Timing the market

[Deleted User]

Linton said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

I'm not clear how you undertake successful due diligence. I once raised a Roger Moore style eyebrow when a portfolio building firm said that part of their due diligence was looking a fund manager in the eye! I'm not also not clear how you avoid the companies that won't be winners - that implies a market mispricing unless I'm misunderstanding what you are saying?

In overall performance terms I guess that is what active management is mainly about - that the market is mispriced. Actually maybe its fairer to say that the stocks that they select are mispriced. Now whether that is a short term mispricing (value investor) or a long term mispricing (growth investor) its still the same idea, that those stocks will perform better than the market expects them too over some time period.

Of course most active investment managers will not focus totally on raw performance. So providing lower than market returns with lower volatility is a perfectly acceptable compromise. I am always wary of any fund that attempts to hit a particular benchmark but for example beating inflation over a particular period might be all you need.

For all of those scenarios the manager needs to believe that to some degree the market is wrong and/or they are better than the market or in some cases doing things so differently that the market doesn't really matter. Then all you need to do is select those managers

"So providing lower than market returns with lower volatility is a perfectly acceptable compromise."

I struggle to understand why this would be optimal within a given asset class. So typically, high quality/low duration bonds dampen equity volatility. Can it be more efficient to try and damp within the asset class itself? Not sure about that.

Reducing equity volatility whilst generating a medium term return at least 1% above inflation is precisely my objective.  Achieving this is the optimal outcome.

The reason is that in retirement the medium term timeframe is the most important for investment.  Short term doesnt matter since cash works fine.  The very long term is irrelevent as most people wont live long enough to really gain the benefits.  Under current circumstances high quality/low duration bonds provide zero return, medium term and long duration ones carry serious risk with their capital values and inflation can become a major concern.  Apart from a few niche investments there is nothing appropriate to invest in other than equity.

I think maybe an example of an offering that reduces equity volatility would be useful - I don't necessarily disagree with your reply so interested what you had in mind.

 - I check Value vs Growth but cant do much about it as there are very few funds with a high Value component around at the moment.

Can you access US traded ETFs, such as EFV or VTV?

Linton

Deleted_User said:

Linton said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

I'm not clear how you undertake successful due diligence. I once raised a Roger Moore style eyebrow when a portfolio building firm said that part of their due diligence was looking a fund manager in the eye! I'm not also not clear how you avoid the companies that won't be winners - that implies a market mispricing unless I'm misunderstanding what you are saying?

In overall performance terms I guess that is what active management is mainly about - that the market is mispriced. Actually maybe its fairer to say that the stocks that they select are mispriced. Now whether that is a short term mispricing (value investor) or a long term mispricing (growth investor) its still the same idea, that those stocks will perform better than the market expects them too over some time period.

Of course most active investment managers will not focus totally on raw performance. So providing lower than market returns with lower volatility is a perfectly acceptable compromise. I am always wary of any fund that attempts to hit a particular benchmark but for example beating inflation over a particular period might be all you need.

For all of those scenarios the manager needs to believe that to some degree the market is wrong and/or they are better than the market or in some cases doing things so differently that the market doesn't really matter. Then all you need to do is select those managers

"So providing lower than market returns with lower volatility is a perfectly acceptable compromise."

I struggle to understand why this would be optimal within a given asset class. So typically, high quality/low duration bonds dampen equity volatility. Can it be more efficient to try and damp within the asset class itself? Not sure about that.

Reducing equity volatility whilst generating a medium term return at least 1% above inflation is precisely my objective.  Achieving this is the optimal outcome.

The reason is that in retirement the medium term timeframe is the most important for investment.  Short term doesnt matter since cash works fine.  The very long term is irrelevent as most people wont live long enough to really gain the benefits.  Under current circumstances high quality/low duration bonds provide zero return, medium term and long duration ones carry serious risk with their capital values and inflation can become a major concern.  Apart from a few niche investments there is nothing appropriate to invest in other than equity.

I think maybe an example of an offering that reduces equity volatility would be useful - I don't necessarily disagree with your reply so interested what you had in mind.

 - I check Value vs Growth but cant do much about it as there are very few funds with a high Value component around at the moment.

Can you access US traded ETFs, such as EFV or VTV?

