Bernstein - Implementing Liability Matching and Risk Portfolios - in 2020

[Deleted User]

1. Most people here know about world trackers. Great instruments but hardly the only ones.
2. Are you aware that the company which invented passive index investing recommends deviating from market cap, eg for home markets? 

3. It is really up to each investor to decide what constitutes passive vs active. 

4. I am not taking a view on future performance of anything.  I just don’t like being too concentrated in certain types of companies all impacted by taxes and other factors within a single jurisdiction.
5. indices often cap maximum allocation to a single company - after a few dominant companies went bust.  Guess indices are active according to your definition. 

6. I am ok knowing that I might be underweight in a future Amazon.  At this point I don’t care about maximizing growth and not ok with having more than half of my equity in a single country and over 100k in FAANG. Then again, I might have a slightly less negligible allocation to a future Nestle or Alibaba. 

7. Yes, Fundsmith is taking on a lot of risk. That’s ok. The only way to beat the market. But also  a much higher chance to suffer unsustainable losses. 

There is more than one way to skin a cat. As long as you have good diversification, stay invested and keep the costs done, it should be fine.  

Linton

Deleted_User said:

1. Most people here know about world trackers. Great instruments but hardly the only ones.
2. Are you aware that the company which invented passive index investing recommends deviating from market cap, eg for home markets? 

3. It is really up to each investor to decide what constitutes passive vs active. 

4. I am not taking a view on future performance of anything.  I just don’t like being too concentrated in certain types of companies all impacted by taxes and other factors within a single jurisdiction.
5. indices often cap maximum allocation to a single company - after a few dominant companies went bust.  Guess indices are active according to your definition. 

6. I am ok knowing that I might be underweight in a future Amazon.  At this point I don’t care about maximizing growth and not ok with having more than half of my equity in a single country and over 100k in FAANG. Then again, I might have a slightly less negligible allocation to a future Nestle or Alibaba. 

7. Yes, Fundsmith is taking on a lot of risk. That’s ok. The only way to beat the market. But also  a much higher chance to suffer unsustainable losses. 

There is more than one way to skin a cat. As long as you have good diversification, stay invested and keep the costs done, it should be fine.  

I am delighted and somewhat surprised we see eye-to-eye on this.  A couple of comments:
4) I was unaware that mainstream indexes cap maximum allocations.  If they do that somewhat undermines their intellectual justification.  The "index" used bythe Vanguard UK Income Index Fund certainly does, but that seems to me to be stretching the definition of an index beyond reasonable limits.
6)  Thanks to a significant % of my US allocation being in small/medium companies I should be overweight in the next Amazon.
7)  Yes, I agree that taking on risk is the best way of outperforming the index.  However, whether this means risk of unsustainable losses depends on one's other investments. A bar bell approach with higher risk equity accompanied by an appropriate allocation to Wealth Preserving investments should keep the overall risk within acceptable limits.

[Deleted User]

When Nortel traded at $125 a share, it made up 35% of the market cap in Canada. It went to zero. Quickly.  More recently Valeant, a pharmaceutical company, almost repeated the trick.  Ever since Nortel good Canadian ETFs have a “safety” cut-off at 10%.  

My Investment Policy Statement isn’t a religion. I like investing based on a market cap but its not because the bible said thou shall do it. Using marked cap allocation indices reduces  ETF’s need to buy and sell stocks, reduces costs and taxes and removes human emotion from decision making. Those are the actual reasons why I like index investing. 

In my book, as long as the portfolio can be run without human decision making (except when setting it up), as long as its low cost and well diversified, its all good.  

Incidentally, I have investment accounts with four institutions and track long term money weighted returns for each.  But I manage allocations as a single portfolio, so my asset and country allocations very between the four institutions.  Nevertheless money weighted returns are surprisingly consistent, within 1% of the overall MWR of the portfolio.  

