Pension recovery performance 2020

[Deleted User]

Linton said:

Deleted_User said:

“ Is there another statistical measurable one that we are missing?”

Yes, its called “common sense”.  An index can fall... Let’s say 70%. A bit extreme but easy. We should all be prepared for that.  Several of the high flying funds mentioned above have most their holdings in US and Chinese Tech. That’s very cool but I would assume a fund like that could drop by a factor of 10 and it wouldn’t even require an economic crash.  And it could be a much longer trend then for the index following a crash. The fund may never recover. High flying funds go out of business all the time. 

Say the governments figure out how to properly tax big Tech and impose tough regulations.  Say the new administration pursues big tech under the anti-monopoly law.  Say Tesla cant ever turn a meaningful profit. Musk is kinda erratic, what if he tweets something against transvestites and it turns out they were the only ones buying Teslas? These kinds of things can reverse recent trends. And they will. And nobody is going to rescue Tesla. Not a bank. Nobody cares. 

We’ve had a very long trend of value underperforming growth resulting in a very large relative premium on growth stocks. These trends tend to reverse themselves, often with a bang.
And when that happens, many will quit investing altogether and move into cash or real estate. And thats going to lead to a permanent damage to their portfolios. We’ve seen it all before.

Do the high flying funds have most of their holdings in US and Chinese Tech?  Perhaps you could give some examples. Morningstar tells me that SMT, perhaps the most widely discussed fund in this area is 58% consumer cyclical.  So yes high risk but on the basis of low sector diversification, not because most of its investments are high risk that could collapse.  Looking at morningstar sectors SMT has less than half the % Tech of the S&P 500.  Are you worried about investing in a US tracker?  If you think (like me) that Tesla is wildly over-hyped are you happy that based on current figures it will be about 1.6% of the S&P500?  Interestingly while the main indexes are buying Tesla, fund manager Baillie Gifford has been selling.

Much  depends on how you define Tech.  Is Amazon Tech or more sensibly classified as a large retailer? What abut Netflix?  Is that Tech?  I would now question whether Microsoft is really high risk Tech being based on steady income from probably every large conpany throughout the world. 

The situation is very different to the Tech Boom/Bust 20 years ago.  At that time over enthusiasm drove the markets and their indexes into LaLa Land when small non-profitable companies were raised to dizzying heights.  Now the technological revolution brought about by advances in electronics is kmainstream.

I am not looking at Morningstar. I am looking at the fund. You always need to look under the hood with these funds. Sure, Tesla, Tencent, Amazon and Alibaba are now classed as “consumer discretionary” or “consumer cyclical” rather than Tech. But these are not stocks which would behave like the traditional  “consumer discretionary” category normally does. These are special stocks which would crash if Tech goes out of favour, 1999 style. Situation is different from 1999 but also the same. Many of these stocks  have not turned a profit.  Even Amazon is not a profitable company. They are all correlated within this fund, whatever you call them. This is the fund betting on Chinese and US tech.  The bets may or may not come off. If you bet long enough, you always lose in the end.
And Trustnet may assign a lower risk category if you buy a fund like this and another purely Tech fund because you have now “diversified”. But in reality all your holdings are still correlated, still vulnerable to a single event.

Yes, I own Tesla - and all of these stocks. I own it through VTI, so I have owned Tesla since 2010 and nothing changes in that respect because it joins S&P 500. But I won’t even notice if Tesla goes belly up. 

Linton

itwasntme001 said:

Prism said:

MarkCarnage said:

Prism said:

Like it or not investment risk is measured by volatility rather than some abstract concepts like being overweight a sector, being different from the index, high conviction of few holdings or manager risk. Based on that and the ability to put together a portfolio of funds based on reducing that volatility by blending the right combinations of sectors you can indeed create an allocation which can boost the chance of returns while also reducing risk. 

How someone attempts to do that is up to them. It is exactly what I try and do with my fund selections and allocations between funds - and it seems to work. For example Trustnet tells me that my SIPP has a risk score of 71 which is much lower than the score of some of the individual funds I hold while the performance has been better than single funds of a similar risk level. I have taken a lower level of risk and got higher returns, at least historically. I have no reason to believe that this is all going to fall apart for some reason just because how could it possibly continue forever. 

If us DIY investors do this, risk based multi asset funds like HSBC Global Strategy do this why do we presume that IFAs aren't doing this. Isn't this an important role of asset allocation. 

