The "Balanced" (60/40?) Investor: Topic for Discussion & Analysis | New Thread

george4064

Really enjoyed reading through the comments and interesting posts, thought I would share my strategies. Currently have 3 portfolios; S&S ISA, S&S LISA and DC pension pot.

S&S ISA targets are as below (all equity unless specified otherwise), and are made up of 47% ITs, 29% ETFs, 22% individual shares and 2% cash. That makes this portfolio approx 70% active and 30% passive. Very much put this at the high end of the risk scale, but comfortable with that.

US - 32.5%
UK - 10.0%
European - 10.0%
Asia Pacific ex Japan - 8.0%
Global Emerging Markets - 12.0%
Japan - 7.5%
Global Small Cap - 10.0%
Logistics REIT - 5.0%
Private Equity - 5.0%
Cash - 0% (target)

S&S LISA is a work in progress with just the core fund invested, but shall be adding to the satellite funds over time. This takes a more thematic approach/a bit of fun. Again, very high risk but this pot won't be accessed until I'm 60 so still got a good 30 years or so till then!

Global All Cap Stocks - 40%
Battery Value Chain ETF - 20%
Clean Water ETF - 20%
Cyber Security ETF - 20%

DC Pension/SIPP via regular contributions, invested as below. I was a bit silly having that small allocation to UK Gilts, it was a one-off switch into UK gilts so not actively contributing to the UK gilt fund. All funds utilised are passive, but with my tactical overlay on top. Out of all my portfolios I monitor the pension the least, and don't have set targets like I do with the other portfolios. Something to work on in the future!

World Equity ex UK - 90%
UK Equities - 5%
UK Gilts - 5%

ivormonee

JohnWinder said:

ivormonee said:

And how to you measure performance? What benchmark(s), if any, do you use?

35 posts on, without anyone satisfying you, you may be pointing at the elephant in the room. I'll have a shot.

For benchmarking performance, funds need to be matched for risk and perhaps asset type for it to be meaningful.

A couple of approaches are either: against an absolute standard eg inflation +2%, or a market index;  or against another fund in the same category. The former is an absolute benchmark, the latter a relative one.

For a passive fund you could use the former because the fund sets out to track the index, so the performance measure is how far its return differs from the index. A relative benchmark, such as how well it tracks the index compared to a comparable index fund would add a bit more information. A relative benchmark of comparative costs would be useful if the returns did not include the effects of costs.

For an active fund, it's not so easy. if you were to compare it with an index it would need to be investing in a way representative of that index - eg same asset class, sector, region, whatever. For other active funds however, with more complex asset allocations it’s beyond the ordinary investor to find an index or mix of indices with the same risks for a valid comparison to be made, and the managers seem not to do it. I quote:

'risk-adjusted studies involve complicated computer analyses that are only available to research houses and academics. They do not reflect the information available to retail investors via advertisements, league tables or formal offer documents.'

So one is left with using the ‘inflation +2%’ type absolute benchmark, or a relative benchmark.

Once you start using a relative benchmark, ‘is this fund’s returns better than its comparators’?’, you are into the area of 'does past performance predict future performance?’. Because there is no point comparing the past performance of a fund with its comparators if that will tell you nothing about its future performance.

So what do we know about that predictability? I quote:

'Good past performance seems to be, at best, a weak and unreliable predictor of future good performance over the medium to long term.

Where persistence was found, this was more frequently in the shorter-term, (one to two years) than in the longer term. 

Short-term past performance is only correlated with short term future performance. Longer term future performance is only correlated (if at all) with longer term past performance.'

The source material is an academic review, 18 years old, commissioned by a national investments regulator titled:

'A Review of the Research on the Past Performance of Managed Funds' 

https://downloads.asic.gov.au/media/1337666/FMRC_Report.pdf

If the relevant conclusions were true then, and remain true, it suggests that many active funds have no benchmarks you and I could reliably use to evaluate them. That's could be handy for someone, just not you or me.

Excellent post. Analytical and meaningful I found.

It is dependent on the type of portfolio/ funds - passive or active. If passive, then a comparison against the index for a fund would just inform tracking differences. If a portfolio of passives then it should be the same, unless there is a difference in asset allocation, in which case it would inform on the over/ under performance of the asset allocation. Can we compare the passive portfolio to an equivalent active one? As you say, very difficult for the reasons you've outlined. If we take the average of a particular category, as described previously, eg. 40%-85% equity, then we are faced with a wide disparity of returns without attention to risk (aka. volatility). So it is not possible to make a meaningful comparison in this way, unless we had a way of adjusting the benchmark to accomodate the same level of risk.