IWVL is available from Ireland.  Looking at its investments I am not convinved that Cap Weighting helps put together a Value portfolio.  Would you put IBM and Cisco in the top 10 list?  Also it is 20% Tech, again rather surprising for a Value fund.  EFV looks much more what I would expect from a Value fund.  On the downside it is purely US.  Also I havent found it as available in the UK.

A major problem with adding Value is that there is no historical data that includes such funds from when Growth wasnt dominant.  So its not possible to get any feeling for what the effect would be.

I think we are wandering too far off the topic now, so perhaps better to  cover this more in another thread.

Thrugelmir

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

MarkCarnage said:

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

Yep, I'd be surprised if an active manager had any form of informational advantage in modern markets - far, far too competitive for that. 

Employing an analyst to cover Amazon full time ( there are 54 alone). Is probably cost effective for the large investment groups and investment banks. due to their clients exposure to the stock. As you come down the market cap scale. Increasingly it becomes less cost effective and analysts are assigned sectors rather than specific stocks. European small caps is an interesting area. There are 4.500 listed companies with a mkt cap of less than 1 billion on the European bourses. Hence why dedicated active investment teams are able to outperform their indices over longer periods of time. 

Why stay in asset management if they have a genuine edge? Far more money to be made in the hedge fund space, surely? Capacity constraints limiting leverage?

Lars Kroijer is a more successfull author than he was a hedge fund manager. 

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

MarkCarnage said:

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

Yep, I'd be surprised if an active manager had any form of informational advantage in modern markets - far, far too competitive for that. 

Employing an analyst to cover Amazon full time ( there are 54 alone). Is probably cost effective for the large investment groups and investment banks. due to their clients exposure to the stock. As you come down the market cap scale. Increasingly it becomes less cost effective and analysts are assigned sectors rather than specific stocks. European small caps is an interesting area. There are 4.500 listed companies with a mkt cap of less than 1 billion on the European bourses. Hence why dedicated active investment teams are able to outperform their indices over longer periods of time. 

Why stay in asset management if they have a genuine edge? Far more money to be made in the hedge fund space, surely? Capacity constraints limiting leverage?

Lars Kroijer is a more successfull author than he was a hedge fund manager. 

I'm not sure of the relevance? 

Thrugelmir

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

MarkCarnage said:

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

Yep, I'd be surprised if an active manager had any form of informational advantage in modern markets - far, far too competitive for that. 

Employing an analyst to cover Amazon full time ( there are 54 alone). Is probably cost effective for the large investment groups and investment banks. due to their clients exposure to the stock. As you come down the market cap scale. Increasingly it becomes less cost effective and analysts are assigned sectors rather than specific stocks. European small caps is an interesting area. There are 4.500 listed companies with a mkt cap of less than 1 billion on the European bourses. Hence why dedicated active investment teams are able to outperform their indices over longer periods of time. 

Why stay in asset management if they have a genuine edge? Far more money to be made in the hedge fund space, surely? Capacity constraints limiting leverage?

Lars Kroijer is a more successfull author than he was a hedge fund manager. 

I'm not sure of the relevance? 

Hedge funds fail as well. 

BritishInvestor

jamesd said:

BritishInvestor said:

"Why should fund managers try to react to the latest news or profit from long term inefficiencies? "

If you're not paying them for alpha, what are you paying for?

" Far more important is the objective and  management of the risk in achieving it"

Agreed, but if you accept that risk and return are related, and costs are a drag on returns, an active manager has to take more risk to generate the same return as a tracker, in theory.
...
There's nothing to stop you using a small cap passive fund (for example) if you want to tilt away from overall market cap.
...
" One can choose the ones that together create the portfolio one believes will achieve objectives at sufficiently low risk. It is impossible to do this with the range of passive funds that are available in the UK at the moment."

Would be useful to see some examples of how this has worked historically (if we accept that tactical asset allocation doesn't work), and also what you cannot do with the available passive/factor funds.

"The second and simpler risk reduction role is to provide due diligence.  Choosing next years winner is impossible but trying to avoid the companies that wont be is much easier."

I'm not clear how you undertake successful due diligence. I once raised a Roger Moore style eyebrow when a portfolio building firm said that part of their due diligence was looking a fund manager in the eye! I'm not also not clear how you avoid the companies that won't be winners - that implies a market mispricing unless I'm misunderstanding what you are saying?