Sometimes I think we spend too much effort agonizing about the exact investments.  A low cost diversified portfolio will always do well given enough time in the market. 

gm0

As OP - if I can I would like to draw the conversation back to the original what to do about the "not equities" question - a number of responses have agreed that this is more challenging than the 40 year view equities piece where you can hold "all" (for differing views on what spread of cap and geo and factor represents that)  or pay for active concentrated stockpicking

Here is my emerging overall portfolio thinking (comments welcome)

Scenario is splitting a DC pot which represents the majority of our pension assets as a couple and setting it up for a planned 40 year deaccumulation. We have 2xSP and a small DB coming in mid 60s which are ~50% of essential income later. 
So a not atypical "bridging" scenario 55-67 with early retirement SORR risk handling overlaid.

Portfolio elements

Fairly easy bit - "Growth portfolio".  - Long term core equities portion

Low cost global equities tracker with some bells and whistles added - small and EM.  I am suspicious of REIT to buy a lot of it just now (covid acceleration of retail trends).
Basic global developed tracker is 0.16% (inc Platform, Admin, Fund, Drawdown). 
Can extend this portfolio with 10% EM and 10% Small for some extra diversification at a total cost of 0.2%. 
This is on the L&G Master Trust Wrapper - Insured funds, 100% protection basis).  So a shade more than doing it on Vanguard.  There is a geographic split global equities active option (Threadneedle Managed Equity which I am trying to understand in order to evaluate it.  I don't really want to increase far beyond whole of market risk + concentration substantially.  A little the other direction - a little lost possible return for a degree less ulcerindex would be more to taste.  I guess we are still moderately aggressive.  We accumulated DC at 100% equities.  And have seen 50% drop(s) - albeit at a younger age without SORR to worry about.

Now the tricky one - Alongside the whole of market cheaply half.  A "wealth preservation + contingent SORR buffer" portfolio - which I think needs more targeted wealth preservation flavour in fund selection. And something for the buffer if there is a good solution other than a few years cash.  Transfer to a full SIPP platform seems quite likely for 50% of the fund for this portfolio if something more specialised and active is ultimately selected.

In my current wrappers there are bond funds but when I see a lot (50%) of BBB corporate bonds then I don't think "minimal risk asset" An example of this is L&G PMC Janus Henderson Peference and Bond Fund 3 (0.71% all in).  US and UK corporates with a lot of BBB and also afflicted (or less likely blessed) with 80% FX hedging. Just not falling in love with that for the SORR hedge. And the other short dated corporate bond index fund is also half BBB.  They don't meet the criteria for SORR buffer or Bernstein's more extreme LMP thinking.

What to do ?

In this thread so far for the "wealth preservation" / not equities element the following suggestions were made:
>Troy Trojan, Capital Gearing Trust, and Jupiter Strategic Bonds and also increasing our cash reserves
I have also come across Personal Assets Trust PNL, Janus Henderson UK Absolute Return. RIT Capital Partners. RCP.  But I am wandering in the dark on this wealth preservation topic as it is new to me.  I would like to understand history and plot ulcerindex on them across periods where corrections occurred which may be possible to do.  To see if they do what I would like them to in previous different crises.

[Deleted User]

Do you have enough to buy gilts and treasuries directly? That would be my preferred approach. And I would keep duration below 5yrs. If not, bond ETFs are usually cheaper than funds. The costs become important in an asset which is struggling to keep up with inflation.

Linton

gm0 said:

As OP - if I can I would like to draw the conversation back to the original what to do about the "not equities" question - a number of responses have agreed that this is more challenging than the 40 year view equities piece where you can hold "all" (for differing views on what spread of cap and geo and factor represents that)  or pay for active concentrated stockpicking

Here is my emerging overall portfolio thinking (comments welcome)

Scenario is splitting a DC pot which represents the majority of our pension assets as a couple and setting it up for a planned 40 year deaccumulation. We have 2xSP and a small DB coming in mid 60s which are ~50% of essential income later. 
So a not atypical "bridging" scenario 55-67 with early retirement SORR risk handling overlaid.

