All World Trackers - High Risk? - I Don't Think So

fred246

There is no right strategy to investing but there are WRONG strategies. Investing all your money in one company is a WRONG strategy. If you invested all your money in Baillie Gifford American you would have made a lot but it would be a WRONG strategy. Investing all your money in a global tracker IS an acceptable strategy. Investing all your money in lots of managed funds is an acceptable strategy but all you are doing is getting punters to choose samples of various regions or sectors. The likely outcome is that you will end up with the general direction of travel which a global tracker will give. It does give the IFA a list of investments to make it look complicated and give him lots to blah blah blah about at your meeting and justify their daft fees.

Thrugelmir

JohnWinder said:

Linton said:

The primary issue with 60% US is risk not performance. ...  I dont see any predictions that the US will become more dominant.

Not sure what we're to take from that observation, but I'm losing faith in predictions:

' It also makes all 67 economists wrong, as this chart of the benchmark yield shows:' That was a prediction of interest rates, a whopping six months into the future. 2014.

https://www.marketwatch.com/story/yes-100-of-economists-were-dead-wrong-about-yields-2014-10-21

'The average forecast for the end of June was 3.39% on the ten-year. As you can see in the chart below, not one of them came close to where rates currently are.'  2019.

https://theirrelevantinvestor.com/2019/06/12/more-art-than-science/

Suggest you have a read of 

Radical Uncertainty: Decision-making for an unknowable future

By John Kay and Mervyn King

eskbanker

Shock, horror, Fred manages to shoehorn some routine gratuitous IFA bashing into a thread devoid of any prior mention of IFAs....

Linton

JohnWinder said:

dunstonh said:

  Plus, you can largely eliminate 80% of managed funds without much effort.

Just roughly, how many would we be left to choose from with the remaining 20%?

'Sharesight tracks the price and distribution information for over 12,000 mutual funds in the United Kingdom,'

And what is the approach of the folk who do eliminate 80% with little effort?

The 12000 number would probably include all the charging variants,  Then there are funds configured as a pension fund or life funds which would not be appropriate for most investors. Trustnet recognises just under 4000 OEICs/UTs.
Funds can be eliminated easily because they:

1) Invest in the wrong things eg one may be looking for an ethical fund or to invest in South America when most funds in the EM sector invest  predominantly in SE Asia.
2) Are "me too" funds with no particular redeeming characteristics eg every major fund manager has a balanced managed fund and a UK large companies fund.
3) Are closet trackers
4) Are very small funds and/or from obscure fund managers
5) Have a long history of poor performance
and no doubt many other criteria.
This list also suggests how ine choses from what's remaining.  In practice I find that the final choice is made between perhaps 2-5 funds.

JohnWinder said:

Linton said:

Over the past 10 years the weighted average UK fund outperformed the relevent S&P Index  in 5 out of the 8 sectors for which data is available.
See https://www.spglobal.com/spdji/en/documents/spiva/spiva-europe-mid-year-2020.pdf?force_download=true page 12.

1) I wish I could untangle this in my head. Punters choose which fund or funds to invest with. Do they need to choose all of the funds in each sector, with a weighting relevant to the funds' sizes, in order to get the benefit of 5 out of the 8 sector funds outperforming the relevant index.

That the majority of active funds evaluated underperformed the relevant index beyond about 3 years is the relevant bit for those trying to choose a fund, surely?

1) Of course investors dont need to chose all funds from each sector.  A sensible investor would choose a sector on the basis of overall portfolio asset allocation and then apply the type of criteria listed above.   The SPIVA weighted average data for UK funds suggests that in  the majority of sectors the majority of the money goes into funds that outperform the index.  There is no data to tell us whether it is a majority of investors who win out, or perhaps it's that investors with more money to spend tend to be better at picking funds (or vice versa).

2) You are repeating your strawman that investors pick funds from a long list at random.  If this were so why is there such a wide variation in fund sizes?  In any case just counting numbers of funds hides the possibility that those funds which outperform the index do so by more than that by which underperforming funds underperform.  

A quick look at performance tables suggests could well be the case.  Looking at the North American Equity sector over 10 years  the highest performer returned 919%, The highest index fund returned 302%.  The worst performer returned 130%.  So for every £100 invested the highest performer increased to about £1019, the index tracker to £402 and the worst performer to £230. Presenting data in terms of numbers of funds or numbers of fund managers seems to me a less than obvious way of doing so.  Perhaps data presented in other ways comes up with the "wrong" answer.

