Investing in one world fund vs multiple regional ones

Linton

Kaizen917 said:

Im investing for the long term (stocks only) by trying to make use of both ISA and pensions. 

For the most part, my SIPP/DC pension are one fund index fund/ETFs that are globally diversified in the usual way by proportion of their stock market share(e.g. 55-60% in the US, 10-15% in Europe and so on).

However, for my ISA, my approach became a bit different by picking 6 different ETFs that vaguely represents each of those segments - SP 500 for the US, one for Europe ex UK, FTSE100 for the UK, one for Japan, one for Asia and then one for Emerging markets. 

My reasoning here was twofold - to have the freedom of altering the proportions of exposure by region (e.g. do a bit less US instead of another region) and Im ok to rebalance if needed. Also, charges-wise, its actually an improvement since it works to a 0.11% against my FTSE Global all cap being at 0.23% and if I pick the same proportions by regions, the overlap will be quite big.

Anyway, performance has been ok and not too different from the world funds but it got me wondering - other than having to rebalance, is there some other drawback to this approach that I am overlooking when investing like this in the ISA? 

I know that people can mostly just offer opinion but thats all Im asking for. 

Other than the extra work involved there is no particular drawback to using multiple funds to cover the world.  I do that myself with separate large and small company funds for each area.  The reason is the one you suggest to implement the allocation appropriate to my circumstances and comfort requirements such as US exposure.

It is important to keep a consistent strategy - dont chase returns by trying to guess the next boom or disaster regions.

If you are going down the route ofn fixing allocations there are other factors to control such as excess allocation to particular sectors and value vs growth.  These are arguably more important that geography. 

As regards performance my experience with allocations quite different to those of a global tracker is that provided the  portfolio is well diversified the performances are very close over the medium/long term.  There is nothing special about the allocations of a global tracker.

JohnWinder

‘but I do know at age 74’

You’ve been around long enough to get your ideas straight and recognise the issues so don’t change anything on account of my ramblings. But for the sake of our younger brethren I’ll add a couple of points.

Firstly, what you’re talking about ‘tactical asset allocation’ I think: ‘go heavily into cash’; ‘underweight US’; ‘switch Japan/China’ etc. TTA has a bad record, and can’t be commended to younger players. It sounds logical and ought to work, but it relies on the the same stock picking or market timing that any active fund manager struggles with.

I quote:

‘Tactical asset allocation was very popular during the 1980s and 1990; many (pension) funds offered them as choices, and the Vanguard LifeStrategy funds began as tactical asset allocation funds. They failed conspicuously enough that they are almost forgotten now. Vanguard's LifeStrategy funds still exist, but Vanguard froze their allocations at fixed values (20/80, 40/60, 60/40, and 80/20). Vanguard gave up on tactical asset allocation.

Tactical asset allocation was advocated by Mebane Faber in a book entitled Global Tactical Asset Allocation, as well as some papers and articles, and eventually he launched an ETF based on it. Here is how it performed (red) compared to a simple non-tactical fund with a similar stock-bond allocation, Vanguard LifeStrategy Moderate: (not well if the link doesn’t open).

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=383012&newpost=6925407 

https://www.evidenceinvestor.com/tactical-allocation-funds-have-been-stinkers-morningstar/

I'm only interested in holding funds managed by FM's that are at the top of their game and have successful track records, that is after all what I'm paying for and a tracker won't allow me to meet that selection criteria.’

A good sentiment, but how does one choose the time to jump ship when the fund turns sour in a big way as BG’s American fund did a couple of years ago? If you’re not happy to ‘track the market’ then you need to know when to get out of a fund as much as you need to know when to get in. Secondly, a tracker will definitely allow you to apply your ‘selection criteria’ (sic) of being on top of their game (how closely they track the index, and have done so for how long).

JohnWinder

 There is nothing special about the allocations of a global tracker.

Except that those allocations and those alone, represents the combined wisdom of all participants in the market. It might not be right as to market value, but you have to have information not known by others in the market, or luck, to choose a better allocation.

chiang_mai

JohnWinder said:

‘but I do know at age 74’

You’ve been around long enough to get your ideas straight and recognise the issues so don’t change anything on account of my ramblings. But for the sake of our younger brethren I’ll add a couple of points.