You're paying them to do the work that you don't want to do, or aren't capable of doing, whether through ability or lack of time.

If active managers are identifying inefficiencies then there isn't inherently more risk. Of course adding risk is one way to increase returns, say a small cap tilt or tilt towards even weighting from market cap weighting. A classic claim was the active manager who wen receiving an investment award thanked the passive fund managers he'd been front running. (for others, this means loosely trading in advance of the known trades of someone else, in possibly its nastiest for it's a trading house trading just ahead of its own customers so it gets a better price and they get a worse one).

You can choose a small cap passive fund if you like, but personally I rather like my selection of small cap active funds. That's because they seem to be soundly beating their indexes and have been for a long time - easily enough time for me to identify them and confirm that as usual persistence of outperformance exists.

Avoiding dogs starts out by avoiding 1.5% AMC funds in a limited selection offered by a pension company that's really a passive tracker fund. When you get rid of those you've shifted the average above the average including dogs.

So far as persistence of outperformance goes, someone got to add an exception to their book based on work I did here when this came up around 2006-7. What I did was look at the performance of the top ten funds in the global growth sector from around 2003 onwards. What I found and posted about here was that the top ten were highly likely to still be in the top ten in succeeding years and even if not, the drop was still to outperformance. With some help from other posters it turned out that every case where that was not true was due to a change in human manager.

Naturally enough, this and continued reliability of this approach has rather skewed my thoughts about whether you can pick winners, having demonstrated that you can, in at least some circumstances.

Of course this also identifies a systematic flaw in lots of studies, which don't control for change in human manager.

"You're paying them to do the work that you don't want to do, or aren't capable of doing, whether through ability or lack of time."

That may have been the case many years ago, but since trackers became available there are alternatives

"If active managers are identifying inefficiencies then there isn't inherently more risk."

In 2021, it's quite tough (to put it politely) to find inefficiencies if you're an active fund manager, for a number of reasons:

1. Competition: The resources available to fund managers in terms of brainpower, computer capacity, historical data (quality and quantity) is far, far behind the quant-style hedge funds, and I'd assume a fair way behind investment banking prop desks (I don't know how many of these are still in existence to be fair). The best talent (certainly in the City (London)) tends to gravitate to IBs or hedge funds.
2. Scalability: Inefficiencies tend to be limited in scale, with more volume tending to move the market, therefore, eliminating the edge. A large fund run by an active fund manager (with effectively one strategy) is unlikely to be able to exploit inefficiencies at this scale.
3. Reaction time: Hedge fund computers react in near real-time to remove the inefficiency before Mr active fund manager has finished his cornflakes



"A classic claim was the active manager who wen receiving an investment award thanked the passive fund managers he'd been front running."

Once an inefficiency like that becomes known, it tends to disappear. Can you please post the article and I'll have a look?

"but personally I rather like my selection of small cap active funds. That's because they seem to be soundly beating their indexes and have been for a long time"

What's the market cap? I do wonder if there is more inefficiency at the lower levels, but question whether you are being paid to accept liquidity risk.

"What I did was look at the performance of the top ten funds in the global growth sector from around 2003 onwards"

But hasn't this been because growth has been on a roll for many, many years, or something more nuanced?

BritishInvestor

Linton said:

Deleted_User said:

Linton said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

I'm not clear how you undertake successful due diligence. I once raised a Roger Moore style eyebrow when a portfolio building firm said that part of their due diligence was looking a fund manager in the eye! I'm not also not clear how you avoid the companies that won't be winners - that implies a market mispricing unless I'm misunderstanding what you are saying?

In overall performance terms I guess that is what active management is mainly about - that the market is mispriced. Actually maybe its fairer to say that the stocks that they select are mispriced. Now whether that is a short term mispricing (value investor) or a long term mispricing (growth investor) its still the same idea, that those stocks will perform better than the market expects them too over some time period.

Of course most active investment managers will not focus totally on raw performance. So providing lower than market returns with lower volatility is a perfectly acceptable compromise. I am always wary of any fund that attempts to hit a particular benchmark but for example beating inflation over a particular period might be all you need.

For all of those scenarios the manager needs to believe that to some degree the market is wrong and/or they are better than the market or in some cases doing things so differently that the market doesn't really matter. Then all you need to do is select those managers

"So providing lower than market returns with lower volatility is a perfectly acceptable compromise."