Portfolio elements

Fairly easy bit - "Growth portfolio".  - Long term core equities portion

Low cost global equities tracker with some bells and whistles added - small and EM.  I am suspicious of REIT to buy a lot of it just now (covid acceleration of retail trends).
Basic global developed tracker is 0.16% (inc Platform, Admin, Fund, Drawdown). 
Can extend this portfolio with 10% EM and 10% Small for some extra diversification at a total cost of 0.2%. 
This is on the L&G Master Trust Wrapper - Insured funds, 100% protection basis).  So a shade more than doing it on Vanguard.  There is a geographic split global equities active option (Threadneedle Managed Equity which I am trying to understand in order to evaluate it.  I don't really want to increase far beyond whole of market risk + concentration substantially.  A little the other direction - a little lost possible return for a degree less ulcerindex would be more to taste.  I guess we are still moderately aggressive.  We accumulated DC at 100% equities.  And have seen 50% drop(s) - albeit at a younger age without SORR to worry about.

Now the tricky one - Alongside the whole of market cheaply half.  A "wealth preservation + contingent SORR buffer" portfolio - which I think needs more targeted wealth preservation flavour in fund selection. And something for the buffer if there is a good solution other than a few years cash.  Transfer to a full SIPP platform seems quite likely for 50% of the fund for this portfolio if something more specialised and active is ultimately selected.

In my current wrappers there are bond funds but when I see a lot (50%) of BBB corporate bonds then I don't think "minimal risk asset" An example of this is L&G PMC Janus Henderson Peference and Bond Fund 3 (0.71% all in).  US and UK corporates with a lot of BBB and also afflicted (or less likely blessed) with 80% FX hedging. Just not falling in love with that for the SORR hedge. And the other short dated corporate bond index fund is also half BBB.  They don't meet the criteria for SORR buffer or Bernstein's more extreme LMP thinking.

What to do ?

In this thread so far for the "wealth preservation" / not equities element the following suggestions were made:
>Troy Trojan, Capital Gearing Trust, and Jupiter Strategic Bonds and also increasing our cash reserves
I have also come across Personal Assets Trust PNL, Janus Henderson UK Absolute Return. RIT Capital Partners. RCP.  But I am wandering in the dark on this wealth preservation topic as it is new to me.  I would like to understand history and plot ulcerindex on them across periods where corrections occurred which may be possible to do.  To see if they do what I would like them to in previous different crises.

PNL is ok, similar to CGT. The Abs Return funds do not have a good history. RCP is relatively high equity, with a lot of private equity so it is not clear what it actually invests in. It did not do a WP job during the COVID mini crash and I do not see it as a true WP fund. On the other hand it is closely linked to the Rothschilds who have large holdings.  Perhaps they know more about WP than me!

A good place to look at how the WP funds have performed in the past is Trustnet/tools/charting where you can get performance  comparison graphs going back to around 1995 for the funds that were around at the time. So it may be of interest to focus on the 2008 crash.

gm0

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

[Deleted User]

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

Audaxer

gm0 said:

And something for the buffer if there is a good solution other than a few years cash.  

I think always keeping at least a few years cash is a good solution - I don't think there is any better solution for a true buffer. As you have already highlighted there is still some risk with bond and wealth preservation funds, so I would hold the cash buffer in addition to these type of funds.

Linton

Deleted_User said:

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

For most private investors, UK Gilts can only be bought on the secondary market.  Not that it makes much difference since new gilts are auctioned by the government rather than being sold at face value, so there is no chance of a good deal.

However gilt yields are so low, negative in £ terms in some cases especially for index linkers if inflation stays at current values, I dont believe a gilt ladder is worth the effort taking into acount the risk of unplanned capital loss should you need to sell early.

I think you are being paranoid if you believe CPI is manipulated.