Pension recovery performance 2020

Another_Saver

Deleted_User said:

“ most national stock market indices lag their country's GDP by about 2% a year...”

Source? I find this very surprising.  Have not seen anything like this in practice.  Stock markets are weakly correlated to GDP for several reasons. And generally they have outperformed anaemic GDP growth in the developed world. 

I didn't say correlated.
Markets are a human system, to suggest they are so efficient that to try and do something else is silly... Well I think that's a silly idea.
I have explained how even over the recent long term, uprating (or positive speculative return) and listed companies expanding the share of GDP they occupy have cancelled out this effect. Neither of those should be relied on indefinitely.

Source: https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.researchaffiliates.com/documents/FAJ-2003-Two-Percent-Dilution.pdf&ved=2ahUKEwiLz4Dz_bbtAhUOfMAKHe7kBDUQFjAAegQIAhAB&usg=AOvVaw3k73yZYUiPErU7pmTxLLQD

At the level of a sufficiently broad and large national index, stock returns are a function of:
Dividend yield and capital growth

Capital growth is a function of:
Inflation/change in price level

Population growth

Capital dilution/concentration

Change in valuation/rerating/

Stock market share of GDP expansion/contraction

Real productivity growth (real GDP per capita growth)

Unfortunately the UK has been tending towards an extreme example like Hong Kong or Singapore of a stock market that has close to nothing to do with the economy it is in. The FTSE 100s biggest mining company Rio Tinto for example pay most of their tax in Australia, have essentially negligible operations in the UK, I would guess that a very small amount of their sales, directly or indirectly are to the UK, and I suspect they are more than the UK average 55% foreign-owned.
However this is true, to varying degrees, of almost every company and every stock market in our globalised, internationally trading world.

itwasntme001

Don't forget, capital growth / dividend yield is also a function of profit margins.  In a very unlikely situation where we have perfect competition globally, stock markets around the world would just collapse to 0.

Profit margins, at least in the US, are at very high levels relative to history (due to a combination of low interest rates and tech sector monopoly).  The stock market knows this and has priced this accordingly.  The question is what happens to margins next.

Linton

Another_Saver said:

Deleted_User said:

“  I know the UK is materially undervalued, etc” 

You don’t actually “know” any of that. What you know is that the current multipliers are low compared to other jurisdictions. Mr Marker knows it too.  Also, both of you know the reason for that.  You are just assigning a different probability to Brexit negatively impacting companies in FTSE 100/250... And that industries in which UK companies are overweight will under/outperform. You could be right but you don’t “know”, you are guessing, betting that the known risks would not materialize.  Betting against Mr Market isn’t easy.  

Funny thing... Most investors think their home markets are undervalued and have the best potential for growth, not just the Brits. The Germans do. And the Yanks. And the French. And Canadians. And Chinese. They can’t all be right. 

I'm taking a contrarian approach that minimises currency and geopolitical risks, and the risk of knowing sweet FA about the future of the world but believing that this island has plenty of history left in it. I know the UK's current valuation is historically very, very cheap. Aside from 2008/9 and the odd crash, the cheapest in my lifetime. I also know the UK's current valuation is very cheap by current global standards. Even if it wasn't, I would probably still be at least 50% in the UK.
I don't agree with your second point, I see far more negative UK sentiment in the forum than I do positive, and not just because of the FTSE 100's make-up. The US for example does not nearly follow the same pattern. I think according to the St Louis FRED some 35% of the US stock market is owned overseas, in the UK it's 55% (ONS ownership of UK listed shares). China is experiencing capital flight, Germany with their smaller stock market and Mittelstand - preference for direct ownership - are not as comparable.

I don't see everyone else with their own portfolio attracting criticism or being asked to justify doing anything other than owning a global index fund.

I am completely supportive of you setting up your portfolio in your own way to meet your objectives.  What I am objecting to is index investors claiming that their way is automatically the superior way in all circumstances.  We should be learning from each other rather than trying to prove that people who dont do things the way we do have got it wrong.

As regards the investng in the UK I and many other contributors have purely been unhappy with the FTSE 100 where inherent problems with the index can be identified.   The FTSE 250 and below, on the other hand, provides excellent opportunities for investors.  My global growth investments are currently about 9% UK Small Comanpies.

Another_Saver

itwasntme001 said:

Don't forget, capital growth / dividend yield is also a function of profit margins.  In a very unlikely situation where we have perfect competition globally, stock markets around the world would just collapse to 0.

Profit margins, at least in the US, are at very high levels relative to history (due to a combination of low interest rates and tech sector monopoly).  The stock market knows this and has priced this accordingly.  The question is what happens to margins next.

And return on equity - UK return on equity is the same as the global average. So even if you dont buy the raw "UK is on sale" argument, you can still buy a diverse, global portfolio as capital efficient as a global index fund by buying a UK index fund for 1/2 to 2/3 the price depending which measure you're looking at, the best are the CAPE and PB. The only real caveat here is comparability of accounting standards; any argument about sector weights and the relevance of the price to book ratio is mooted by the ROE being the same.

[Deleted User]

There is no argument that UK’s indices are discounted. But there is a reason for that - extra risk. May not materialize and then you’ll do very well. Or the other way round. going 60% home market is a major bet.  It may all come out in the wash long term but one must be prepared for decades of potential underperformance. 

