IFA or DIY - any thoughts appreciated

bowlhead99

tcallaghan93 said:
Take 2000-2020, the only reason the FTSE 100 did so much worse than the S&P 500 was because the FTSE 100's PE fell 3% a year, the S&P 500s by only 1% (30.5-16.5 vs 29-23.5). FTSE 100 earnings growth was about 3.6%, just -0.3% behind GDP, with an average 3.6% dividend yield whereas S&P 500 earnings growth was 5.3%, somehow ahead of GDP with an average 2% dividend yield, and the US had about 0.1% higher inflation.

Oh right, so if I'm reading your data correctly then the only reasons the FTSE 100 did worse than S&P was because:
 
a) the mix of companies making up the S&P index grew their earnings by 5.3% annualised (181% over two decades) while the 'old economy' companies in the FTSE 100 only grew their earnings by 3.6% annualised (103% over two decades); and

b) companies with higher sustainable rates of profit growth are more attractive, so that the price people are willing to pay for a given level of earnings is higher for the S&P index (dominated by Microsoft and Apple and Google and Amazon and Facebook etc) at 23x earnings, than it is for the FTSE (dominated by oil, banking, big pharma, tobacco) at 16.5x earnings

there is also a (c) where sterling has devalued over time such that for a UK investor, the returns from S&P relative to FTSE have been better than might have been presumed from (a) and (b) alone, though this is something that could reverse so we should not pay such attention to (c).

So to suggest the US or global equity is outperforming the UK or is somehow magically going to given the maths (US 1.95 div yield, bubble valuation, UK 4.7% div yield, below average valuation) is unfounded nonsense.

Well, the US equity index *has* been significantly outperforming the particular mix of companies that make up the UK index and that statement is 'founded' on the very facts and data that you put forward - hardly 'unfounded nonsense'.

83705628

bigadaj said:

tcallaghan93 said: 

Deleted_User said:

IvanOpinion said:

Buffetology is the only fund I have that is currently showing a negative and Lindsell Train UK is showing a positive but nowhere near its previous highs (in fact my Vanguard LS 80, which has done well, is still lower than I hoped, but I am working on the assumption that is down to a UK bias).  At the minute my line of thinking is that UK has not yet started to show the level of recovery seen elsewhere in the world. Hopefully the UK will recover and these will push back up.

Its a widespread misconception that UK listed stocks represent UK economy. Its not. In fact, the large UK listed companies derive a majority of their revenue outside UK. Which is why FTSE goes up when GBP falls.
The large listed stocks in other countries too exhibit similar attributes, to a varying degree. For example the large listed Swiss companies are actually multi national companies.
The main differentiators between countries (when it comes to choosing indexes) are the managements of these companies and the sectors. UK indexes are heavy on oil & gas, retail banks, mining etc - mostly mature industries that have limited growth opportunities. Stable dividends probably, but might have to be revisited after Covid.

1. UK equity returns have very closely matched GDP growth as far back as records go (Barclays Equity Gilts Study, Credit Suisse Global Returns Yearbook, compare with ONS nominal GDP data). 1990-2020 GDP, FTSE All Share and the dividend paid all grew almost exactly 4%.

2. There is no evidence that the FTSE has an inverse relation with £ exchange rates. PensionCraft has a video about this (can't find the link sorry). While 3/4 of FTSE 100 earnings and 1/2 of FTSE 250 earnings come from overseas, the UK is also a slight net importer so it makes very little difference.

