Active managed funds plummeted - what would you do?

masonic

BG in particular, but also other funds, tend to have a very high % active share. This can be viewed as a benefit in that they can be added in very small measure to a core portfolio to achieve some form of active allocation equivalent to holding a considerably larger percentage in a more conventional active fund (at higher cost). I think a mistake we've seen by a number of posters in recent times is that they don't appreciate the concentration of these funds and hold too much of them (rather like not appreciating the chilli rating of your hot sauce when preparing dinner).

JohnWinder

I dont think this is an active vs passive question but rather one of asset allocation within an equity portfolio.  To make this work in my experience …

It’s a cogent argument and sound strategy until I get to the part where you have to decide how much of this or that country’s stocks you want, and whether you want growth or value or tech or consumables. That’s when it starts getting into predicting the future; exactly the game the active fund managers play, mostly failing compared to trackers. It does often seem to come back to that.

True enough, value not growth has been a good choice; with few years’ exceptions, in USA at least, value stocks have outperformed and under-wobbled growth stocks in the last 50 years. And there’s a bit of theory to support that I think if the ‘factors of return’ gurus are right. But you need the conviction to stick with ‘factor’ choosing or ‘country’ choosing or ‘sector’ choosing through the underperforming years if you’re going to tilt away from market cap weighting, and hope you have enough years left to make good. And there’s no useful theoretical basis for one country or sector over another as there is for ‘value’ stocks; no one even suggests there is.

But if it’s ‘value’ you want, there are probably ‘value’ trackers. If it’s this country or that, there are trackers. And if there aren’t, beware. You don’t need to pay more for a professional to let you down.

adindas

older_and_no_wiser said:

As background, I am 54 and planning to retire in around 4 years debt and mortgage free. FSP at 67. I am single with no dependents. No requirement to leave any legacy. My annual living expenses will be around £15,000.

The core of my pension and savings portfolio is all invested in passive global trackers and multi-asset funds. This totals around £350,000 currently with £30,000 in high(ish) interest paying savings.

 I took the decision to invest in some satellite managed funds about 18 months ago. This was around £100,000 (on top of the value mentioned above). These funds are:

Schroder UK Smaller Companies (currently down 29%)
Marlborough UK Micro-cap (currently down 29%)
BG Emerging Markets (currently down 23%)
BG American (currently down 49%)

At the time, all were performing well as that was the top of the market. I felt that with global trackers and multi-asset funds, I had little UK and emerging market exposure, so thought I would take a punt by investing in managed funds that specialised in this area. I also felt that the UK would bounce back in the long term and wanted to hone in on that. I've since learnt that over the long haul, managed funds really don't outperform global trackers. BG American was a complete mistake. I regret it every day. I bought this at the wrong time with so little knowledge of investing. I have learnt so much since that day though!

My question is; should I crystalise the losses, cash those managed funds in and put the money into my core funds? 

My head says no to that question - as I will remain invested in retirement and won't need to touch those funds for at least 20+ years - if ever! Another part of me is thinking that those funds may never recover and I'm best cutting my losses now and the sooner I do it the better. In addition, I still believe the UK will perform in future, but that future is further away than I thought 18 months ago.

I am interested to hear what others think they would do if they were in the same position. 

Generally speaking, in order to make the sensible decision, it is important to research of the fund in question. Unless they personally hold that funds, not many people want to do that.

If I were you I would not crystallise losses, especially if they are already down 49%. In general people will only crystallise loses if there is a solid evidence / judgement the fund is going to zero or perform much worse in its current state. These could be caused such as frauds, against the new regulations, losing majority of its market share, war etc. Let alone you are buying a fund (Not a single stock), so it has almost zero chance to go to zero.

It is difficult to say without doing a deep research, also depending on predictions of major event such as recession on the US, war in Ukraine, inflationary rate in the next few years, etc. But the chance here is that the fund that already down 49% has a lower probability to go much lower than to go higher. Also form your statement, you will not need that money for 20+ years.

Also I do share the same opinion with you that an IFA might not add much in your case apart from maybe tax efficiency, pension planning in retirement. As it is about written regulation people could easily get this information or ask other people from everywhere and confirm it by reading the regulation by your own. An IFA is not necessarily an investment strategists, analysts that have track records of making money, helping people to recover their losses which what you are aiming for.

Linton

JohnWinder said:

I dont think this is an active vs passive question but rather one of asset allocation within an equity portfolio.  To make this work in my experience …

It’s a cogent argument and sound strategy until I get to the part where you have to decide how much of this or that country’s stocks you want, and whether you want growth or value or tech or consumables. That’s when it starts getting into predicting the future; exactly the game the active fund managers play, mostly failing compared to trackers. It does often seem to come back to that.

......

I believe that in the very long term it makes very little difference what country's stocks you hold and whether you push for growth or value as long as your choices are rational and stable and your portfolio is broadly diversified.  So no need to predict the future.

For a shorter term, say 10-15 years, the risk is excess volatility with insufficient time for the returns to balance out.  The approach I use for country and sector allocation is to start off from an allocation such as that currently used by Vanguard FTSE Global All Cap. and modify that to reduce risk.  In particular I have a max US % of 40% and lower Tech.  Also the large company allocation is reduced from around 75% to 55-60% to add more diversification and in any case I like Small Cap.

Backtesting against VGFAC since the fund first became available in 2016 my latest portfolio shows extremely close performance but with a somewhat lower 5 year Standard Deviation.   The performance match is somewhat surprising considering the large difference in US allocation.

So again there is no attempt to predict the future.

older_and_no_wiser

Thanks again for all the exceptionally valuable comments.

