Fund Selection

thunderroad88

Eyeful said:

thunderroad88 said:

“it would involve a political and economic assessment of future returns on a regional basis”

Isn’t that what fund managers do, so if a manager has demonstrated consistently over a respectable period of time that they can make those assessments successfully, isn’t it reasonable to think they have as good a chance as an index of producing average or even better results?

“Where did anyone say they bought funds on the basis of reputation or product comparisons?”

I think many do (they’d be silly not to consider comparative performance)… many put fund cost first too, even when the % difference in performance is significantly more than the % difference in cost

1. What do you define as a respectable period of time 10, 15, 20,30 years?

2. Academic research shows that out performance which was once attributed to "Star Managers" is  primarily due to factors such as luck, market efficiency, and statistical reversion rather than consistent skill or unique insights

 3. As academic research repeatedly shows that, after fees and charges are taken into account,
most fund managers cannot match a simple major global index fund.

4. Many put fund costs first, because over long periods of time say 30 or 40 years, they have a significant effect on the amount of money that ends up in your pocket and not in that of the fund manager.
Also cost is something you do have control over. You cannot foretell future fund performance    

5. The active fund industry did for a long time, fool the average investor into thinking that the costs they where paying where small and worth while. Now we know better.
   See your own T=Rex score: https://larrybates.ca/t-rex-score/

6. Can you tell me which active fund manager has for 20 years consistently outperformed lets say the ACWI ?

1. 5 years is enough for me, even less… I’m free to move at any time into an index fund if a manager doesn’t deliver

2. Academic research…must be right then 

3. Maybe most can’t, so pick the ones who can and when they can’t, move on

4. A fund with 1% fees that can return 2% more than a cheap index fund puts more money in my pocket

5. Pass

6. Don’t care, I’m only interested in the next few years at most

I can see the benefits of both passive index funds and active funds, that’s why I have both. You seem quite rigid in your belief in passive index investing which is fine as it works for you, I simply don’t subscribe to the theory that just passive is always the right way to go and that’s what works for me

chiang_mai

I was trying to exit the debate but some of the comments make it difficult to do so. Rather than respond individualy, some random observations follow:

Risk is an odd beast which means different things to each of us. I struggled with what it means to me and decided that it means failure to achieve the return I expected or wanted at the outset. My profit target is about 12% per year and having already made that this year, I've been in asset protection mode for a while, rather than anything else. If anything threatens that 12%, that's a risk to me right now but later, next year, I will percieve my risks differently. When I cash out of a fund doesn't really matter to me, as long as I realise my profit. It doesn't have to be at the top, I don't care too much if I sell in the middle of its life, just so long as I get my profit. Those things said, I'm not against leaving some money on the table and making in excess of my 12%, as long as the risk to my 12% is broadly proportional, which is why I am currently sub 50% invested in equities at present, despite a booming market.

I think the conversation has probably got carried away in a few places and the purpose of the original post has been overlooked. I continue to believe that it's important to understand what you own and why, espcially when you adopt a multi-region/multi fund strategy and there are fairly precise gaps that need to be filled in order to maintain overall balance. It would be overly repetitve and boring if I were to say that I'm not opposed to trackers, so I wont repeat myself! Indeed, now that I am in asset protection mode for the rest of my ffinancial year, I've sold two managed funds and replaced them with index trackers, in the interests of risk reduction and profit protection. 

Somebody asked about risk tolerance: there are several risk ratings systems that are free to use and whilst they are not perfect, they do at least use the same methodologies across all funds, hence comparative fund risk ratings can  be useful. Beyond that, it's a matter of reading documentation to see if the FM's perception of risk matches mine and whether or not it is acceptable to me personally. Home bias is a significant factor in the minds of many UK and US investers and any investment outside the home market, is likely to be percieved as higher risk......I have seen where people have said that EM investment represents unacceptable risk to some. I don't have the same constraints and tend to treat regions more equally, from a risk perspective. As said previously, my EM holdings this year have been the best of any region in which I'm invested. 