If you put 20 or even 30% in the UK, your portfolio wouldn’t trail the world by too much even if UK underperformed. As it is, you are exposed. We all have opinions, good portfolios allow for the fact we might be wrong. 

Another_Saver

Deleted_User said:

There is no argument that UK’s indices are discounted. But there is a reason for that - extra risk. May not materialize and then you’ll do very well. Or the other way round. going 60% home market is a major bet.  It may all come out in the wash long term but one must be prepared for decades of potential underperformance. 

If you put 20 or even 30% in the UK, your portfolio wouldn’t trail the world by too much even if UK underperformed. As it is, you are exposed. We all have opinions, good portfolios allow for the fact we might be wrong. 

I am not aware of periods when the UK has underperformed the wider global market for decades (you can pick longer periods which includes shorter periods of UK underperformance such as any period including the last 5 years, but to compare fairly you need to isolate the period of relative over/under performance).

Until the Brexit referendum the UK's total return was not distinguishable from the US or global market's total return. In the 80s the UK did better, in the 90s the US did better because of the .com bubble, in the 2000s the UK did a little better, last decade and this decade so far the us is doing better.

I don't see picking the UK as having any particular extra long term risk, for those reasons. There is always the single country risk which I don't see as material in the UK, a UK index fund has the lowest currency risk of any global or country specific fund to a UK Investor, and the lowest geopolitical risk.

Prism

Deleted_User said:

If you put 20 or even 30% in the UK, your portfolio wouldn’t trail the world by too much even if UK underperformed. As it is, you are exposed. We all have opinions, good portfolios allow for the fact we might be wrong. 

I'm 20% UK and I don't trail the world at all. I didn't specifically select that percentage - just what I have ended up with.

Another_Saver

Linton said:

Another_Saver said:

Deleted_User said:

“  I know the UK is materially undervalued, etc” 

You don’t actually “know” any of that. What you know is that the current multipliers are low compared to other jurisdictions. Mr Marker knows it too.  Also, both of you know the reason for that.  You are just assigning a different probability to Brexit negatively impacting companies in FTSE 100/250... And that industries in which UK companies are overweight will under/outperform. You could be right but you don’t “know”, you are guessing, betting that the known risks would not materialize.  Betting against Mr Market isn’t easy.  

Funny thing... Most investors think their home markets are undervalued and have the best potential for growth, not just the Brits. The Germans do. And the Yanks. And the French. And Canadians. And Chinese. They can’t all be right. 

I'm taking a contrarian approach that minimises currency and geopolitical risks, and the risk of knowing sweet FA about the future of the world but believing that this island has plenty of history left in it. I know the UK's current valuation is historically very, very cheap. Aside from 2008/9 and the odd crash, the cheapest in my lifetime. I also know the UK's current valuation is very cheap by current global standards. Even if it wasn't, I would probably still be at least 50% in the UK.
I don't agree with your second point, I see far more negative UK sentiment in the forum than I do positive, and not just because of the FTSE 100's make-up. The US for example does not nearly follow the same pattern. I think according to the St Louis FRED some 35% of the US stock market is owned overseas, in the UK it's 55% (ONS ownership of UK listed shares). China is experiencing capital flight, Germany with their smaller stock market and Mittelstand - preference for direct ownership - are not as comparable.

I don't see everyone else with their own portfolio attracting criticism or being asked to justify doing anything other than owning a global index fund.

I am completely supportive of you setting up your portfolio in your own way to meet your objectives.  What I am objecting to is index investors claiming that their way is automatically the superior way in all circumstances.  We should be learning from each other rather than trying to prove that people who dont do things the way we do have got it wrong.

As regards the investng in the UK I and many other contributors have purely been unhappy with the FTSE 100 where inherent problems with the index can be identified.   The FTSE 250 and below, on the other hand, provides excellent opportunities for investors.  My global growth investments are currently about 9% UK Small Comanpies.

I haven't said that, Mordko has. I have merely explained how I have arrived at my portfolio. I agree re: the FTSE 250 hence I own it as in index but it is important to understand why - simply being a smaller/mid-sized UK listed company is not of itself a key to success. The single factor that explains the FTSE 250s outperformance is capital concentration as opposed to dilution: net acquisitions, and perhaps some advantage caused by shuffling with the 100 and Small cap.
There are plenty of companies with great return records but that is what has made the difference.

I do not see inherent problems in the 100 anymore than I see inherent problems in any other national stock index. 

Another_Saver

Deleted_User said:

“ most national stock market indices lag their country's GDP by about 2% a year...”

Source? I find this very surprising.  Have not seen anything like this in practice.  Stock markets are weakly correlated to GDP for several reasons. And generally they have outperformed anaemic GDP growth in the developed world. 

Another less academic source than the paper j referred to is https://www.investopedia.com/investing/calculating-equity-risk-premium/

Thrugelmir

Deleted_User said:

There is no argument that UK’s indices are discounted. But there is a reason for that - extra risk. 

Perhaps it's investors preference for global funds and large cap companies generally. Rarely do you see a recommendation for holding the Russell 3000 on a UK site. The company names mean little nor is there research coverage freely available.