I struggle to understand why this would be optimal within a given asset class. So typically, high quality/low duration bonds dampen equity volatility. Can it be more efficient to try and damp within the asset class itself? Not sure about that.

Reducing equity volatility whilst generating a medium term return at least 1% above inflation is precisely my objective.  Achieving this is the optimal outcome.

The reason is that in retirement the medium term timeframe is the most important for investment.  Short term doesnt matter since cash works fine.  The very long term is irrelevent as most people wont live long enough to really gain the benefits.  Under current circumstances high quality/low duration bonds provide zero return, medium term and long duration ones carry serious risk with their capital values and inflation can become a major concern.  Apart from a few niche investments there is nothing appropriate to invest in other than equity.

I think maybe an example of an offering that reduces equity volatility would be useful - I don't necessarily disagree with your reply so interested what you had in mind.

 - I check Value vs Growth but cant do much about it as there are very few funds with a high Value component around at the moment.

Can you access US traded ETFs, such as EFV or VTV?

IWVL is available from Ireland.  Looking at its investments I am not convinved that Cap Weighting helps put together a Value portfolio.  Would you put IBM and Cisco in the top 10 list?  Also it is 20% Tech, again rather surprising for a Value fund.  EFV looks much more what I would expect from a Value fund.  On the downside it is purely US.  Also I havent found it as available in the UK.

A major problem with adding Value is that there is no historical data that includes such funds from when Growth wasnt dominant.  So its not possible to get any feeling for what the effect would be.

I think we are wandering too far off the topic now, so perhaps better to  cover this more in another thread.

"I think we are wandering too far off the topic now, so perhaps better to  cover this more in another thread."

Yes, probably a good idea   

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

MarkCarnage said:

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

Yep, I'd be surprised if an active manager had any form of informational advantage in modern markets - far, far too competitive for that. 

Employing an analyst to cover Amazon full time ( there are 54 alone). Is probably cost effective for the large investment groups and investment banks. due to their clients exposure to the stock. As you come down the market cap scale. Increasingly it becomes less cost effective and analysts are assigned sectors rather than specific stocks. European small caps is an interesting area. There are 4.500 listed companies with a mkt cap of less than 1 billion on the European bourses. Hence why dedicated active investment teams are able to outperform their indices over longer periods of time. 

Why stay in asset management if they have a genuine edge? Far more money to be made in the hedge fund space, surely? Capacity constraints limiting leverage?

Lars Kroijer is a more successfull author than he was a hedge fund manager. 

I'm not sure of the relevance? 

Hedge funds fail as well. 

Most certainly, but I'm still not sure of the relevance. A hedge fund could operate for 5 years, pulling inefficiencies from the marketplace (and therefore stopping others from getting to it), before blowing up due to poor risk mismanagement, bad luck or a multiple sigma event (https://www.nottingham.ac.uk/business/who-we-are/centres-and-institutes/gcbfi/documents/cris-reports/cris-paper-2008-3.pdf), but during the time they were operating, the owners should be making (and extracting) reasonable money - I'd expect far more than they would in asset management.

And it's not impossible to rise from the ashes even if it doesn't work out the first time.

https://en.wikipedia.org/wiki/Victor_Niederhoffer

BritishInvestor

Linton said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

I'm not clear how you undertake successful due diligence. I once raised a Roger Moore style eyebrow when a portfolio building firm said that part of their due diligence was looking a fund manager in the eye! I'm not also not clear how you avoid the companies that won't be winners - that implies a market mispricing unless I'm misunderstanding what you are saying?

In overall performance terms I guess that is what active management is mainly about - that the market is mispriced. Actually maybe its fairer to say that the stocks that they select are mispriced. Now whether that is a short term mispricing (value investor) or a long term mispricing (growth investor) its still the same idea, that those stocks will perform better than the market expects them too over some time period.

Of course most active investment managers will not focus totally on raw performance. So providing lower than market returns with lower volatility is a perfectly acceptable compromise. I am always wary of any fund that attempts to hit a particular benchmark but for example beating inflation over a particular period might be all you need.

For all of those scenarios the manager needs to believe that to some degree the market is wrong and/or they are better than the market or in some cases doing things so differently that the market doesn't really matter. Then all you need to do is select those managers

"So providing lower than market returns with lower volatility is a perfectly acceptable compromise."