By some, and I don't really. I tend to think of it as sustained or permanent significant or total loss of capital. Yes, that could equal  a 'volatility' measure if I was measuring it over a specific, usually relatively short, time period, but it usually doesn't. It ties in with the mistaken belief that an investor has 'suffered a loss' if a holding has fallen in value. They have suffered a loss if they crystallise that fall in value by selling. Which many do, thereby offering  opportunity for others. To the extent that your time horizon is finite and relatively short, and your tolerance of nominal monetary loss is low, then yes, many if not all equity funds are 'high risk'. 2008/9 proved that many 'diversified' or 'low risk' funds were too by that definition. 
When you talk about 'risk based' multi asset funds, do you define these as risk allocators or asset allocators? 

I do agree that volatility is a pretty naff measure of total risk however it is pretty much the only one we can put a number on and therefore compare between two portfolios. We could say that portfolio 1 was riskier than portfolio 2 because it was more volatile over the same time period. It would be very subjective to say that actually portfolio 2 is riskier than portfolio 1 because it has a higher chance of permanent loss of capital. Very hard to predict and although there are tell tale signs (poor old Woodford) it is difficult to really put a probability on it ahead of time.

You can put a number on manager risk for example - number of active managers who have outperformed their benchmark over a number of economic and market cycles, compared to the total number of active managers (failed AND otherwise).

I am sure there are ways to put a number on other risks.

Why just do this for active managers?  Why their benchmark since you often cannot invest in their benchmark as an alternative? Perhaps the nearest investable index would be a useful choice.  However in any case it's not a very helpful measure when comparing one portfolio with another since the metric would be the same for both.

Short/medium term volatility is better than nothing - certainly the Trustnet measure means something since similar funds are grouped together, broadly the order is much as one would expect andf mixing very different equity funds reduces the measure below the average of the overall portfolio.

The non numeric proxy I use for least equity risk is maximum diversification across all the characteristics about which I can find data.

Linton

Deleted_User said:

Linton said:

Deleted_User said:

“ Is there another statistical measurable one that we are missing?”

Yes, its called “common sense”.  An index can fall... Let’s say 70%. A bit extreme but easy. We should all be prepared for that.  Several of the high flying funds mentioned above have most their holdings in US and Chinese Tech. That’s very cool but I would assume a fund like that could drop by a factor of 10 and it wouldn’t even require an economic crash.  And it could be a much longer trend then for the index following a crash. The fund may never recover. High flying funds go out of business all the time. 

Say the governments figure out how to properly tax big Tech and impose tough regulations.  Say the new administration pursues big tech under the anti-monopoly law.  Say Tesla cant ever turn a meaningful profit. Musk is kinda erratic, what if he tweets something against transvestites and it turns out they were the only ones buying Teslas? These kinds of things can reverse recent trends. And they will. And nobody is going to rescue Tesla. Not a bank. Nobody cares. 

We’ve had a very long trend of value underperforming growth resulting in a very large relative premium on growth stocks. These trends tend to reverse themselves, often with a bang.
And when that happens, many will quit investing altogether and move into cash or real estate. And thats going to lead to a permanent damage to their portfolios. We’ve seen it all before.

Do the high flying funds have most of their holdings in US and Chinese Tech?  Perhaps you could give some examples. Morningstar tells me that SMT, perhaps the most widely discussed fund in this area is 58% consumer cyclical.  So yes high risk but on the basis of low sector diversification, not because most of its investments are high risk that could collapse.  Looking at morningstar sectors SMT has less than half the % Tech of the S&P 500.  Are you worried about investing in a US tracker?  If you think (like me) that Tesla is wildly over-hyped are you happy that based on current figures it will be about 1.6% of the S&P500?  Interestingly while the main indexes are buying Tesla, fund manager Baillie Gifford has been selling.

Much  depends on how you define Tech.  Is Amazon Tech or more sensibly classified as a large retailer? What abut Netflix?  Is that Tech?  I would now question whether Microsoft is really high risk Tech being based on steady income from probably every large conpany throughout the world. 

The situation is very different to the Tech Boom/Bust 20 years ago.  At that time over enthusiasm drove the markets and their indexes into LaLa Land when small non-profitable companies were raised to dizzying heights.  Now the technological revolution brought about by advances in electronics is kmainstream.