Firstly, what you’re talking about ‘tactical asset allocation’ I think: ‘go heavily into cash’; ‘underweight US’; ‘switch Japan/China’ etc. TTA has a bad record, and can’t be commended to younger players. It sounds logical and ought to work, but it relies on the the same stock picking or market timing that any active fund manager struggles with.

I quote:

‘Tactical asset allocation was very popular during the 1980s and 1990; many (pension) funds offered them as choices, and the Vanguard LifeStrategy funds began as tactical asset allocation funds. They failed conspicuously enough that they are almost forgotten now. Vanguard's LifeStrategy funds still exist, but Vanguard froze their allocations at fixed values (20/80, 40/60, 60/40, and 80/20). Vanguard gave up on tactical asset allocation.

Tactical asset allocation was advocated by Mebane Faber in a book entitled Global Tactical Asset Allocation, as well as some papers and articles, and eventually he launched an ETF based on it. Here is how it performed (red) compared to a simple non-tactical fund with a similar stock-bond allocation, Vanguard LifeStrategy Moderate: (not well if the link doesn’t open).

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=383012&newpost=6925407 

https://www.evidenceinvestor.com/tactical-allocation-funds-have-been-stinkers-morningstar/

I'm only interested in holding funds managed by FM's that are at the top of their game and have successful track records, that is after all what I'm paying for and a tracker won't allow me to meet that selection criteria.’

A good sentiment, but how does one choose the time to jump ship when the fund turns sour in a big way as BG’s American fund did a couple of years ago? If you’re not happy to ‘track the market’ then you need to know when to get out of a fund as much as you need to know when to get in. Secondly, a tracker will definitely allow you to apply your ‘selection criteria’ (sic) of being on top of their game (how closely they track the index, and have done so for how long).

Yes, tactical allocation works for me and I'm OK if my FM's employ the technique. That's one of the things I pay them for, to avoid getting stuck in a dying market or to lose money by continuing to hold inappropriate assets. I probably have more time to devote to portfolio management and analysis than our younger brethren plus I enjoy the effort very much. My experience is that an outperforming FM's star never burns brightly forever but if you watch it closely enough for long enough you can start to see when it begins to dim. I track a series of metrics for each of my holdings which if they exceed the boundaries I have set, they will be replaced. Another aspect to this is avoid sentimentality, I've held this fund for ages and it's always been OK before...that's fatal, queue Neil Woodford and Nick Train! 

I was lucky enough to spot RL Global Equity Select when it was much smaller than it is today. One of the aspects I liked was the multi-manager approach which I still think is superior in many cases, simply, two heads are better than one, any changes in FM is also a warning flag for me. Lastly, the cost to switch funds is not big, wasting time watching a fund sink and agonising over markets is not productive.  

IanManc

chiang_mai said:

JohnWinder said:

The ride up with an Index tracker can be fun but the ride down is uncontrolled, you have to go with it and you can't get out. It's for that reason alone that I much prefer a managed fund where the FM has some scope to switch funds around when things get rough in one area.’‘

Perhaps you need to finish the thought process there. You got as far as ‘I prefer a type of fund because it’s actively managed’, but what I suspect you prefer is to get the best returns you can for the level of risk you take. And that’s where the data on fund returns starts crashing into the apparent logic of your proposition.

Year after year, country after country, equity sector after equity sector, the results show that fewer than half the active managers’ funds can outperform a comparable index (ie in a similarly risky market). Here’s a recent report: https://www.evidenceinvestor.com/us-active-managers-continue-to-struggle/

Your challenge, if you prefer better than market returns without taking more risk, is to identify the small percentage of fund managers who will outperform the market over however long you’ll be investing for; or you’ll know how to choose when to abandon them if they underperform the market. When you come up with those answers you’re onto a winner choosing funds which switch around when things get rough in one area.

Lastly, one of my strict criteria for fund selection is the track record of the FM, I'm only interested in holding funds managed by FM's that are at the top of their game and have successful track records, that is after all what I'm paying for and a tracker won't allow me to meet that selection criteria.

Lots of fund managers are at the top of their game and have successful track records, e.g. Woodford. Then they are not and their successful track record shudders to a halt.

As John Winder has said, a majority of active managers underperform the market. You are not in a position to predict if or when your chosen individual's lucky/inspired results will end and, as the standard disclaimer says,  past performance is not indicative of future performance. 