Lastly, I don't see much evidence that members generally use in depth analysis to select funds and don't appear to favour backwards looking metrics to aid in their funds selection. In fact, backwards looking metrics appear to be highly suspect in the minds of many, so what does that leave?  Following the herd, succuming to subliminal advertising, recommendations from the bloke down the pub, there are only so many possible options. I don't think that reviewing historic metrics is an attempt to predict the future, it's more a case of trying to understand the past and how different funds navigate different political, economic and global events, in relative terms.           

thunderroad88

The best investment strategy is the one which a) helps you achieve your financial goals and b) helps you sleep relatively well in times of market stress. I’m sure we can all agree on that.

I think that all that needs to be said has been said now…I enjoyed reading all the opinions and views

ShinyStarlight1

chiang_mai said:

I was trying to exit the debate but some of the comments make it difficult to do so. Rather than respond individualy, some random observations follow:

Risk is an odd beast which means different things to each of us. I struggled with what it means to me and decided that it means failure to achieve the return I expected or wanted at the outset. My profit target is about 12% per year and having already made that this year, I've been in asset protection mode for a while, rather than anything else. If anything threatens that 12%, that's a risk to me right now but later, next year, I will percieve my risks differently. When I cash out of a fund doesn't really matter to me, as long as I realise my profit. It doesn't have to be at the top, I don't care too much if I sell in the middle of its life, just so long as I get my profit. Those things said, I'm not against leaving some money on the table and making in excess of my 12%, as long as the risk to my 12% is broadly proportional, which is why I am currently sub 50% invested in equities at present, despite a booming market.

I think the conversation has probably got carried away in a few places and the purpose of the original post has been overlooked. I continue to believe that it's important to understand what you own and why, espcially when you adopt a multi-region/multi fund strategy and there are fairly precise gaps that need to be filled in order to maintain overall balance. It would be overly repetitve and boring if I were to say that I'm not opposed to trackers, so I wont repeat myself! Indeed, now that I am in asset protection mode for the rest of my ffinancial year, I've sold two managed funds and replaced them with index trackers, in the interests of risk reduction and profit protection. 

Somebody asked about risk tolerance: there are several risk ratings systems that are free to use and whilst they are not perfect, they do at least use the same methodologies across all funds, hence comparative fund risk ratings can  be useful. Beyond that, it's a matter of reading documentation to see if the FM's perception of risk matches mine and whether or not it is acceptable to me personally. Home bias is a significant factor in the minds of many UK and US investers and any investment outside the home market, is likely to be percieved as higher risk......I have seen where people have said that EM investment represents unacceptable risk to some. I don't have the same constraints and tend to treat regions more equally, from a risk perspective. As said previously, my EM holdings this year have been the best of any region in which I'm invested. 

Lastly, I don't see much evidence that members generally use in depth analysis to select funds and don't appear to favour backwards looking metrics to aid in their funds selection. In fact, backwards looking metrics appear to be highly suspect in the minds of many, so what does that leave?  Following the herd, succuming to subliminal advertising, recommendations from the bloke down the pub, there are only so many possible options. I don't think that reviewing historic metrics is an attempt to predict the future, it's more a case of trying to understand the past and how different funds navigate different political, economic and global events, in relative terms.           

I’ve found your contributions very interesting and helpful.
It’s been unpleasant to read some of the rude responses to your generous discussion.

LHW99

Risk is an odd beast which means different things to each of us. I struggled with what it means to me and decided that it means failure to achieve the return I expected or wanted at the outset.

That says it all really, and the degree to which detailed analysis is desired(able) will depend on exactly what that target is.

Linton

chiang_mai said:

I was trying to exit the debate but some of the comments make it difficult to do so. Rather than respond individualy, some random observations follow:

Risk is an odd beast which means different things to each of us. I struggled with what it means to me and decided that it means failure to achieve the return I expected or wanted at the outset. My profit target is about 12% per year and having already made that this year, I've been in asset protection mode for a while, rather than anything else. If anything threatens that 12%, that's a risk to me right now but later, next year, I will percieve my risks differently. When I cash out of a fund doesn't really matter to me, as long as I realise my profit. It doesn't have to be at the top, I don't care too much if I sell in the middle of its life, just so long as I get my profit. Those things said, I'm not against leaving some money on the table and making in excess of my 12%, as long as the risk to my 12% is broadly proportional, which is why I am currently sub 50% invested in equities at present, despite a booming market.