3. Aside from small, extreme examples like Greece and Denmark, for most sufficiently large and diverse stocks markets - US, UK, JPN, most of the larger European countries - the sector weighting doesn't make a huge difference. Aside from the 1972-1974 crash, and post-Brexit, there is no significant difference in the long-term returns of UK and global equity. https://www.starcapital.de/fileadmin/user_upload/files/publikationen/2018_04_Market_Valuation_Determined_by_Sectors.pdf. I just don't buy this nonsense that you HAVE to diversify globally or that the UK is "done" and is being overtaken by the rest of the world.
Take 2000-2020, the only reason the FTSE 100 did so much worse than the S&P 500 was because the FTSE 100's PE fell 3% a year, the S&P 500s by only 1% (30.5-16.5 vs 29-23.5). FTSE 100 earnings growth was about 3.6%, just -0.3% behind GDP, with an average 3.6% dividend yield whereas S&P 500 earnings growth was 5.3%, somehow ahead of GDP with an average 2% dividend yield, and the US had about 0.1% higher inflation. So to suggest the US or global equity is outperforming the UK or is somehow magically going to given the maths (US 1.95 div yield, bubble valuation, UK 4.7% div yield, below average valuation) is unfounded nonsense.

So you are presumably fully invested in the UK, and so wold have suffered relatively poor returns compared to a global view, particularly the US over the last few decades. For a UK investor the continual weakening of sterling has formed no small part of those returns but total return in gdp is what counts to someone in the UK. 

No I think I've already said or answered this in this thread (if not then somewhere else).
I've ended up at 2/3 UK 1/3 global and I'm happy with that.
The UK and US and global equity performed almost identically in £ until Brexit, the other exception being 1972-1974.
You can always find examples of things that would have worked better in hindsight. My point is that that's the allocation I've arrived at is based on my own thinking about the current situation. Maybe if the relative valuation normalises and the £ strengthens I'll move upto 50:50.
Currency change is pure speculation you can't expect that to continue indefinitely. Neither can you claim that global markets maintaining higher valuations implies higher future returns.
What kind of long-tern returns do you expect from UK Vs global and US equity?

83705628

So you are presumably fully invested in the UK, and so wold have suffered relatively poor returns compared to a global view, particularly the US over the last few decades. For a UK investor the continual weakening of sterling has formed no small part of those returns but total return in gdp is what counts to someone in the UK. 

Mate I'm 26 I've only just started and I don't quite follow you. I've ended up at 2/3 UK 1/3 global equity and I'm happy with that. What's your allocation? What returns do you expect from UK vs global over the forseeable future and how do you explain those return expectations? What's behind your apparet preference for global?
The UK has not done worse than global equity "over the last few decades". I've attached 2 pdf's from generated on trustnet.com showing UK, global and US returns as far back as their data goes til 23/6/16, and til today. What it shows is that all of the underperformance you're talking about happened since the Brexit referendum. Which means now, the UK is cheap.
Over the period 1990-2020 S&P the 500 total return was 10% in $, of which 2.5% was inflation, 1.5% was speculative return (PE went from 15 - 23.5), 2% was dividends and 3.9% was real earnings growth. A £ based investor earned an extra 0.6% on currency appreciation.
Over the same period the FTSE All Share's return in £ was 8%, of which 2.4% was inflation, dividends averaged 3.6%, 1.8% was real price growth, and PE data doesn't go back that far but the dividend yield went from 4.2% - 4.1% so probably not much either way, so that 1.8% real growth of the index is probably very close to the actual earnings growth figure.
So yes you're right a UK investor would have suffered "poor" returns of 8% versus the US's 10% because the US speculated up by 1.5% and UK may have speculated down a little, and maybe there was a slightly higher investment return from inflation and earnings growth, and the $ appreciated by an average 0.6% a year.
But I don't see how you expect that to continue for another decade.
*Numbers are rounded and won't sum exactly because it's geometric not arithmetic.

BritishInvestor

Diplodicus said:

Correct, Mordko.
Most people are more comfortable deferring to an “expert” - then whatever happens “isn’t their fault.”  The cost of that security, which is a bogus security, is massive in time.  

Cost vs what alternative?

bigadaj

tcallaghan93 said:

So you are presumably fully invested in the UK, and so wold have suffered relatively poor returns compared to a global view, particularly the US over the last few decades. For a UK investor the continual weakening of sterling has formed no small part of those returns but total return in gdp is what counts to someone in the UK. 