In two years I've gone from knowing nothing about investing to learning a large amount and being a bit "Billy big boots" and thinking I knew it all and then making wrong decisions....
... And now I'm thinking I don't need the headache of over analyzing. Invest passively globally and diversified.
It's been quite a ride, but I've enjoyed it so much. I've bored friends and family along the way. I've created lots of spreadsheets and subscribed to many podcasts and YouTube channels....which I still listen to every day at home and on my lunchtime walks!

Thankfully I feel that since that point 2 years ago, I've managed to understand what my future finances will be and put (mostly correct) things in place to secure a comfortable life. I've made a couple of debatable decisions but they haven't spoilt the plans. In fact, without those mistakes, I may not have appreciated the correct decisions I've made.

 I must say that a huge part of learning and assistance has been from this forum, so thank you all again! 

EthicsGradient

Just as an aside: " 23% Healthcare (I guess this is drug development rather than US hospitals)" - it's typically both. This list, for instance, shows as the largest in the sector, UnitedHealth, which is "healthcare and insurance".

https://finance.yahoo.com/screener/predefined/ms_healthcare/

That also goes for some others like Elevance, though pharmaceuticals are the majority, and some others are non-pharmaceutical products that are used in healthcare.

dunstonh

 I took the decision to invest in some satellite managed funds about 18 months ago. This was around £100,000 (on top of the value mentioned above). These funds are:
Schroder UK Smaller Companies (currently down 29%)
Marlborough UK Micro-cap (currently down 29%)
BG Emerging Markets (currently down 23%)
BG American (currently down 49%)

All of those are very high risk funds and all of the losses you have suffered are actually quite small compared to what the funds are actually capable of losing during an extreme crash (such as 2008 and 2000-2002).

Apart from BG American, they have not plummeted.

My question is; should I crystalise the losses, cash those managed funds in and put the money into my core funds? 

What has changed?  You have had mild losses in a loss year relative to the risk.   You must have known there would be periodic loss years.  So, why would you do anything when that loss year occurs?

Effectively, it comes down to whether you can handle high risk funds or not along with the weightings allocated to them.    In positive years you will probably make more.  In negative years, you will lose more.

bostonerimus

I would reassess your attitude to risk. When the possible gains are highlighted rather than the losses people can end up in riskier investments than is right for their circumstances or true financial psychology. So what do these losses do to your plan and do the losses change your mind about risk? As they don't form the core of your portfolio do you need to do anything at all?

Being over optimistic is dangerous for personal finances and so a little skepticism and pessimism can be useful protections. I would not act without some careful though, but you need to have a portfolio that you can deal with through all market cycles. That's why I use a small number of inexpensive cap weighted index funds that are less volatile than actively managed sector funds - they let me sleep at night. I don't think the complication of satellite funds brings anything other than the perception of diversity and that it's doing something to capture excess gains, but they can also capture losses.

aroominyork

Linton said:

Value represents  stable and profitable reasinably priced companies and Growth those companies which are mainly priced on possibly unrealistic future expectations. 

I think this views growth companies as one type. I would divide them into three types. 1) The ‘future expectation’ type, largely among large companies. I agree these P/Es of 40, 50, 60, 70 can be unrealistic. 2) Smaller companies. Almost by definition they are growth oriented but that doesn’t mean they are wildly inflated or, as a proxy, volatile. The median FE of UK smaller companies on Trustnet is 127 which is far from off-the-charts risky. 3) Emerging markets. We invest there because of the growth potential but there are plenty of funds that take cautious and pragmatic approaches.

JohnWinder

I believe that in the very long term it makes very little difference what country's stocks you hold and whether you push for growth or value as long as your choices are rational and stable and your portfolio is broadly diversified.  So no need to predict the future.

I’ll go along with that, although ‘rational’ needs elaboration if it’s to be investing advice for beginners. A corollary is that we can keep our investing choices very simple if we’re not the type who gets off examining financial chicken entrails and naval gazing, without losing out much (or even at all).
But for perspective we can look at some history. The Nikkei 225 lost 75% of its value over 20 years from 1990-2013.
And an analysis of investing in single country stocks (developed market only, not the dodgy emerging markets) shows that for any random 30 year investing period the average chance of losing money compared to inflation was 13%; so a one in eight chance of going backwards by holding only one country’s stocks for a long period. The detail shows that if it was US stocks the chance would have been only 1%, but if it was Viennese stocks before the Russians pushed the Nazis out of eastern Europe, 100%. 13% is why we diversify by country, and why it doesn’t always ‘make very little difference’. https://rationalreminder.ca/podcast/224

 In particular I have a max US % of 40% and lower Tech. 

I think we’ll see from this example that for most of us ‘the chicken entrails’ approach of tweaking at the edges just isn’t necessary, despite the fun you and I might get out of it. 

The US stock market has been between 40-60% of global for the last 50 years. We can compare a roughly global stock return with your ‘max US % of 40%’ using portfoliovisualizer. One has a standard deviation of returns of 15.49%/year and the other was bigger by 0.29%; it just doesn’t matter, so I won’t say which was smaller.

 Also the large company allocation is reduced from around 75% to 55-60% to add more diversification 

Yes, diversification. It can mean different things to different folk, and it’s ‘good’ to do. The simple approach is to hold a market cap weighted fund which is a bit of all/most stocks in proportion to their worth. Moving away from that to hold less tech or more small cap might ‘diversify’ by some definition, but others would call it ‘tilting’ to or from a sector in that it’s a bet you’re taking that the market as a whole hasn’t got the values right. While they’re tilts of modest size, again I think it hardly matters and for most of us the soccer is more interesting.