I think the conversation has probably got carried away in a few places and the purpose of the original post has been overlooked. I continue to believe that it's important to understand what you own and why, espcially when you adopt a multi-region/multi fund strategy and there are fairly precise gaps that need to be filled in order to maintain overall balance. It would be overly repetitve and boring if I were to say that I'm not opposed to trackers, so I wont repeat myself! Indeed, now that I am in asset protection mode for the rest of my ffinancial year, I've sold two managed funds and replaced them with index trackers, in the interests of risk reduction and profit protection. 

Somebody asked about risk tolerance: there are several risk ratings systems that are free to use and whilst they are not perfect, they do at least use the same methodologies across all funds, hence comparative fund risk ratings can  be useful. Beyond that, it's a matter of reading documentation to see if the FM's perception of risk matches mine and whether or not it is acceptable to me personally. Home bias is a significant factor in the minds of many UK and US investers and any investment outside the home market, is likely to be percieved as higher risk......I have seen where people have said that EM investment represents unacceptable risk to some. I don't have the same constraints and tend to treat regions more equally, from a risk perspective. As said previously, my EM holdings this year have been the best of any region in which I'm invested. 

Lastly, I don't see much evidence that members generally use in depth analysis to select funds and don't appear to favour backwards looking metrics to aid in their funds selection. In fact, backwards looking metrics appear to be highly suspect in the minds of many, so what does that leave?  Following the herd, succuming to subliminal advertising, recommendations from the bloke down the pub, there are only so many possible options. I don't think that reviewing historic metrics is an attempt to predict the future, it's more a case of trying to understand the past and how different funds navigate different political, economic and global events, in relative terms.           

What that leaves is basing one's investments on the overall structure of the portfolio. If the allocations of a global tracker suit you, fine.  If not then you have to construct the portfolio so that the allocations adopted by the individual funds combine to give you what you want.
 
ISTM that fund managers design their funds in terms of which areas of the market and what types of company they wish to focus on.  Then the market does what it will, some funds may perform well, others poorly. It all depends on global economic circumstances and the affect on different companies and sectors.

When people analyse fund performance they often use phrases like a fund has gone off the boil or a fund manager has lost his touch.  That isnt what happens, rather the market moves on in ways that dont work well with the fund managers' chosen strategy. There is no strategy which will deliver high performance in all possible market conditions.

Two major problems with taking too much account of past performance are:
1) You dont know what the future market conditions will be so data on how a fund has performed in the recent past does not help much.
2) It leads you to sell last year's losers when prices are low to buy something else that has performed well at a higher price.  In the long term this is not a good way of managing your investments.

Much better to keep your strategy constant and take the rough with the smooth.  If you want to manage the risk of major falls do that at the strategic level, not by ad hoc changes made at arbitrary times perhaps after something bad has happened.

gm0

Interesting criteria.  Reaction and my added ones.  My use case to pick funds is different. Subjective risk management views naturally differ as does the cut off to "not bother about that". 
Controllable doesn't mean significant. Nor does the reverse of course.  

Criteria commentay

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

(Agree)

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

(Agree but don't find the comparative rankings of equity funds at 567 that useful).

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

(Agree - I wish to extend and tilt GlobalDeveloped - cautiously)

-          Capitalisation percentages of large, medium and small caps  

(Agree - a pressing concern given the 7 and its concentration risk - for my buy and long term hold in deaccumulation usage).

-          Fund size and managed vs passive.. 

(Agree - nothing tiny because of closure)

-          Sector allocations.  

(Less interesting to me but I look at it at portfolio level. I skip the very unethical, and seek to avoid being too far concentrated into a single one).  

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

(I have skipped factor as a shaping tool. Total market + tilts based on strategic perspective regionally)

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

(Agree)

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

(Agree skip closet trackers as expensive way to do the same thing.  I often want trackers (regional).  But when I pay for active I want it.

-          Upside/Downside Capture Ratio’s,  

(Don't understand how to use this - something for me to look into perhaps to understand it if it helps when applied to my portfolio shape and fund selections)

-          Investment flows.  

(Agree as part of other viability checks. Is this fund dying. Or growing)

-          Fund Manager experience and other funds managed.

(As a mostly passive investor with extensions and regional tilts.  I do sometimes evaluate regional actives. And occasionally thematics/sector.  But this is satellite not core - for me.  I like narrow fund mandates. WIth fairly visible underlying investments.  And I rely less on individual FM.  So don't care about this mostly.  Will move around.  And what triggers change.  My long term hold and deaccumulate use case is different to screening for shorter term switching and following the smart/lucky people in the room.  I don't want to have to care about who the fund manager is most of the time.  Which feedsback into the design.