I am not looking at Morningstar. I am looking at the fund. You always need to look under the hood with these funds. Sure, Tesla, Tencent, Amazon and Alibaba are now classed as “consumer discretionary” or “consumer cyclical” rather than Tech. But these are not stocks which would behave like the traditional  “consumer discretionary” category normally does. These are special stocks which would crash if Tech goes out of favour, 1999 style. Situation is different from 1999 but also the same. Many of these stocks  have not turned a profit.  Even Amazon is not a profitable company. They are all correlated within this fund, whatever you call them. This is the fund betting on Chinese and US tech.  The bets may or may not come off. If you bet long enough, you always lose in the end.
And Trustnet may assign a lower risk category if you buy a fund like this and another purely Tech fund because you have now “diversified”. But in reality all your holdings are still correlated, still vulnerable to a single event.

Yes, I own Tesla - and all of these stocks. I own it through VTI, so I have owned Tesla since 2010 and nothing changes in that respect because it joins S&P 500. But I won’t even notice if Tesla goes belly up. 

Google tells me that Amazon has reported positive profits every quarter since 2016.

[Deleted User]

When the profit is 3%, its not a profitable company. Tesla also turned a slight profit recently. Neither company is worth the multiples based on traditional measures. 

itwasntme001

Linton said:

itwasntme001 said:

Prism said:

MarkCarnage said:

Prism said:

Like it or not investment risk is measured by volatility rather than some abstract concepts like being overweight a sector, being different from the index, high conviction of few holdings or manager risk. Based on that and the ability to put together a portfolio of funds based on reducing that volatility by blending the right combinations of sectors you can indeed create an allocation which can boost the chance of returns while also reducing risk. 

How someone attempts to do that is up to them. It is exactly what I try and do with my fund selections and allocations between funds - and it seems to work. For example Trustnet tells me that my SIPP has a risk score of 71 which is much lower than the score of some of the individual funds I hold while the performance has been better than single funds of a similar risk level. I have taken a lower level of risk and got higher returns, at least historically. I have no reason to believe that this is all going to fall apart for some reason just because how could it possibly continue forever. 

If us DIY investors do this, risk based multi asset funds like HSBC Global Strategy do this why do we presume that IFAs aren't doing this. Isn't this an important role of asset allocation. 

By some, and I don't really. I tend to think of it as sustained or permanent significant or total loss of capital. Yes, that could equal  a 'volatility' measure if I was measuring it over a specific, usually relatively short, time period, but it usually doesn't. It ties in with the mistaken belief that an investor has 'suffered a loss' if a holding has fallen in value. They have suffered a loss if they crystallise that fall in value by selling. Which many do, thereby offering  opportunity for others. To the extent that your time horizon is finite and relatively short, and your tolerance of nominal monetary loss is low, then yes, many if not all equity funds are 'high risk'. 2008/9 proved that many 'diversified' or 'low risk' funds were too by that definition. 
When you talk about 'risk based' multi asset funds, do you define these as risk allocators or asset allocators? 

I do agree that volatility is a pretty naff measure of total risk however it is pretty much the only one we can put a number on and therefore compare between two portfolios. We could say that portfolio 1 was riskier than portfolio 2 because it was more volatile over the same time period. It would be very subjective to say that actually portfolio 2 is riskier than portfolio 1 because it has a higher chance of permanent loss of capital. Very hard to predict and although there are tell tale signs (poor old Woodford) it is difficult to really put a probability on it ahead of time.

You can put a number on manager risk for example - number of active managers who have outperformed their benchmark over a number of economic and market cycles, compared to the total number of active managers (failed AND otherwise).

I am sure there are ways to put a number on other risks.

Why just do this for active managers?  Why their benchmark since you often cannot invest in their benchmark as an alternative? Perhaps the nearest investable index would be a useful choice.  However in any case it's not a very helpful measure when comparing one portfolio with another since the metric would be the same for both.

Short/medium term volatility is better than nothing - certainly the Trustnet measure means something since similar funds are grouped together, broadly the order is much as one would expect andf mixing very different equity funds reduces the measure below the average of the overall portfolio.

The non numeric proxy I use for least equity risk is maximum diversification across all the characteristics about which I can find data.

By benchmark I did mean an index.  So a global fund like Fundsmith or SMT would use a FTSE All World as a benchmark for example.  It won't tell you much.  But it at least should tell something about relative performance and drawdowns.

But even then there is just so much more to risk.  Fundsmith has only been around 10 years.  Against one type of economic environment.  Don't think that's really enough to say anything meaningful about the fund's performance.  So likely at some point it will start a long period of under-performance.  Which means a retail investor like Prism needs to be ahead of the game and make a decision on selling.  Human biases may be too powerful to make this decision early enough.