And of course the majority of index funds will presumably underperform their index over more than 3 years.  If not how are the costs being covered?

aroominyork

This is what the OP is missing: Yes, the demand for shares can continue to rise but that does not mean you can simply apply: Demand > Supply = Price Rises. The price of shares is also affected by their underlying worth, ie the P/E ratio. If demand for shares sends prices up, the P/E of a global index fund might rise from 19 (where it is today) to 20, then 22, then 25, and then the investing world - which is driven by psychology - takes profits and/or gets spooked and/or smells the coffee and decides the P/E should really be around 15, which some might say would be reasonable. Cue a 40% fall with no guarantee that it will not be a slow climb back to prevously lofty heights.

Thrugelmir

aroominyork said:

This is what the OP is missing: Yes, the demand for shares can continue to rise but that does not mean you can simply apply: Demand > Supply = Price Rises. The price of shares is also affected by their underlying worth, ie the P/E ratio. If demand for shares sends prices up, the P/E of a global index fund might rise from 19 (where it is today) to 20, then 22, then 25, and then the investing world - which is driven by psychology - takes profits and/or gets spooked and/or smells the coffee and decides the P/E should really be around 15, which some might say would be reasonable. Cue a 40% fall with no guarantee that it will not be a slow climb back to prevously lofty heights.

Markets appear to have a high degree of fragility. The relatively small rise in US bond yields is already unnerving the market. A potential combination of higher interest rates and/or inflation isn't helping. As companies free cash flow has been the boost to markets with interest rates and inflation being so low. Providing a positive return whereas could easily turn negative. 

Sebo027

maxsteam said:

Personally I expect a fund manager to beat the indices rather than just match them. Tracker funds have a place in the investment world (lots of derivatives rely on them) but any idiot can track an index.

Given it's their job you would expect that to be case, I agree, but the reality is - based on all the empirical evidence we have - is that the majority do not, over the long term, and you pay a higher fee compared to the index tracker. 

bd10 said:

Thing is, tell someone the story about "the stock market ever going up" who went long Nasdaq in March 2000. It took just a bit over 15 years to break even. In the first 3 years of the crash, US tech stocks lost 80% of their value. The S&P 500, FTSE 100 and Dax 30 took over 7 years to get back to the same peak levels. That's a long time and maybe an investor does not have that much time left to sit that one out. Suppose you have a 100k windfall and go long right at the peak?

Investing is easy, picking the winners a piece of cake? Where have I heard that before? Ah, yes, about 20 years back. Tech stocks and the biotech stocks went nuts and whatever you bought made you money, no skills required, pretty easy. Back then I worked in a small bank and saw the frenzy first hand. We had pensioners glued to the real time Reuters screen which we had in the lobby. They brought in their breakfast and lunch and punted like crazy. Stock tips were passed between commuters on the way from work, a granny wanted to buy tech stocks for her grand kids' savings accounts, many discovered warrants (back then you could not get easy access to Eurex), some bought calls instead of the underlying, had the ISINs mixed up, that was a few months before the party ended.

I suppose this is where time horizon, attitude to risk and investment strategy all come into play. Let's look at some examples. 
Consider March 2000 to February 2015 in the NASDAQ index - this represents a "peak to peak" that you are describing and two market crashes: the dot com bubble and the 2008 financial crash:

• If you invested an 18k lump sum at the peak of the market, yes you would need to wait about 15 years to see the NASDAQ index recover to the level when invested. However, if you held on another 5 years, your investment would be worth $32.9k. 
• Alternatively, consider an investor who made only regular contributions per month of $100 across the same 15 year period, investing a total principle of 18k. Due to cost averaging, that individual would cash out having received 7.13% annual growth and a cash value of $50,257. 

Consider March 2000 to March 2020:

• An individual investing between 2000 and 2020 - a 20 year investment horizon, had they invested $100 per month would have invested a principle of $24,100 and currently be sitting on $103,393 - compound annual growth rate 7.52%.
• An individual investing a lump sum of 10k in June 1984 and cashing out in June 2004 would walk away with $81,74k and benefit from a compound annual growth rate of 11.29%.

Data from here. 
All above is obviously based on the investor committing to the long term and not trying to time the market, or panic selling and is miles away from "trying to pick a winning stock." 