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

I don't pick last year's winners and pile in with the crowd into BG, LT etc. But chasing star power and short term momentum doesn't fit my use case.  It may fit others so I can see it would be a useful filtering criteria.  An active stock picker that focuses on an off cycle sector or factor may have underperformed but possibly be about to go the other way in a business cycle. So winners or sector losers could both feature I guess.  Depending on the nature of the fund shopping goal

-           Drawdown.

(Agree - re fund in peril/closing - other ssues as per Woodford.

-          Overlap with other holdings.

Agree - Overall portfolio and top20 is something I use a lot to just check I am not adding something siilly adding too much accidental additional concentration.

Extra things

Extra filters and risk management items - generally I follow these but will override them individually as a tradeoff. Not everything is always packaged exactly how you want it or offered by a particular platform in that variant. 

- No leverage in the mandate. Just never on my shopping list.

- Physical not synthetic - I prefer my asset/custody risks to single counterparty ones.  See 2007/8.

- For trackers - market price or better essential - for maintstream (larger) providers - iShares/BlackRock/VG etc.  For 40 year use.  Drag is something I can control.  And for passive.  Drag is drag.  You are not paying extra for anything else good or bad. I don't want to shave a few 0.01% if the cost is being with a fly by night outfit.  
Will have to monitor it more carefully. Not going to do that. It's not reputation so much as hopefully not needing to be as diligent in DIY monitoring.

- Scale of provider - For lower risk/ease of long term monitoring.  
My strategy doesn't require or seek out small outliers.

- Does this preserve, enhance or diminish the diversity of my holdings.  Underlying investments. But also tax wrappers used, fund vs etf, trust, base currency.  FX exposure risks carried, platform, FM house.   I operate a risk impact hedging approach - to avoid all my eggs in a single basket where the unexpected thing that happens has a higher impact on my total wealth - be it interruption (legal/IT) or othere scandal.  Impact mitigated if I choose my investments in this manner.  e.g. If I want another 100 units of Global Developed equities.  And I have 100 at VG.  The next 100 are bought somewhere else.  2-3 not 10.

- Narrow mandate.  I hate open "can just do anything" casino mandates.  

Focused narrowly to something.  An EM exchange. A sector.  Green energy trusts.  Whatever it is.  I can see situations where structurally active and stock picking is preferred/essential - though in some cases I will just skip that country.

- UKFRS only

- No crypto, commodities, gold, REITS - asset class choices I have made (On a don't understand their cycles basis)

- Bonds and equities generally held separately - multi-assets tolerated for unique feature or cost effectiveness for desired underlying assets.

- I use inc and acc in different investments and as a minor part of income buffering design.

Areas of difference are use case, time horizon and engagement with the activity.  I am not sufficiently engaged to run my portfolio in pension deaccumulation on a rolling stable of selected fund managers and a longer list of niche funds.  And I know my spouse would not be.  A long term stable passive rebalancing/income setting process may be more than she wants to deal with.  Horses for courses.  

My current approach has about 12 funds and that is probably on the high side for my needs.

But good luck with your approach.  Your effort. Your rewards.  Even if some may be a bit random.  As with my plan and how things unfold.

My current risk managed approach (seeking enough income (most market return) at a desired lowered volatility vs pure 100% market average at weight).  Willing to sacrifice some potential pot at end of retirement in return for a more sustainable/smoother ride.  Enough income first. Sustainable second.  More legacy last.   

Since entering deaccumulation. This approach has performed like this.  44 months.  3 2/3 years.  Very short period in investing terms. Although also approaching 10% of retirement.  Tick tock.  

CPI Inflation has been 5.16% CAGR. (1.2029 RoyalLondon CPI data series) for that period.

