Fund Selection

chiang_mai

I wanted to try to set out the process that I go through when I’m looking to add a fund to my portfolio but it became too lengthy to be useful. Instead, I decided to set out some of the key actions that I go through in the hope that others will point out important steps that I have overlooked and will contribute constructively so that others may learn as well. The objective here is to develop a framework that everyone can use, regardless of their experience and knowledge levels 

When I add a new equities fund to my existing holdings, it’s important to me to ensure the proposed fund fits in the way that I want it to, especially in regard to the following. There's no point in buying into a great fund if it throws the rest of your portfolio out of whack:

-          Overall asset allocation, e.g. equities vs MA vs Bonds etc.

-          Is the risk level appropriate for me and the gap I’m trying to fill, e.g. Morningstar, Kiid,                     Trustnet etc ratings.

-          Geographic allocations, e.g. Regions/countries.

-          Capitalisation percentages of large, medium and small caps.

-          Fund size and managed vs passive..

-          Sector allocations.

-          Is the investing style appropriate for my needs, e.g. Value, Growth or Blend.

-          Are the metrics in line with my needs, e.g. P/E, Beta, Alpha etc.

-          The number of companies in the fund, e.g. not a closet tracker.

-          Upside/Downside Capture Ratio’s,

-          Investment flows.

-          Fund Manager experience and other funds managed.

-          Previous performance against the Index, using trailing returns to understand anomalies.

-           Drawdown.

-          Overlap with other holdings.

I target a Giant/Large vs Medium/Small ratio of around 70/30, because I’m older and more risk averse. I hold about 10% small caps. And 20% mid caps.

An average T’net or Morningstar risk score of 50, across all my holdings is my guide.

My main regions are US, UK, Europe, EM, Developed Asia but I treat China as a region of its own.

I typically look for a fund to occupy at least four or five sectors of over 8% each with none over about 25%.

A P/E over 18 is likely to get passed over, ditto a Beta greater than 1.0.

My preference is usually for Value or Blend, because they tend to be less volatile.

I personally favour multi manager funds, wherever possible.  

High average and maximum drawdowns attract scrutiny, unless time to recovery figures are available which dictate otherwise.

Some fund overlap is to be expected; I don’t view overlap as a bad thing, as long as it is not excessive.

Upside/Downside and investment flows are yet more ways to assess interest in the fund and the degree to which it functions in a way that I hope it will.

An alternate approach to the above is to buy an off the shelf, one size fits all popular fund that everyone else buys. Personally, I like to understand what’s inside the funds I buy, so whist it’s a lot of hard work trying to understand that, it’s very worthwhile, I think.

Lastly, I don’t pay much attention to the cost of the fund, as long as it’s under 1%.

Those are some of the things I do and think, now have at it!

Qyburn

How many funds do you invest in at the moment? 

El_Torro

I believe most of the regular posters on this forum invest in multi asset funds and / or global trackers and leave it at that. Personally I add a bit of spice by having a global smaller companies fund in my pension. Nothing more complex than that though.

I agree with Qyburn, it's interesting to see your criteria but it would be good to see the end result too. i.e. what funds you currently invest in based on these criteria. 

I'm a bit surprised that you don't pay much attention to the fund charges. Sure, if someone is changing funds because of a 0.05% difference in fund charges I would question their priorities. However if you find 2 funds that do similar things and one is 0.50% more expensive than the other I would seriously consider why I should pay the extra.

Alexland

El_Torro said:

I believe most of the regular posters on this forum invest in multi asset funds and / or global trackers and leave it at that. 

I don't know if that's the case.

While I agree with the benefits of keeping things fairly simple I get the impression most regular posters with multi asset portfolios will have split them out into separate holdings for equities, bonds, etc.

A multi asset fund is great for new investors and small accounts but expensive and inflexible for larger more established investors.

Just holding a global tracker worked great when there was nothing else worth investing in (and thats mostly what I did at the time) but portfolios are looking like a better option now.

chiang_mai

Qyburn said:

How many funds do you invest in at the moment? 

I currently hold eleven equities funds spread across three portfolio's, they comprise a mixture of index trackers and managed funds that span all the main regions globally.

chiang_mai

El_Torro said:

I believe most of the regular posters on this forum invest in multi asset funds and / or global trackers and leave it at that. Personally I add a bit of spice by having a global smaller companies fund in my pension. Nothing more complex than that though.

