Shin Nippon woes...

Heedtheadvice

I have been a happy long term investor (ISA) in BG Shin Nippon but they do seem to have lost their way recently.

I have four investment tranches. First two in positive territory ( just ) but the more recent ( just a few years less invested) quite a loss. Overall negative territory.

Anyone with insight into why such a big overall loss latterly ?

Watched the managers video presentation from May 2023 and, although not doing great even then, he was quite positive regarding the prospects ....but with hindsight not very convincing.

Not keen to keep buying and selling with the associated costs and have been happy to hang on hoping for growth coming up sometime but that long term approach ( up to 10 years) currently is not working - certainly not as well as some other growth trusts that of course have been generally poor though too over recent years.

Not really wishing to sell at a loss but if I can understand what is wrong that might help make a decision. Obviously no divi from BGSN to help compensate. Thinking about the next five years or more in S&S investments.

aroominyork

It's a very volatile fund. As you know, it doubled in the space of six months back in 2020 when Japanese smaller companies were flavour of the month, but it's been a sorry tale since then. My view about Japan is that it's the most unpredictable investment region in the world and the one, more than any other, where it's best just to choose an index fund and sit back.

Linton

BG specialise in very high risk nvestments, BG Shin Nippon is not a good choice for those of a nervous disposition.

masonic

I presume it has a growth focus like most of the other BG trusts. They've all suffered in a high inflation, higher interest rate environment. Check out SMT, BGEU, USA, etc.

JohnWinder

Anyone with insight into why such a big overall loss latterly ?

If the fund manager hasn't changed between the recent several years of badly under-performing that market and the previous market out-performance years, you can be pretty sure it's not skill that determined the fund's good earlier results, but chance. Any skill wouldn't desert them that abruptly; chance simply delivered very different results in different periods.

In which case, if the outcome depends on chance for long enough, and you're a long term investor, then you just keep holding and time will bring you closer and closer to market average returns as you would get consistently with an index fund. Your only regret then might be having paid 0.8%/year in fees instead of something less, but then you know about that from the outset.

Prism

JohnWinder said:

Anyone with insight into why such a big overall loss latterly ?

If the fund manager hasn't changed between the recent several years of badly under-performing that market and the previous market out-performance years, you can be pretty sure it's not skill that determined the fund's good earlier results, but chance. Any skill wouldn't desert them that abruptly; chance simply delivered very different results in different periods.

Or its neither skill or luck and simply a matter of the market conditions changing. Pretty much all growth investing has underperformed the general markets over the last few years and there is almost nothing that a growth focused fund manager can do in those circumstances. It doesn't really matter how skillful or lucky they are. Equally, you likely wouldn't want to invest in a fund where the manager changes their style based on the market conditions as they likely wouldn't be any good at it or be able to time it.

The decision of if to hop in and out of different investing styles is down to the individual investor. If they think they can time it then all they have to do is click the sell/buy button. Personally I would stick with a chosen style, even if it underperforms the wider markets for many years. 

JohnWinder

'Or its neither skill or luck and simply a matter of the market conditions changing.;

For a sensible discussion I suppose we'd have to define 'skill', but it's Sunday so....

I looked at BG's data showing the fund recently markedly underperformed the index BG compared it with, small cap Japan. So if the market conditions changed, then the manager needs the skill to keep up with this, otherwise the fund underperforms its benchmark which would be a good enough indication of inadequate skill for me. But that's a high standard: to never underperform the index over realistic investing periods (meaning not just a few months). 

But if we're to be realistic in our expectations, and allow for periods of under- and out-performing the index, as long as we get a better than index return over a good few years due to skill, then we have to decide how many years it will take to demonstrate that a manager is out-performing the index by skill rather than luck. Because if we don't know, what is the point of paying more for skill if it's not adequate and observed returns are due to the play of luck/chance?

Well, the answer by Prof French is 64 years. You can hear the argument here: https://mebfaber.com/2024/04/19/kenneth-french/ but basically he suggests that if the manager's results vary a lot from the index then you need a lot of returns to be highly confident the results can't be attributed to chance. If you're not so fussy, it's a lot less than 64 years.

Linton

JohnWinder said:

'Or its neither skill or luck and simply a matter of the market conditions changing.;

For a sensible discussion I suppose we'd have to define 'skill', but it's Sunday so....

I looked at BG's data showing the fund recently markedly underperformed the index BG compared it with, small cap Japan. So if the market conditions changed, then the manager needs the skill to keep up with this, otherwise the fund underperforms its benchmark which would be a good enough indication of inadequate skill for me. But that's a high standard: to never underperform the index over realistic investing periods (meaning not just a few months). 

