught up in it.

I have one 'alternatively weighted' passive fund in my pension which is the iShares Edge MSCI World Size Factor UCITS ETF. This tracks the MSCI World Mid-Cap Equal Weighted Index which is rebalanced at the end of May and November (so they are currently 4/6ths of the way towards being equalised again). It is a relatively simple way to get exposure to a broad allocation of global mid-caps (c.900 stocks) and I don't have a fundamental problem with the concept of equal-weighting and rebalancing twice a year. The fund size is about £520m / $640m and the ticker is IWSZ for the dollar share class or IWFS for the GBP (unhedged) one.

DrSyn wrote: »

All of the Index Funds with these supposed advantages are relatively new.

Only in the long term will we know if they do beat a normal Index Fund consistently.

To me it does sounds like the same old record being played. It's just that they have stuck a new label on it.

I don't see how it is the same old record being played with a new label. Previously, the record of low cost 'index factor investing' was not being played.

Then, they did some studies, which involved backtesting using actual market data over decades, and determined that certain factors over the long timescales had given an improvement to performance (i.e. beating a pure index tracker consistently even accounting for additional costs inherent from the higher churn of holdings). Then index providers and fund managers brought out products incorporating those factors.

When backtesting actual historic data and building a model one can find a 'best fit' formula for things like when stocks should have been sold or purchased to capture a good proportion of the 'momentum'. However, as booms and busts and individual stock characteristics vary each time, the proof-of-the-pudding will be whether the products created with the 'best fit' mode on the historic data will still be the optimum way of doing things for the actual future data. Inevitably it won't be the actual 'optimum', but it just needs to be sufficiently better than basic cap-weighting to outweigh the additional transaction costs.

[Deleted User]

Thanks bowlhead, I am aware of World Size Factor and will probably buy. With the rebalancing, bi-annually, is this when they will readjust every percentage of the holding to (number of stocks/100)% or do you know if this is done more regularly?
Ps yes it is DB X trackers (they also have an EW S&P500) and I am also looking at Think Global Equity (250 equally weighted large caps with 40% one country cap)

DrSyn

bowlhead99 wrote: »

I don't see how it is the same old record being played with a new label. Previously, the record of low cost 'index factor investing' was not being played.

The "same old record" I had in mine, is fund companies employing some new idea which they can use to increase sales with the help of their advertising department. The active funds companies seems to me have been doing it for years. Now the passive fund companies appear to be doing the same.