I agree with Qyburn, it's interesting to see your criteria but it would be good to see the end result too. i.e. what funds you currently invest in based on these criteria. 

I'm a bit surprised that you don't pay much attention to the fund charges. Sure, if someone is changing funds because of a 0.05% difference in fund charges I would question their priorities. However if you find 2 funds that do similar things and one is 0.50% more expensive than the other I would seriously consider why I should pay the extra.

I hold individual legacy funds that do not meet all the criteria but on average, the portfolio does so overall when measured against Pounds invested per category. Artemis Smartgarp UK for example has a whopping great 45% allocation to the Financial Services sector which is diluted to 22% overall when all funds are considered. Ditto risk. Artemis Smartgarp GEMS has a Morningstar risk of 89 but the average portfolio risk comes in at 51 on the Morningstar scale and 52 on Trustnet. As legacy funds are replaced, I make a concious effort to seek out individual replacements that meet the criteria I set out. It's late evening here but in the morning I'll try to cut and paste a spreadsheet that shows the funds and demonstrates this.

If I was faced with two competing funds then I agree that I may well pay attention to the cost as a tie breaker. The message I wanted to give however was that the cost of the fund is not the be all end all that some people make it out to be, not for me at least. I am happy to pay for an above average fund that is managed by a good FM who has a decent track record and wont let cost, within reason, stand in my way.     

Eyeful

1. Anyone can make their portfolio as simple or as complex as they care to.

2. Indeed there are many off the shelf "Lazy Man" portfolios to choose from, if you do not want to do it yourself.

3. If a person is happy to spend time, effort and money on learning to invest it can an interesting hobby.

4. I think that over the long term (lets say 30 years) that a simple low cost world index fund or ETF,
after the charges are taken into account,.will do better than their complex portfolio.

5. It would be nice if the OP came back every 5 years, to tell us how their complex portfolio, (after charges) compares against a simple world index tracker such as the ACWI or HMWO.

6. If the OP is has a 70/30 share/bond split then maybe compare it with the
 HSBC Global Strategy Dynamic Fund (Accumulation)

Perhaps the OP will do better? 

snarffie

My current view (subject to change of course :0 ) is that I’m just not smart enough to play at being a fund manager and second guess the markets. I’m not smart enough to decide which sector/asset allocation/region/growth v value/market cap I should buy at any one time.

I have therefore decided to have about halfish in a multi-asset fund and halfish in a global tracker. In fairness, I could probably have the whole lot in the multi-asset fund, but like the idea of not having 100% of my eggs in one fund. OCFs averaging about 0.2%.

The rest (<10%) is a mix of STMM and fun stuff.  The STMM allocation is enough to keep me going for 3 years, so can hopefully ride most downturns.  Anything else is just too clever for me!

chiang_mai

Eyeful said:

. If a person is happy to spend time, effort and money on learning to invest it can an interesting hobby.

4. I think that over the long term (lets say 30 years) that a simple low cost world index fund or ETF,
after the charges are taken into account,.will do better than their complex portfolio.

5. It would be nice if the OP came back every 5 years, to tell us how their complex portfolio, (after charges) compares against a simple world index tracker such as the ACWI or HMWO.

6. If the OP is has a 70/30 share/bond split then maybe compare it with the
 HSBC Global Strategy Dynamic Fund (Accumulation)

Perhaps the OP will do better? 

I think you're right that in my case this is very much a hobby, it's never occured to me to try to do better than any other approach, just to try and understand what happens in the engine room and to understand how all the nuts and bolts fit together. I'm certain that if maximising profit and minimising expense were my sole priorities, there would be better and simpler ways to tackle the problem. But doing things the simople way would mean I wouldn't learn as much, only that I'd made money.

chiang_mai

snarffie said:

My current view (subject to change of course :0 ) is that I’m just not smart enough to play at being a fund manager and second guess the markets. I’m not smart enough to decide which sector/asset allocation/region/growth v value/market cap I should buy at any one time.

I have therefore decided to have about halfish in a multi-asset fund and halfish in a global tracker. In fairness, I could probably have the whole lot in the multi-asset fund, but like the idea of not having 100% of my eggs in one fund. OCFs averaging about 0.2%.

The rest (<10%) is a mix of STMM and fun stuff.  The STMM allocation is enough to keep me going for 3 years, so can hopefully ride most downturns.  Anything else is just too clever for me!

Once again, it's not about trying to be smart or to build a better mousetrap, only to understand what happens, how and possibly why.