Finding a small subset of active funds that are close to the mark (in terms of matching volatility) may have achieved a similar performance but based on different asset allocations, so we would not be comparing like with like. We could, of course, just take the average, ie. the category return anyway, which would simply answer the question : "how did the managers who run portfolios within this category perform overall, based on their chosen asset allocation and stock selection strategies?". In a way, that still provides an insight even though it's not an exact like for like benchmark; but useful nevertheless as far as the previous question is concerned.

Looking at a portfolio of actively managed funds is easier and more difficult at the same time, depending on what comparison we are trying to make. If we take an actively managed fund, again within the 40%-85% equity category then we can compare it to the category benchmark, as we did for the passive portfolio above, and therefore subject to the same limitations. But we could also make a comparison to an index, which would be more insightful, but only, as you say if we have the same weightings to asset mix. Or, we could ask, how does the fund compare to an index designed as a multi asset mix that would fall within the same category. An earlier poster suggested the closest VLS fund.

So, if our own portfolio was, say 60% equity then we would draw a comparison with VLS60. A good proxy, gives us an insight as it compares the active management decisions to those of an unwavering passive strategy, but would deviate by the specific allocation of the VLS nevertheless. So, if VLS is skewed more to the UK, then it moves away from the true passive return as it has an inbuilt skewness. But it still makes sense in some respects; it simply answers a different version of the question that we seek to answer, which is: how did the actively managed fund perform relative to an asset allocation comprising of index trackers?

Your comment about some studies and data only available to research houses/ institutions is good to highlight that we would also benefit from having such benchmarking information as it would bring us closer to understanding the tue picture of the relative performance of the portfolios of our own construction. Failure of its availability means that we would have to construct our own benchmarks if we were to be so inclined.

Thrugelmir

Prism said:

One risk is permanent loss of capital but that isn't measured as we can't tell within funds if a manager sold out of an equity at a lower value than we bought in - and is that even a problem? 

Companies do go bust or are delisted with no value to shareholders. The less regulated the market the greater the risk. Corporate governance differs across the globe. Fluctuation in market price is more often or the history of the majority of companies. With the average life span of a listed company now being as little as 15 years. 

tigerspill

Does anyone know how often MA funds such as VLS are rebalanced.
I appreciate that this will partly relate to the rebalancing of the contents of the funds within VLS.
I would guess that it is constant and that the underlying assets in the lowest tier funds but and sell daily to meet their balancing objective.  The the tier of funds then does the same etc?

Costabit

tigerspill said:

Does anyone know how often MA funds such as VLS are rebalanced.

Don't know for sure and Vanguard may be able to answer specifically for each fund, but they likely rebalance almost constantly as new contributions or dividends etc are reinvested to maintain the target allocation.

Vanguard might be a bit coy over it as they should weigh up the transaction costs so whether that is daily or not is a guess.

Hadn't thought of it before but will be interested in what the answer is

Thrugelmir

tigerspill said:

Does anyone know how often MA funds such as VLS are rebalanced.
I appreciate that this will partly relate to the rebalancing of the contents of the funds within VLS.
I would guess that it is constant and that the underlying assets in the lowest tier funds but and sell daily to meet their balancing objective.  The the tier of funds then does the same etc?

Thought I read somewhere it was 6 monthly. As will be a considered investment allocation decision.  There'll be a tolerance band within which the funds will be maintained in between. The daily flow of new money and redemptions, along with income generated can be used to keep the overall VLS in check. 

Linton

Costabit said:

tigerspill said:

Does anyone know how often MA funds such as VLS are rebalanced.

Don't know for sure and Vanguard may be able to answer specifically for each fund, but they likely rebalance almost constantly as new contributions or dividends etc are reinvested to maintain the target allocation.

Vanguard might be a bit coy over it as they should weigh up the transaction costs so whether that is daily or not is a guess.

Hadn't thought of it before but will be interested in what the answer is

The transaction costs should be minimal except if a share enters or leaves the index.  I would guess that most variation can be managed with differential buying/selling when there is a net movement of unit holders into and out of the fund.  And then, another guess, if all shares are in Vanguard's name a lot of rebalancing can be done by internal transfers at close to zero cost.