But if we're to be realistic in our expectations, and allow for periods of under- and out-performing the index, as long as we get a better than index return over a good few years due to skill, then we have to decide how many years it will take to demonstrate that a manager is out-performing the index by skill rather than luck. Because if we don't know, what is the point of paying more for skill if it's not adequate and observed returns are due to the play of luck/chance?

Well, the answer by Prof French is 64 years. You can hear the argument here: https://mebfaer.com/2024/04/19/kenneth-french/ but basically he suggests that if the manager's results vary a lot from the index then you need a lot of returns to be highly confident the results can't be attributed to chance. If you're not so fussy, it's a lot less than 64 years.

My take...

The most useful UK funds these days adopt a well defined house strategy which is maintained for years.  Very few focus purely on stock picking across the full market.  Sometimes the strategy will work well, sometimes it wont. Sadly what will work best next year is unknown. What worked well last year is not a good guide.  Trying to guess and frequently changing the strategy accordingly is generally counter-productive.

Following The Index is just another strategy. Its main advantage is that it is cheap to implement.  Over the very long term any consistent strategy should give the same results.   If not one could beat The Index by shorting the consistently failing strategy.

So why choose one strategy rather than another?  The key driver in my view arises if one is not investing for the indefinitely long term.  Hence shorter term risk factors become important.  Avoiding a bad result could be more important than achieving a very good one. Conversely If one already has a good safety net taking higher risk than average may be attractive.

Another aspect of risk is that achieving the returns of The Index does not seem a sensible goal.  Surely it is more rational to aim for the results one needs at a low risk.  

The views attributed to French may be valid but if so are pretty irrelevent as they merely rule out the type of investing based on successful stock choice by a highly skilled star manager, which from my argument one should do anyway.

Prism

JohnWinder said:

'Or its neither skill or luck and simply a matter of the market conditions changing.;

For a sensible discussion I suppose we'd have to define 'skill', but it's Sunday so....

I looked at BG's data showing the fund recently markedly underperformed the index BG compared it with, small cap Japan. So if the market conditions changed, then the manager needs the skill to keep up with this, otherwise the fund underperforms its benchmark which would be a good enough indication of inadequate skill for me. But that's a high standard: to never underperform the index over realistic investing periods (meaning not just a few months). 

These types of funds typically provide a benchmark because they are required to, but they don't invest with it in mind. This is the text for Shin Nippon for example.

'The Investment Manager aims to take a five year view and the portfolio is managed by looking at the underlying investments rather than the comparative index, the MSCI Japan Small Cap Index, total return in sterling terms.'

I would also be displeased if a manager did, as you suggest, try and keep up with the benchmark. I wouldn't want a manager who chopped and changed style, to try and keep up with the benchmark when they specifically said they wouldn't.

I can think of very few growth funds and trusts that were the topic of much conversation 5 years ago that have done well in the last 5 years. I have certainly underperformed every index over that last few years. If I had wanted to try and do something about that I would have changed investment style. 

JohnWinder

'Following The Index is just another strategy. Its main advantage is that it is cheap to implement.  Over the very long term any consistent strategy should give the same results.'

The practical reality standing in the way of that is that so many funds don't make it to the long term. Investors don't tolerate under-performing active funds doing more of the same, moving their money out presumably which makes the fund unviable. About 600 new funds appear in US each year, and about 600 are closed or merged because people can't wait this 'very long term'. 

'So why choose one strategy rather than another?  The key driver in my view arises if one is not investing for the indefinitely long term.  Hence shorter term risk factors become important.  Avoiding a bad result could be more important than achieving a very good one.'

And to do that you simply reduce your holdings of higher risk assets and replace them with lower risk assets. And we all know which which are. No need to try to be your own stock picker, or theme picker or segment picker since with every trade you're up against the smartest most informed investors around, and in every trade there can only be one winner. Do we think we're the smarter most often?

'Another aspect of risk is that achieving the returns of The Index does not seem a sensible goal.  Surely it is more rational to aim for the results one needs at a low risk. '

The reason it's thought sensible is because it offers the best return for the risk taken, which is a sensible goal, because if you don't need that much return then you can dial down the risk.

JohnWinder

'These types of funds typically provide a benchmark because they are required to, but they don't invest with it in mind. This is the text for Shin Nippon for example.'

In the long game I can't see the point of investing in a fund which can't beat the index unless perhaps it has much less volatility (Shin Nippon fails badly here). In the short game, if Shin Nippon sometimes out- and sometimes underperforms the index, then if I wanted to trade (sell at the highs and buy at the lows) it could make some sense. But who thinks market timing is that easy to make a success of?

What am I missing in the reason to invest? Is it follow a particular style of investing as the primary outcome, or is it to get the best risk adjusted returns after costs.