Fund Selection

snarffie

chiang_mai said:

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. The likes of Morningstar give investers all manner of data and information about the funds they are buying so why not use it and understand it. If I was to play roulette I would probably play red or black, in  investing terms that's an index tracker, but only because no amount of additional learning can help me make better or more informed choices. 

I don't disagree that we should do our best to understand what we are investing in and I broadly understand the principle that my funds track the market rather than try to beat the market. This isn’t ‘playing roulette’ or trying to ‘build a better mousetrap’, it is simply accepting the ups and downs with expectation that on balance things will come good.  I don’t see this as any more flawed than trying to outsmart the markets by building your own funds using your ‘additional learning’ to play fund manager yourself.  

Maybe you’ll do better than that small number of ‘expert’ fund managers with their enormous resources who consistently beat the market, and good luck to you-and I am still interested in subject of the OP anyway.

I suppose the point I’m trying to make is that whilst I do agree that increasing our understanding is a good thing, we should also remember that a little knowledge can be dangerous and that knowledge gap, for those of us who sit between ‘newbie’ and the Warren Buffets of this world, is where the danger lies!

chiang_mai

snarffie said:

I don't disagree that we should do our best to understand what we are investing in and I broadly understand the principle that my funds track the market rather than try to beat the market. This isn’t ‘playing roulette’ or trying to ‘build a better mousetrap’, it is simply accepting the ups and downs with expectation that on balance things will come good.  I don’t see this as any more flawed than trying to outsmart the markets by building your own funds using your ‘additional learning’ to play fund manager yourself.  

Maybe you’ll do better than that small number of ‘expert’ fund managers with their enormous resources who consistently beat the market, and good luck to you.  

I suppose the point I’m trying to make is that whilst I do agree that increasing our understanding is a good thing, we should also remember that a little knowledge can be dangerous and that knowledge gap for those of us who sit between ‘newbie’ and the Warren Buffets of this world is where the danger lies!

I have no intention nor the abilities to ever beat or be at the standard of a professional fund manager and I'm not trying to be so. FWIW I see a Fund Manager as somebody who manipulates the internals of a fund rather than the likes of me that tries to decide the best combination of funds to deploy. There seems to be a gap between investers who buy a simple off the shelf tracker and accept whatever happens, and, the informed and switched on invester who has the bandwidth and abilities to compete professionally. I see myself in the second group but only at entry level. 

I also don't think it's about trying to beat the market, I never had that expectation. I only ever expected to make an above average return that is sutainable and that it's clear how that return was made, so that it's repeatable. Anyone who only deploys a tracker and makes money, is doing so based on luck but without much knowledge or understanding to underpin it. I know for example that no sector performs consistently well so it makes sence to ensure your investment is spread over at least 50% of the sectors, unless of course you're a specialist invester. I also know that large caps are less volatile than small caps yet large caps are profit constrained by comparison. Comming to terms with that conundrum seems important to me, espcially since it reflects directly on the investers risk appetite and comfort levels. And so on with the other available metrics that the industry makes available to us.  

chiang_mai

Can I just point out that whilst I've explained several of things I look for in a fund, nobody has yet said what steps they take or what things they look for and I'm wondering why that is. My suspicion is that many people buy funds because they are popular and because everyone else is doing the same thing. 

masonic

chiang_mai said:

Can I just point out that whilst I've explained several of things I look for in a fund, nobody has yet said what steps they take or what things they look for and I'm wondering why that is. My suspicion is that many people buy funds because they are popular and because everyone else is doing the same thing. 

My approach, which has remained fairly consistent for the past decade, is to start from a default option of the market-cap weighted global market for equities and global aggregate bond index, the apply a series of tilts, with the main objective of avoiding excess concentration risk and making the resultant portfolio more resilient to different market conditions. I use valuation (such as CAPE) as part of that, but fairly loosely.