I struggle to understand why this would be optimal within a given asset class. So typically, high quality/low duration bonds dampen equity volatility. Can it be more efficient to try and damp within the asset class itself? Not sure about that.

Reducing equity volatility whilst generating a medium term return at least 1% above inflation is precisely my objective.  Achieving this is the optimal outcome.

The reason is that in retirement the medium term timeframe is the most important for investment.  Short term doesnt matter since cash works fine.  The very long term is irrelevent as most people wont live long enough to really gain the benefits.  Under current circumstances high quality/low duration bonds provide zero return, medium term and long duration ones carry serious risk with their capital values and inflation can become a major concern.  Apart from a few niche investments there is nothing appropriate to invest in other than equity.

I think maybe an example of an offering that reduces equity volatility would be useful - I don't necessarily disagree with your reply so interested what you had in mind.

My strategy is high diversification.  So for the latest version of the 100% equity portfolio alongside income and Wealth Preservation portfolios:
 - US allocation 40% 
 - Large companies (as classified by Morningstar) 50%.  50% small/medium.  
 - Total of top 10 underlying holdings is <10% of portfolio. 
 - Funds chosen to avoid excessive dependence on particular industry sectors, particularly tech.
 - I check Value vs Growth but cant do much about it as there are very few funds with a high Value component around at the moment.

Backtesting performance shows 117% return over 5 years compared with MSCI World's 90% but over the past year it has returned 26% to the MSCI Worlds 27% perhaps due to the relaively low holding in tech giants. However this tells us nothing about the next 5 years.  We will see. In any case high performance is a secondary concern to appropriate allocations and those numbers are way above the requirement.

Thank you

I'd wonder how close you could get to that implementation with a passive approach vs what you currently have

So for example, for equities

tilting towards small
https://www.msci.com/documents/10199/a67b0d43-0289-4bce-8499-0c102eaa8399

tilting away from US
https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111
https://www.msci.com/documents/10199/db217f4c-cc8c-4e21-9fac-60eb6a47faf0
(and others)


Wealth preservation trusts are an interesting one. The (popular) one I picked at random fell ~12% in late 2008 whereas a global bond benchmark fell by around 2%. Maybe that was an outlier.

Prism

BritishInvestor said:

In 2021, it's quite tough (to put it politely) to find inefficiencies if you're an active fund manager, for a number of reasons:

1. Competition: The resources available to fund managers in terms of brainpower, computer capacity, historical data (quality and quantity) is far, far behind the quant-style hedge funds, and I'd assume a fair way behind investment banking prop desks (I don't know how many of these are still in existence to be fair). The best talent (certainly in the City (London)) tends to gravitate to IBs or hedge funds.
2. Scalability: Inefficiencies tend to be limited in scale, with more volume tending to move the market, therefore, eliminating the edge. A large fund run by an active fund manager (with effectively one strategy) is unlikely to be able to exploit inefficiencies at this scale.
3. Reaction time: Hedge fund computers react in near real-time to remove the inefficiency before Mr active fund manager has finished his cornflakes

There may be some fund managers that still try to compete in this area with small agile funds and a trading rather than investing stance but I don't know any.

Most completely agree that market timing is pointless and wouldn't compare themselves quants or traders. It can take several weeks if not a few months to build up a position in a new holding so any inefficiencies they see must be long multi year ones. The most effective fund houses in this area seem to be the ones that do their own analysis and completely ignore sell side data or others opinions. If you reduce the importance of the current share price then moving the market and reaction time become less of a concern. Due to the work required to do in house analysis this tends to limit the number of holdings of those funds making them more concentrated.

This theoretically indicates a higher risk due to less diversification but this seems pretty rare to find an example. One is JEO which had a 17% top holding drop to zero (Wirecard) and yet the performance has still kept pretty close to the index over the last 5 years and easily beats it over 10 years. I find it quite interesting that a fund can shrug off a permanent 17% loss in capital.

My thoughts in general are that some fund managers, and their teams, are pretty good at this in spite of the huge sums at money thrown at their hedge fund competitors. Most of them seem to be relatively small teams who try and do something a bit different, whether that be Scottish Mortgage with their ideas about companies in 10-20 years, Fundsmith with its obsession of cash producing stalwarts or the large variety of UK small cap funds working in under researched areas.