Vanguard Factor Funds

bostonerimus

Don’t go with something like “John Edwards” and stop listening to the chattering classes. There are going to be ups and downs in active and passive portfolios, often it’s not what you own it’s how you react, or don’t, to market volatility. You are looking for a silver bullet and it doesn’t exist.

The best way to have a set and forget portfolio is to own a diverse selection of stocks, bonds and cash. You can get that in multi-asset funds and that’s the way I would go. Forget about “beating the market”. So whether you go active or passive look for established multi-asset funds that take a whole market approach and avoid the stock picking focused funds like Fundsmith.

There will always be market beating funds in the headlines that you don’t own and it’s easy to feel like you missed out, but you haven’t if you own a well designed diversified portfolio. The only benchmark that matters is your own ie is your portfolio returning enough to meet your financial goals. Never compare yourself to the market leaders in the news because you will always be disappointed.

Prism

msnau wrote: »

Going back several years, how did investors successfully come to the conclusion Lindsell Train, Fundsmith etc were solid future investments?

For me it was an ethos of the fund managers. I watched a bunch of videos about Terry Smith and Nick Train and decided I agreed with their investment ideas. It doesn't harm that their styles have been tested and held up since the mid 90's although nothing really prepared me for how well that style would do in this current set of conditions. All I can say is that the funds don't feel any more expensive or highly valued than when I first invested in them - its the companies underneath that have actually grown rather than the value of them especially. That is the biggest risk in the near future. Will these currently successful companies that these funds invest in revert under different market conditions to being more average ones.

[Deleted User]

Alexland wrote: »

Then you could watch the regular Morningstar videos where they explain how they have just downgraded a bunch of top rated funds following a period of poor performance...

True, past performance is not an indiciation of future performance.

Linton

bostonerimus wrote: »

Don’t go with something like “John Edwards” and stop listening to the chattering classes. There are going to be ups and downs in active and passive portfolios, often it’s not what you own it’s how you react, or don’t, to market volatility. You are looking for a silver bullet and it doesn’t exist.

The best way to have a set and forget portfolio is to own a diverse selection of stocks, bonds and cash. You can get that in multi-asset funds and that’s the way I would go. Forget about “beating the market”. So whether you go active or passive look for established multi-asset funds that take a whole market approach and avoid the stock picking focused funds like Fundsmith.

There will always be market beating funds in the headlines that you don’t own and it’s easy to feel like you missed out, but you haven’t if you own a well designed diversified portfolio. The only benchmark that matters is your own ie is your portfolio returning enough to meet your financial goals. Never compare yourself to the market leaders in the news because you will always be disappointed.

Yes but some detailed points...
1) This is fine if your aim is long term growth. With more complex aims such as those people face in retirement, or in other circumstances where capital is required to support expenditure in the short and medium term, life is more complex.
2) One problem I see with multi-asset funds is that although they do a reasonable job with equity some appear to give a lot less attention to diversifying non-equity assets. Majoring on safe developed government bonds is not adequate diversification in my view.

3) Fundsmith - mmmm. Yes it has performed remarkably well since it started in 2010. However whether this is due to a well honed investment strategy is less clear to me. For example with a bit of research I find that Fundsmith started off in 2010 on the basis of long standing US and UK consumer staples at 46%. Perhaps in practice not too different to Woodford in his glory days.


From the 2019 figures Information Technology is now at 32%, up from 9% for Technology as a whole. Consumer staples is next, down to 28% and then healthcare at 28% up from 12%. I find it difficult to square this change in focus with one of Smith's fundamental principles that the companies he invested in would be "resilient to change, particularly technological innovation".

Prism

Linton wrote: »

From the 2019 figures Information Technology is now at 32%, up from 9% for Technology as a whole. Consumer staples is next, down to 28% and then healthcare at 28% up from 12%. I find it difficult to square this change in focus with one of Smith's fundamental principles that the companies he invested in would be "resilient to change, particularly technological innovation".

I think to some degree that higher percentage in technology is because those holdings have grown so much. Over the last 3 years the tech stocks in Fundsmith are up between 100% and 150% whereas the staples stocks are around 30%-50%

With the exception of Facebook and Microsoft, the tech holdings are pretty specific B2B industry sector focused companies. Basically travel and accounts software. Do Facebook and Microsoft have enough of a wall to hold off challengers or is their industry big enough to embrace more competition? Microsoft I would say yes, Facebook I am less certain of.

msnau

Again, many thanks for everyone's thoughts and advice. It is all appreciated.

From what I now understand, active investing is just a gamble - even if you pick from best buy/top rated funds etc - there are no guarantees these funds will do well. You cant judge future performance based on past success. For the inexperienced investor (me), best to keep active funds to a minimum - maybe a small gambling pot I am comfortable losing in worst case scenario.

