Poor Financial Advice in Newspaper?

Thrugelmir

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

bostonerimus

Malthusian said:

Can anyone see any justification for using 20 different funds for a £56k pot?

I can't see any justification for using 20 different funds for a £5.6 million pot.

For the retail investor you can get 20ish funds in a multi-asset fund like VLSxxx. If you are DIYing with individual indexes/active funds I'd keep things in single digits to keep things manageable and you'll still have plenty of diversity. Personally I have the vast majority of my money in 3 funds.

GeoffTF

najan49 said:

JohnWinder said:

The counter argument is that the effects of diversification can be seen with about 20 assets, so 15-20 funds, each with 20-200 holdings, is likely to be overkill.

It's not only the stocks that can benefit from some diversification, it's the managers, that's the point. Here's a star manager who's now in a crash and burn spiral: https://www.evidenceinvestor.com/hamish-douglass-the-aussie-fund-star-who-fell-to-earth/.  That's what they're trying to minimise the effects of. It's a risk one takes seeking above-market returns.

No, the point is that if you take this diversification to the extreme you end up with an expensive index tracker, so you might as well use a cheap index tracker instead.

Furthermore, buy selecting active funds, the adviser is claiming a skill that he does not have. Over a long period only a small percentage of funds beat a cheap tracker. The longer the the time period, the smaller the percentage. There is no way of selecting the funds that will beat a tracker in advance, except by chance:

https://www.spglobal.com/spdji/en/spiva/article/us-persistence-scorecard/

GeoffTF

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

Malthusian

JohnWinder said:

It's not only the stocks that can benefit from some diversification, it's the managers, that's the point. Here's a star manager who's now in a crash and burn spiral: https://www.evidenceinvestor.com/hamish-douglass-the-aussie-fund-star-who-fell-to-earth/.  That's what they're trying to minimise the effects of. It's a risk one takes seeking above-market returns.

If you minimise the effects of manager underperformance you also minimise the effects of manager outperformance. The way to minimise the effects of manager underperformance is to invest in trackers. Investing across multiple active managers is a more expensive way of doing the same thing.

The only reason anyone does it is because, like the Torygraph's rentaquote, they are labouring under the delusion that "more funds = better" which was debunked over 50 years ago (Fisher & Lorie).

If this was a bigger portfolio there's an argument for spreading money between, say, 2 or 3 managers in each particular sector rather than betting the whole farm on one manager. (Although it still requires you to believe that there's evidence that active management can consistently beat the market.) However for a 56k portfolio, if we assume it's sensibly diversified (i.e. not all in Woodford Equity Income), the effect of investing in 2 or 3 active managers per sector rather than 1 will be unnoticeable. The extra time cost to identify not just 1 but 2 or 3 active managers with bright eyes and swishy tails will also exceed any realistic benefit.

If you invest in 2 managers with similar styles then their funds will do largely the same thing which means you haven't diversified, you've just wasted your time. If you invest in 2 managers with contrasting styles, then when one outperforms the other will probably underperform and you've created a closet tracker.

Diversifying between 2 managers will limit the impact if one of the managers is an idiot, and underperforms regardless of market conditions. But someone who believes in active management should have confidence in their ability to pick managers who aren't idiots. If they are significantly worried about the possibility they can't sort the wheat from the chaff they should stick with passives.

Thrugelmir

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

Can you name such a passive global index fund though? 

Aegis

Thrugelmir said:

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

Can you name such a passive global index fund though? 

Presumably something like this: https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing

Prism

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

I don't think there is a global statistic on it but the estimates are that somewhere between 60-80% of equities are held by institutions (funds) and the rest is held by individuals. So the sum of all of the funds has a big influence on the index but individual holders influence it too.

Thrugelmir

Aegis said:

Thrugelmir said:

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

Can you name such a passive global index fund though? 

Presumably something like this: https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing

Doesn't cover every listed global stock though nor is it pure market capitalisation based. . 

Aegis

Thrugelmir said:

Aegis said:

Thrugelmir said:

GeoffTF said:

Thrugelmir said:

GeoffTF said:

JohnWinder said:

Can anyone see any justification for using.....15 to 20 actively managed funds, which will spread the risk across different fund managers...... for a £56k pot? 

Surely, that is the justification....it's theoretically safer than investing in just 2 or 3 because of the diversification across fund managers.

The global index is the capitalisation weighted average of all the active funds in the world.

What did you mean to say?  This makes no sense........

Calculate the percentage increase of every actively managed fund in the world. Calculate the average of those percentage increases, weighted by the capitalisation of each fund. The result will be the increase in the global index, provided that you have included all the actively managed funds in the world. Actively manged funds here include any portfolio that does not track the index. Here is an old paper by the Nobel Prize winner William Sharpe giving the details:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

Can you name such a passive global index fund though? 

Presumably something like this: https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing

Doesn't cover every listed global stock though nor is it pure market capitalisation based. . 

Oh, I think I see what you were after.  Nothing like that springs to mind.