Shin Nippon woes...

Linton

JohnWinder said:

'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.

You could take advantage of the Shin Nippon's very high volatility by regular rebalancing against a short dated gilt fund.  It seems so easy I am almost tempted to give it a try.
 

Linton

JohnWinder said:

'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'. 

Do you have any evidence for the UK situation? This should be based on the fund's capitalisation not on the numbers of funds.  There may be any number of very small funds with close to zero £s under management that may come and go.

It is unusual in my 25 year of fund investment experience for mainstream funds to disappear unless through rationalisation after take overs and mergers of the fund manager.   I can only think of one fund that I held that was closed down and that happened in the year immedediately after when it was  top of the performance tables in its particular sector.

JohnWinder said:

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.

It would seem that we have very different definitions of "risk".  Your's I would guess is linked to Gaussian random noise volatility. I dont care about that.  Mine links to major events in individual countries/sectors etc.   So  60%-70% US allocation is a risk to a UK investor simply because of its size.  My use of a 40% maximum reduces my worries without removing the US as a major player.

Particular sectors can be a concern.  The obvious one is Tech where history has shown that The Index can go into positive feedback madness.  Controlling  its % is important for the medium term.

Dialing down this type of risk is not possible by simply adding bond funds.

For my education I would like to understand your explanation of the mechanism by which the market minimises risk.  Clearly the Perfect Market Hypothesis ensures that individual shares are correctly priced as far as can be generally known since shares available at too high a price for their perceived value intrnsic would be sold to buy shares available more cheaply.

In any case it is unlikely that an individual private investor's assessment of risk in their circumstances corresponds to that of the average investor across the whole market who probably is an agent for a major institution. 

JohnWinder

'Do you have any evidence for the UK situation?'

No. When I searched I only found a Morningstar article about USA. But I recall Rees-Mogg's fund worth $10bn once that closed when profits dropped to $10M/year.

'So  60%-70% US allocation is a risk to a UK investor simply because of its size'. 

But it's only a risk if US stocks fall further than others. If all stocks fall 20%, it doesn't matter if you're holding 70% as US or 0% as US if the same amount of money is invested in stocks. So to under-weight US stocks as a risk management strategy is to get into the business of picking winners (or in this case losers). Now that's right at the heart of active management, and if you can get ahead of passive investors by doing that long term you're in rare company. But I accept your point that it's less about 'getting ahead' and more about reducing risk. Assuming it does reduce risk, which I'm not sure is the case, it's not the better strategy if returns are reduced more than risk is. Do we have any reliable data on this?

'The obvious one is Tech where history has shown that The Index can go into positive feedback madness.  Controlling  its % is important for the medium term.'

Now, what's the medium term? Positive feedback madness, common enough, doesn't last ten years does it? Stock investing needs a long term outlook, and not be led astray by short term madness.

'Dialing down this type of risk is not possible by simply adding bond funds.'

Depends on how much volatility the bonds have surely; and it requires one to think of the portfolio as a whole.

'For my education I would like to understand your explanation of the mechanism by which the market minimises risk.  Clearly the Perfect Market Hypothesis ensures that individual shares are correctly priced as far as can be generally known since shares available at too high a price for their perceived value intrnsic would be sold to buy shares available more cheaply.'

I think you've said it as well as I could.

There's some obvious appeal to the idea that US or tech stocks look over-priced, so it's safer to reduce the holding of those. But I wonder how much of that belief is due to the cognitive bias of the illusion of control; the idea that by doing something we can affect the outcome. https://www.investopedia.com/illusion-of-control-bias-7377200   Some folk have a need to control, more than others; some are more confident in their actions than others. No finger pointing, I'm just trying to understand. 

Heedtheadvice

......and there I thought it a simple question

Obviously the answer is not simple!

Heedtheadvice

Thanks all for your thoughts.