Coming to the conclusion that asset allocation & diversification are most important.

Just to confirm my understand, is this correct:

Asset Allocation = stocks, bonds, cash, property, commodities, infrastructure, energy

Diversification = domestic (UK), developed work ex UK, Emerging markets

Thank you for posting the John Edwards sample portfolio. It is a nice starting point.

AnotherJoe

msnau wrote: »

Can anyone help with a step plan on how to choose the most suitable active fund?
Why active ?? Why not the most suitable fund ?
Going back several years, how did investors successfully come to the conclusion Lindsell Train, Fundsmith etc were solid future investments?

You've assumed they hada skill. But at the same time they came to that conclusion others came to the conclusion that Woodford Equity Income or Patient Capital or most funds run by St James Place were solid future investments, and you are only looking at the winners. If those winners all flipped a coin or threw a dart at a list of funds, you wouldn't think the winners had skill at flipping coins or throwing darts,
What is more likely is that some kept an eye on their investments and if the manager seemed to be making decisions that werent consistent with the approach they decided they liked or chose companies that consistently had issues, they bailed out. I hold Fundsmith because I like his stated philosophy but if TS started buying startups or using it asa rubbish bin for his other funds, against that philosophy I'd be out in a heartbeat. To coin a phrase, "trust but verify"

Linton

msnau wrote: »

Again, many thanks for everyone's thoughts and advice. It is all appreciated.

From what I now understand, active investing is just a gamble - even if you pick from best buy/top rated funds etc - there are no guarantees these funds will do well. You cant judge future performance based on past success. For the inexperienced investor (me), best to keep active funds to a minimum - maybe a small gambling pot I am comfortable losing in worst case scenario.

Coming to the conclusion that asset allocation & diversification are most important.

Just to confirm my understand, is this correct:

Asset Allocation = stocks, bonds, cash, property, commodities, infrastructure, energy

Diversification = domestic (UK), developed work ex UK, Emerging markets

Thank you for posting the John Edwards sample portfolio. It is a nice starting point.

I dont see Asset Allocation/diversification like that....

Asset allocation is the % of your wealth you choose to invest in the various types of asset. There are many types of Asset:
At the top level you have: Shares, Fixed Interest, Property, Precious metals, Cash, Works of Art, Wines etc. These can be subdivided. A partial list:
Shares: Geographies, Company Sizes, Industry Sectors, Value vs Growth, Income vs Growth, Private Equity vs tradable etc
Fixed Interest: Bonds of various types, P2P, Cash savings, DB pensions and Annuities etc
Property: Commercial, Residential, direct ownership or via funds

The level of detail you consider is up to you and your investment strategy. You could simply choose a general managed fund and leave it all to the fund manager. At the other extreme you can take a nerdy interest in the lowest level of detail. Personally I tend to the latter.

Diversification is the aim of investing in a wide range of different things so that you are not unduly hit when one type of investment fails and do not miss out completely if there is a localised boom. Asset Allocation is the means by which you achieve Diversification.

AnotherJoe

Prism wrote: »

I think to some degree that higher percentage in technology is because those holdings have grown so much. Over the last 3 years the tech stocks in Fundsmith are up between 100% and 150% whereas the staples stocks are around 30%-50%

With the exception of Facebook and Microsoft, the tech holdings are pretty specific B2B industry sector focused companies. Basically travel and accounts software. Do Facebook and Microsoft have enough of a wall to hold off challengers or is their industry big enough to embrace more competition? Microsoft I would say yes, Facebook I am less certain of.

Both of them have something that's incredibly difficult to surmount which is huge scale.
There are better or equally as good OS's and office packages which are free, yet MS thrives, and Facebook a huge embedded base of users with all their data sunk in it that through sheer inertia would require something remarkable to overturn it.

Linton

msnau wrote: »

Again, many thanks for everyone's thoughts and advice. It is all appreciated.

From what I now understand, active investing is just a gamble - even if you pick from best buy/top rated funds etc - there are no guarantees these funds will do well. You cant judge future performance based on past success. For the inexperienced investor (me), best to keep active funds to a minimum - maybe a small gambling pot I am comfortable losing in worst case scenario.
........

Given my post on Asset Allocation and Diversification it should be clear that I do not see investing in active funds as a gamble. On the contrary - just using passive funds makes detailed asset allocation very difficult if not impossible. You are committed to following the market. If the market chooses to go off into never-never land such as happened in the .com boom/bust around 20 years ago you have no choice but to go with it. If some sectors are not amenable to passive investing, such as small companies, you simply cant invest in them.


However for the inexperienced investor with limited amounts of money to invest I would say that the best strategy is to invest in a single multi-asset fund of appropriate risk and dont worry about the asset allocation. Let the fund manager make the decisions. It dioesnt really matter whether the multi-asset fund is active or passive or some sort of mixture.