Key thing to do really is some sort of back-testing over multiple economic cycles throughout history.  Should really be a requirement for asset allocation decisions.  But you can't do this with most managed funds.  Because not many have been around long enough.

Short/medium term vol may be an indicator of something.  But it can also give a false sense of security.

itwasntme001

Deleted_User said:

When the profit is 3%, its not a profitable company. Tesla also turned a slight profit recently. Neither company is worth the multiples based on traditional measures. 

Whether something is worth the multiples is subjective - exactly what markets are about.  High multiples alone should not be an indicator of whether a stock has had its day or not.  Maybe Amazon won't grow its earnings to justify its valuation, but maybe it will.

Thrugelmir

Linton said:

Deleted_User said:

“ Is there another statistical measurable one that we are missing?”

Yes, its called “common sense”.  An index can fall... Let’s say 70%. A bit extreme but easy. We should all be prepared for that.  Several of the high flying funds mentioned above have most their holdings in US and Chinese Tech. That’s very cool but I would assume a fund like that could drop by a factor of 10 and it wouldn’t even require an economic crash.  And it could be a much longer trend then for the index following a crash. The fund may never recover. High flying funds go out of business all the time. 

Say the governments figure out how to properly tax big Tech and impose tough regulations.  Say the new administration pursues big tech under the anti-monopoly law.  Say Tesla cant ever turn a meaningful profit. Musk is kinda erratic, what if he tweets something against transvestites and it turns out they were the only ones buying Teslas? These kinds of things can reverse recent trends. And they will. And nobody is going to rescue Tesla. Not a bank. Nobody cares. 

We’ve had a very long trend of value underperforming growth resulting in a very large relative premium on growth stocks. These trends tend to reverse themselves, often with a bang.
And when that happens, many will quit investing altogether and move into cash or real estate. And thats going to lead to a permanent damage to their portfolios. We’ve seen it all before.

  Is Amazon Tech or more sensibly classified as a large retailer? 

Amazon's value is in the cloud side of the business. 

DT2001

Having read this thread I understand why people do not DIY. When obviously well informed forumites differ in their definitions of risk, how to calculate returns and now profitability.

I am sure Mordko will expand on why 3% profit is not a profitable company and I may well agree with him as he does regularly produce very well reasoned arguments. My point is that what seems obvious to me (and I like to think I am reasonably) well read) isn’t necessarily correct.

I agree with the general gist that good short returns are ‘nice’ but what is more important to me is where I am in terms of my long term goals. Do the impressive performances bring people’s retirement forward or just increase the pots to leave to others?
I’m on target, keeping ahead of inflation so quite happy.

[Deleted User]

Profit margin is a key measure for value investors. Apple turns a meaningful profit. It will show 20-30% profit margin on its revenue.  Apple is selling consumer products.   Amazon is only just keeping its head above water.  It generates a lot of cash but in percentage terms its close to zero. Anything below 10% is very low; not a profitable company in my opinion. Amazon is a pure growth company.  It can grow profit by selling more, but its a very competitive market. Raising margins is very hard for Amazon; could kill their growth. Eventually the growth will stop. Competition will move in.  Or the market becomes saturated. Or the government decides its a monopoly.  Then their shares will drop. Very fast. Because the profit levels are very low and there is no promise of future growth. 

I am a value investor at heart. Some growth companies will produce outsized returns but most will fail. People are buying promises when they are buying Tesla’s shares. I don’t trust promises. I trust profits. That’s my opinion. I do not act on this opinion because I can be wrong. Same as an advisor. He can be wrong. So I buy an index. Whether “value” or “growth” does well tomorrow, I do well either way. You don’t need to understand value to invest today. 

jamesd

Deleted_User said:

When the profit is 3%, its not a profitable company. Tesla also turned a slight profit recently. Neither company is worth the multiples based on traditional measures. 

By traditional measure both are correctly valued because the efficient markets hypothesis claims that the price correctly expresses all that is known about a stock.

That assertion is intended as a joke.

Wirecard is an example of why. The market simply chose to ignore evidence of problems years earlier from the Financial Times, while regulatory capture reached the point that the regulator banned short selling instead of investigating. Meanwhile the company used legal threats to further suppress bad news.

As itwasntme001 implied it's really about speculation and subjectivity for companies like Tesla. Can they change investment to income successfully? There were similar assertions about Amazon long ago and it's far along the path of converting investment into profit.