Your "strict criteria" aren't strict at all. They're just a punt that someone's lucky run will last. Meanwhile, you're paying for their Porsche, which they get to keep even if you lose your shirt.

JohnWinder

It seems you’ve got it sorted out.

‘My experience is that an outperforming FM's star never burns brightly forever but if you watch it closely enough for long enough you can start to see when it begins to dim. I track a series of metrics for each of my holdings which if they exceed the boundaries I have set,’

What are the metrics and their boundaries? A lot sharing around here to help other people, along with a bit of axe grinding.

chiang_mai

IanManc said:

chiang_mai said:

JohnWinder said:

The ride up with an Index tracker can be fun but the ride down is uncontrolled, you have to go with it and you can't get out. It's for that reason alone that I much prefer a managed fund where the FM has some scope to switch funds around when things get rough in one area.’‘

Perhaps you need to finish the thought process there. You got as far as ‘I prefer a type of fund because it’s actively managed’, but what I suspect you prefer is to get the best returns you can for the level of risk you take. And that’s where the data on fund returns starts crashing into the apparent logic of your proposition.

Year after year, country after country, equity sector after equity sector, the results show that fewer than half the active managers’ funds can outperform a comparable index (ie in a similarly risky market). Here’s a recent report: https://www.evidenceinvestor.com/us-active-managers-continue-to-struggle/

Your challenge, if you prefer better than market returns without taking more risk, is to identify the small percentage of fund managers who will outperform the market over however long you’ll be investing for; or you’ll know how to choose when to abandon them if they underperform the market. When you come up with those answers you’re onto a winner choosing funds which switch around when things get rough in one area.

Lastly, one of my strict criteria for fund selection is the track record of the FM, I'm only interested in holding funds managed by FM's that are at the top of their game and have successful track records, that is after all what I'm paying for and a tracker won't allow me to meet that selection criteria.

Lots of fund managers are at the top of their game and have successful track records, e.g. Woodford. Then they are not and their successful track record shudders to a halt.

As John Winder has said, a majority of active managers underperform the market. You are not in a position to predict if or when your chosen individual's lucky/inspired results will end and, as the standard disclaimer says,  past performance is not indicative of future performance. 

Your "strict criteria" aren't strict at all. They're just a punt that someone's lucky run will last. Meanwhile, you're paying for their Porsche, which they get to keep even if you lose your shirt.

Ah yes, the old, was it diligence or was it luck, I guess we'll never know. But I'm seeing the increases in portfolio value that I want and I've still got my shirt, I'm OK if they want their porsche and that I help pay for it, as long as I get my share, and I have.

chiang_mai

JohnWinder said:

It seems you’ve got it sorted out.

‘My experience is that an outperforming FM's star never burns brightly forever but if you watch it closely enough for long enough you can start to see when it begins to dim. I track a series of metrics for each of my holdings which if they exceed the boundaries I have set,’

What are the metrics and their boundaries? A lot sharing around here to help other people, along with a bit of axe grinding.

Yes of course. But understand that I'm in Asia and I wasn't planning on spending my Sunday night detailing my investment tools and processes hence I'm not going to engage on this point to any degree, tonight. I'm also not going to defend my approach against a clearly biased group, it's sufficient that it works for me, it doesn't require that it passes everyone's suitability tests.

Linton

JohnWinder said:

 There is nothing special about the allocations of a global tracker.

Except that those allocations and those alone, represents the combined wisdom of all participants in the market. It might not be right as to market value, but you have to have information not known by others in the market, or luck, to choose a better allocation.

It is difficult to find long term examples but comparing a straight  S&P500 index ETF as far back as the data allows with the extremely differently allocated S&P500 equal weight ETF illustrates my point.



Even thought there is short term variation I see no evidence that in the long term the equal weight fund shows an increasing underperformance.

Note that the linear scale exagerates the significance of more recent events.

Prism

For someone who wants the probability of the best returns for a given level of risk, then either a simple global tracker or a multi-asset fund of regional trackers and bonds, is all that anyone needs.

However many of us have other goals in addition to getting some decent returns. It could be to provide a certain level of dividend income (not for me but some like this approach). Or attempting to avoid some of the largest downturns by under weighting sectors of the market, like tech or energy. Some like to hunt for lower valuations which can be another way of reducing risk and/or boosting returns. 

For those aspects of investing, throwing out the option of managed funds simply because most of them underperform at any given time, seems a bit blinkered to me.