vvfusi or vmid..?

Another_Saver

bowlhead99 said:

Another_Saver said:

bowlhead99 said:

Another_Saver said:

And don't forget kids...
2.9% capital concentration since inception 🥳

Whatever it's done since inception, the top ten constituents of the FTSE250 now make up about 10% of its market cap (spread about a percent each) while the top ten of the All-Share take a much bigger portion of that index with first place in the All-Share being almost 3x the weighting of 10th place. So although the All-Share has more stocks, it's arguably less 'diversified' in terms of concentrating the risk and reward into a few key stocks despite having exposure to a larger number of them. So my vote would be for the 250 as a long term investment, especially given OP's likely to have reasonable exposure to large multinational oil and gas giants, big pharma and banks etc within his global trackers.

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Sorry I wasn't being clear I meant capital concentration as opposed to dilution. Since inception (1992 not 1985) the FTSE 250 index has grown by 2.9% pa more than its market cap, whereas the norm for develped markets has been for rights issues and IPOs to dilute existing holdings, and thus returns, by about 2% pa (since 1985 the 100's capital dilution has been 2.36%, very similar to the S&P500s 2.3%).
 If we assume the efficienct market hypothesis a priori, we could expect a continued period of outperformance for that reason. This is not sustainable indefinitely, but I think the 250 is sufficiently small, attractive and good at finding replacements for acquisitions that it's got a few decades left in it (though 2.9% + 2.36% outperformance seems a tad unrealistic).

Are you saying that in the FTSE100 the returns for an investor in the index have been diluted (weakened) by the fact that an IPO or additional share issue occurred? It's true that the market cap of the companies held by the index will increase faster than the index value if new money comes in (a company issues more shares or a  large new company IPOs, kicking a smaller constituent out), but that doesn't hold back the index investors' returns. 

For example, say I invest £1000 in an index when it is at a value of 10,000 and there is £100 billion of share value across the constituents. A massive new company joins at the September reshuffle and is £4bn bigger than the company it replaces, and perhaps a few companies do fundraisings for an aggregate £1.2bn of new shares issued, so there is now £105.2bn of market cap in the index.  The index figure doesn't need to change from 10,000 as there has been no 'performance' from those events.

My £1000 in the original £100bn of market cap is now only covering 95% of the index value (100/105.2) and if the fund manager took no action I would not have any exposure to the new company and would be underweight in the companies that issued new shares while being relatively overweight in the others that I originally held. However, the index data provider will change the relative weights attributed to each constituent to reflect the new market capitalisation weightings. At the same time, my index tracker fund provider buys into the new company, sells the demoted company, puts extra money into the companies that issued new shares and pays for it by selling proportionately out of the other shares.  I am rebalanced to the new weights.

The index is still at 10,000 and my £1000 is now fairly exposed to the whole £105.2bn of market constituents. As a result, I only have 95% as much money in most of the old companies because I have more in the new IPO company and a more in the ones that fundraised and made themselves bigger.  So my exposure to those old companies have been diluted in favour of the newer or enlarged companies, but the performance I get from the portfolio is not fundamentally weakened, and I don't lose anything - my portfolio is simply reallocated to fairly reflect the current weights.  I haven't 'lost out', just because the market cap of the index constituents went up a few percent more than the index went up at the point the newco was admitted or the companies issued shares without the index value going up. 

Over the next year, if every company in the newly updated index increases in value with a weighted average share price return of 10%, the index goes up from 10,000 to 11,000 and my investment goes up from £1000 to £1100.  

If the new company hadn't performed as well as the old ones which get 10%, I would get less than 10% return, while if it performed better I would get more. If it performs the same I get the same. But the index is correctly doing its job of tracking the growth or contraction of the index constituents' value, and I am taking an exposure to the change in their values. If new money comes into the index constituents (new share issue or IPO) the weightings will change as my allocation is spread differently, but the addition of that new money is not 'performance' so I wouldn't expect to get anything out of it, and nor would I lose anything. 

The effect is the same as if I am invested in any open-ended fund and you come along and subscribe to a new unit in that fund that I'm in.   You put another £1000 in, so I am 'diluted' (my percentage ownership of the fund has reduced) but the performance of the fund shouldn't change from having you aboard, and I am not going to complain at the end of the year that my percentage return from the fund is less than the percentage increase in the fund's total assets under management.