Thrugelmir

You need to recalculate the figures into GDP to have any meaning. Little point in quoting US centric data. 

JohnWinder

Linton said:

The 12000 number would probably include all the charging variants,  ....Trustnet recognises just under 4000 OEICs/UTs.
Funds can be eliminated easily because they:
1) Invest in the wrong things eg one may be looking for an ethical fund or to invest in South America when most funds in the EM sector invest  predominantly in SE Asia.
2) Are "me too" funds with no particular redeeming characteristics eg every major fund manager has a balanced managed fund and a UK large companies fund.
3) Are closet trackers
4) Are very small funds and/or from obscure fund managers
5) Have a long history of poor performance
and no doubt many other criteria.
This list also suggests how ine choses from what's remaining.  In practice I find that the final choice is made between perhaps 2-5 funds.

JohnWinder said:

1) I wish I could untangle this in my head. Punters choose which fund or funds to invest with. Do they need to choose all of the funds in each sector, with a weighting relevant to the funds' sizes, in order to get the benefit of 5 out of the 8 sector funds outperforming the relevant index.

1) Of course investors dont need to chose all funds from each sector.  A sensible investor would choose a sector on the basis of overall portfolio asset allocation and then apply the type of criteria listed above.   The SPIVA weighted average data for UK funds suggests that in  the majority of sectors the majority of the money goes into funds that outperform the index.  There is no data to tell us whether it is a majority of investors who win out, or perhaps it's that investors with more money to spend tend to be better at picking funds (or vice versa).

2) You are repeating your strawman that investors pick funds from a long list at random.
And of course the majority of index funds will presumably underperform their index over more than 3 years.  If not how are the costs being covered?

I wouldn't hold you to someone else's '80% can readily be eliminated', but even with only 4000 funds on offer, we're still left with 800 to choose from after easily eliminating 80%.

Indeed, I shouldn't suggest the SPIVA data points to random selection of funds as a failing strategy, since no one (practically speaking anyway) would choose that way. And you put up an appealing list of some criteria to use, unfortunately incomplete leaving anyone applying it with potentially many funds still to choose from. The full strategy may be too detailed to go into here, and can be found by searching elsewhere, and described by other successful investors. Anyone posting links would be doing us a service.  I'm pessimistic, or the strategy link would be at the top of this forum's readers' 'bookmark' list on their browser.

Some index fund costs are recovered by the managers lending some of their holdings for short periods. It adds counter-party risk, but it helps track the index closely, and when they go overboard with it they beat the index (or get stung with defaults).

Linton

JohnWinder said:

Linton said:

The 12000 number would probably include all the charging variants,  ....Trustnet recognises just under 4000 OEICs/UTs.
Funds can be eliminated easily because they:
1) Invest in the wrong things eg one may be looking for an ethical fund or to invest in South America when most funds in the EM sector invest  predominantly in SE Asia.
2) Are "me too" funds with no particular redeeming characteristics eg every major fund manager has a balanced managed fund and a UK large companies fund.
3) Are closet trackers
4) Are very small funds and/or from obscure fund managers
5) Have a long history of poor performance
and no doubt many other criteria.
This list also suggests how ine choses from what's remaining.  In practice I find that the final choice is made between perhaps 2-5 funds.

JohnWinder said:

1) I wish I could untangle this in my head. Punters choose which fund or funds to invest with. Do they need to choose all of the funds in each sector, with a weighting relevant to the funds' sizes, in order to get the benefit of 5 out of the 8 sector funds outperforming the relevant index.

1) Of course investors dont need to chose all funds from each sector.  A sensible investor would choose a sector on the basis of overall portfolio asset allocation and then apply the type of criteria listed above.   The SPIVA weighted average data for UK funds suggests that in  the majority of sectors the majority of the money goes into funds that outperform the index.  There is no data to tell us whether it is a majority of investors who win out, or perhaps it's that investors with more money to spend tend to be better at picking funds (or vice versa).

2) You are repeating your strawman that investors pick funds from a long list at random.
And of course the majority of index funds will presumably underperform their index over more than 3 years.  If not how are the costs being covered?

I wouldn't hold you to someone else's '80% can readily be eliminated', but even with only 4000 funds on offer, we're still left with 800 to choose from after easily eliminating 80%.

............

The first filter is the sector - that gets rid of more than 80% of the 4000 or so funds listed on trustnet, for example the whole Global sector is only 362 funds.