The nominal returns of different pots of ~1/3 each vary with their risk based content from 14.84% CAGR down to 7.2% to 6.5% for risk reduced mixes and sequence risk income buffering implemented for deaccumulation through corrections.  Figures are net of all income taken and after fees.  Market conditions have been friendly.  The reasons it was this shape for more adverse ones is as yet untested.  The value of the pots has been preserved against inflation and the long term high risk section has grown in real terms comfortably. The high risk, higher return pot with income switched on at the same 3.2% rate would have been grown around 11.7% on the same net income basis. It is net. But net zero. This excess return vs the others reflects 100% equiies, and the higher US and megacap content of those equities. And its very low drag.  It feels entirely risky enough - for my use - without adding further stock concentration on the ARKK model.  Each to their own.



One could take the view I have overcomplicated things - to my own disadvantage short term.  But it has not been a disaster in contex.  Has money been left on the table vs "all in" passive without the risk management features. Yes.  Has it left money on the table vs "winning at active picking" likely also yes.  For the core objective - has it preserved the real value of the DC pots. At a time of modestly (vs 1970s) elevated inflation. And provided the income.  Also yes.  
So I am broadly content with my DIY outcome.  And I spent the adviser fees on some nice holidays.

I broadly aim to take a total investible market approach - drawing back from smaller/odder edges. Regional not sectoral. Tilted to world view. I believe Asia is growing and the West more stagnant and so a long term tilt to Asia might come good eventually.  But be volatile.  Economic success and investor success being imperfectly correlated.  That shorting the US too hard is foolish.  But shorting it a little may be prudent via the tilt when things unwind. May work. May not.  I also think the UK has been undervalued perhaps (relatively) and as I spend in GBP - I do hold a little extra UK FTSE over market weight (providing a nudge down for my unhedged FX risks on all the larger base USD .  I do dislike the concentration risk of the US megacap tech 7. So I tilt mildly from US to Asia ex JPN and Europe ex UK.  I don't understand JPN.  But it is on my list to review and perhaps add.  I added Emerging and Small Cap to extend my stock lists from large cap - more in consideration of impact on volatility than extra return.  Backtesting was suggestive I could see some improvement towards my objectives.  For bonds.  I currently only use very short bonds and MMFs because of my timing of market entry in deaccumulation where bonds were in their falling knife QE rebound phase.  I am reviewing that right now.

thunderroad88

@gm0

Have a thumbs up and respect for having the time and patience to write all that…too detailed a pricess for me but some interesting points 

Bostonerimus1

My criteria are to assume that most large markets are "efficient" and simply apply a 4 fund lazy portfolio using the principles of Modern Portfolio Theory to guide my asset allocation. I have moved away from the US equity market recently and put that into a Global ex US equity index. Costs are low, as is the time I need to spend on managing my portfolio. My portfolio has tracked the indexes over the last 35 years which is as I had planned and I see no reason to get any more complicated than that. Thus endeth the reading from the Boglehead holy book.

chiang_mai

Somebody earlier mentioned drawdown and being unsure how to use this. The AI summary on this aspect is actually quite good. So, in the absence of abything more complex, that may help fill the understanding gap (below). Drawdown is very important to me because I am older. When markets turn down, they need time to recover so it's helpful to try and understand what that recovery period might be.....City wire (and others) display the drawdown for most funds. One of the advantges of trackers is that they spread risk across a large range of companies which causes the index to fall more slowly than some individual shares. But the same is true of the recovery, the index recovers more slowly as a whole, than does individual shares hence the drawdown/peak to trough round trip estimtae, is serioulsy helpful.    

"In investing, the recovery period (or "time to recovery") is the time an investment or portfolio takes to return to its previous peak value after a market downturn or significant drop. This concept is crucial for investors using tracker funds (index funds) to understand the potential duration of losses and the time horizon required for their investment strategy to be effective. 

Key Concepts

• Recovery Period: The duration from the lowest point (trough) of an investment's value back up to its last high point (peak) before the decline.
• Drawdown: The maximum loss from a peak to a trough before a new peak is achieved. The greater the drawdown, the longer the potential time to recovery.
• Tracker Funds and Recovery: Tracker funds are passive investments that mirror the performance of an underlying index (like the S&P 500). Their recovery time directly correlates with the recovery of the index they track.
• Risk and Recovery Time: Generally, riskier investments (e.g., those with an "adventurous" strategy) tend to have larger maximum drawdowns but may also experience faster growth during a bull market. Conservative portfolios experience smaller drops, resulting in shorter, less volatile recovery periods.
• Impact of Returns: The annual rate of return significantly affects how long a recovery takes. A higher rate of return can shorten the recovery period".