Mate I'm 26 I've only just started and I don't quite follow you. I've ended up at 2/3 UK 1/3 global equity and I'm happy with that. What's your allocation? What returns do you expect from UK vs global over the forseeable future and how do you explain those return expectations? What's behind your apparet preference for global?
The UK has not done worse than global equity "over the last few decades". I've attached 2 pdf's from generated on trustnet.com showing UK, global and US returns as far back as their data goes til 23/6/16, and til today. What it shows is that all of the underperformance you're talking about happened since the Brexit referendum. Which means now, the UK is cheap.
Over the period 1990-2020 S&P the 500 total return was 10% in $, of which 2.5% was inflation, 1.5% was speculative return (PE went from 15 - 23.5), 2% was dividends and 3.9% was real earnings growth. A £ based investor earned an extra 0.6% on currency appreciation.
Over the same period the FTSE All Share's return in £ was 8%, of which 2.4% was inflation, dividends averaged 3.6%, 1.8% was real price growth, and PE data doesn't go back that far but the dividend yield went from 4.2% - 4.1% so probably not much either way, so that 1.8% real growth of the index is probably very close to the actual earnings growth figure.
So yes you're right a UK investor would have suffered "poor" returns of 8% versus the US's 10% because the US speculated up by 1.5% and UK may have speculated down a little, and maybe there was a slightly higher investment return from inflation and earnings growth, and the $ appreciated by an average 0.6% a year.
But I don't see how you expect that to continue for another decade.
*Numbers are rounded and won't sum exactly because it's geometric not arithmetic.

You seem to be quoting a ot of figures and putting your spin on the reasons why things have happened, you're not an analyst by any chance?
You are refuting underperformance by the uk stockmarket over decades and quoting data back to 2016, then saying it's all post brexit?
You also are saying I'm only young so cut me some slack, at the end of the day what you do with your money is your business. However one approach to investment would be after determining attitude to risk and so equity exposure preference to then allocate that according to world equity weightings, which would give you say 5% in the uk, maybe a little more given home bias. Not many people would suuprt a 60-70% uk weighting but it's your choice.

k6chris

I think there sensible balance around a 50/50, UK(home) / rest of world equity split, based on currency risk, yield history vs rest of world growth, given the global unknowns re growth and currency risks?  Happy to be shot down (constructively!)

Malthusian

50% is a lot to invest in a country making up 3% of world GDP. Why the UK and not India or France? (Please don't take this as a suggestion to invest half your pension in India.) "Currency risk" is not really relevant unless your "UK" investment excludes the FTSE 100 and focuses almost entirely on UK small-mid caps (which would be even more wacky), as most "UK" equities earn most of their earnings overseas. Yields are only important if you want to live off natural income, otherwise total return is what matters, and there is no evidence that anyone can consistently predict which geographical sectors will have higher total returns than the others.

FWIW I am overweight the UK as well, mainly to buy on weakness, but not 50%. That would annoy me too much if the UK did a Japan-style lost decade.

[Deleted User]

k6chris said:

I think there sensible balance around a 50/50, UK(home) / rest of world equity split, based on currency risk, yield history vs rest of world growth, given the global unknowns re growth and currency risks?  Happy to be shot down (constructively!)

Thats too tilted to the home market. https://personal.vanguard.com/pdf/icrrhb.pdf

[Deleted User]

“50% is a lot to invest in a country making up 3% of world GDP. “

I think its more like 5% by capitalization which is what matters. China may have a lot of state companies which are of no relevance. You cant buy them

Moe_The_Bartender

Investing by geography makes no sense to me. There are companies listed in the UK which do little or no business here. Nestlé is listed in Switzerland but does 15 times as much business in the USA than it does in Switzerland. Emerging markets carry risks surrounding corporate governments and politics. You can get exposure to these markets through the likes of Unilever.