Likewise then, if the FTSE is at 6000 and suddenly goes up from £1.8 trillion to £1.9 tn as a result of a £104bn IPO displacing a £4bn company from the bottom of the index, the FTSE will still be at 6000 and the investors will still have all their money and not gained or lost anything from that process. If by the end of the year the FTSE grows to £2.0 tn from the £1.9 tn it will be about 5% up at ~6300, but I won't look at it and say I should have been 11% up (i.e. 1.8 -> 2.0). The 5% is the fair score.  

So, the FTSE100 or S&P 'diluting' over time due to new share issues is not costing the investors anything or dragging their performance. Likewise if the opposite effect is seen in the FTSE250 (capital concentration as you call it, when market cap reduces relative to performance), this is not causing the performance to improve, nor to be over-reported. 

As such, I don't see why one should 'expect a continued period of outperformance for that reason'. You're implying that the FTSE 100's addition of weighty constituents and new share issues will weaken its performance or reported performance ('capital dilution') while the FTSE250 reducing market cap (e.g. by releasing companies promoted to the FTSE100) enhances its performance ('capital concentration') and therefore we would see FTSE250 outperform for some technical reason. That doesn't seem right, so perhaps you could explain more if I've fundamentally missed your point.

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Put another way, the fundamental point you're missing is that while dilution causes no direct loss, as aggregate profits grow with GDP, the creation of more shares causes earnings-per-share to lag aggregate corporate profits and GDP growth by the amount of dilution.

Aggregate corporate profits constitute a % of GDP, that number cannot rise or fall indefinitely, the long term US average is 7%.

The aggregate market cap of those corporations behaves the same way, it cannot get out of whack with GDP and wealth, nor can/should it shrink indefinitely.

If the total market was a a single corporation with 100 million shares, you own 1 million so 1%, and the number of shares is increased to 102 million, your holding is reduced to 0.98% of the market. From then on you will always receive 2% less of the earnings and dividends that the market generates. Say the market generates £10bn aggregate earnings,your share of that is £100m before the dilution, £98m after the dilution, a 2% loss. If dilution keeps recurring which it does, you will see your earnings-per-share growth lag the total market's and GDP growth by the amount of dilution.

The FTSE 250 experiences a lot of acquisitions, which are often at a 20%-40% premium to the market price before the acquisition was accounced. The profit from these acquisitions is why, yes, shareholders do experience a profit above the market cap growth, which has been more in line with GDP. This is not sustainable indefinitely, and I like the FTSE 250 regardless, but my previous post discusses reasons why this may and may not continue for the foreseeable future.

The main source is : researchaffiliates . com/documents/FAJ-2003-Two-Percent-Dilution.pdf

Another_Saver

@bowlhead99 I hope that explains it, I'm sure I'll have missed something by now though

C_Mababejive

Alexland said:

C_Mababejive said:

I gt the AJB shares mag regularly via email and its an interesting read though i dont dabble in individual shares any more.

I must have told them to stop emailing me about Shares magazine but I just logged in to my AJB account and they are still banging on about the same old stuff with a UK bias trying to encourage you to place trades, use expensive managed funds, and think about things that are unnecessary for most people's personal investment objectives. Life is just too short for Shares magazine. Still there's always worse while the Motely Fool is still pumping greater volumes of internet clutter.

Yes,i find it an interesting read but of course i wouldnt indulge in the risky business of buying into their individual share tips which is way to risky for me. Might as well go down to the bookies. 

Another_Saver

C_Mababejive said:

Alexland said:

C_Mababejive said:

I gt the AJB shares mag regularly via email and its an interesting read though i dont dabble in individual shares any more.

I must have told them to stop emailing me about Shares magazine but I just logged in to my AJB account and they are still banging on about the same old stuff with a UK bias trying to encourage you to place trades, use expensive managed funds, and think about things that are unnecessary for most people's personal investment objectives. Life is just too short for Shares magazine. Still there's always worse while the Motely Fool is still pumping greater volumes of internet clutter.

Yes,i find it an interesting read but of course i wouldnt indulge in the risky business of buying into their individual share tips which is way to risky for me. Might as well go down to the bookies. 

I still get the HL investing times even though I haven't been a customer for years. When you read something that sounds like something a management consultant would say, you just have to ignore it.