At times I have gone to extremes, such as moving from 80% equities/20% bonds to 100% equities just prior to the start of the 2020s when bonds were perilously overvalued and offered very low returns. Recently I have gone the other way, by reintroducing bonds (mostly index linked gilts, which now offer an above average guaranteed real return) into my portfolio now that I can use them to liability-match for the early years of retirement, and to hedge against annuity rates falling from here. I've increasingly tilted away from US equities into ROW, and from simple cap-weighted (dominated by growth) into value.

Almost all of this achieved through low cost ETFs and direct bond holdings, although I have a couple of index OEICs and one actively managed bond fund. I am not trying to beat the market, and expect to underperform it in all favourable market conditions, but in the event of an extended bear market, I will probably outperform. This is not my aim, though, I am simply trying to maximise the likelihood of achieving my future financial objectives, which does not require me to outperform the market, or even harvest all of the available market returns.

chiang_mai

I use Citywire as my primary source of funds during the discovery and selection phase, I like it because it categorises the funds nicely plus it's easy to see relative Standard Deviationa and drawdown. If I want to look deeper into a fund than I turn to Morningstar. I may also look to Trustnet to see which other funds exist that are similar. The FT is also useful for this purpose. I also like the FT's LIPPER ratings (I'm not sure why) and also their risk martrix of similar funds.

LHW99

Because I / OH have DB and SP income covering basics, our SIPP funds have been invested to generate (largely) dividend income. Not by chasing particularly high yield, but by using a range of funds that throw off a range of %.

That target is not particularly aligned with Tracker ETF's, so the only one held (as a smallish growth factor) is the Vanguard Global Smaller Cos. There is a total of 13 funds between the two portfolios.

In order not to take a bet on one particular region, the US (underrepresented) is around 25% of the total, the UK overrepresented at ~20%, bonds now also around 20% with Asia etc making up the rest.

At the (fairly low) rate we expect to draw income, the pot should last till we are both approaching 100, assuming growth matches inflation and a 3%-4% withdrawal rate sufficient for discretionary spends.

That probably wouldn't work if your fund is your only / main income source.

Eyeful

snarffie said:

Maybe you’ll do better than that small number of ‘expert’ fund managers with their enormous resources who consistently beat the market, and good luck to you-and I am still interested in subject of the OP anyway.

1. There are no "expert" fund managers who consistently beat the market!
If you know any, please name them here so we can track their progress.

2. There are "Star Fund Managers" who are supposed to be experts but they only last until their
(a) luck runs out,
(b) investment style does not fit current market conditions

3. Even Warren Buffet (who you named) has not consistently beat the market!
He himself admits he has lost his share holders large sums of money.
He is thought to be among the best investors around.

chiang_mai

Eyeful said:

1. There are no "expert" fund managers who consistently beat the market!
If you know any, please name them here so we can track their progress.

2. There are "Star Fund Managers" who are supposed to be experts but they only last until their
(a) luck runs out,
(b) investment style does not fit current market conditions

3. Even Warren Buffet (who you named) has not consistently beat the market!
He himself admits he has lost his share holders large sums of money.
He is thought to be among the best investors around.

Nothing lasts forever! Nobody beats the market forever. But what does frequently happen is that many funds beat their relative benchmark or index, often for several years at a time and finding those funds is good enough for me. 

ShinyStarlight1

As someone who is very much a beginner and mostly mystified by the world of investment, I really appreciate this thread and will learn a lot from it. So thank you chiang_mai.

snarffie

Eyeful said:

snarffie said:

Maybe you’ll do better than that small number of ‘expert’ fund managers with their enormous resources who consistently beat the market, and good luck to you-and I am still interested in subject of the OP anyway.

1. There are no "expert" fund managers who consistently beat the market!
If you know any, please name them here so we can track their progress.

2. There are "Star Fund Managers" who are supposed to be experts but they only last until their
(a) luck runs out,
(b) investment style does not fit current market conditions

3. Even Warren Buffet (who you named) has not consistently beat the market!
He himself admits he has lost his share holders large sums of money.
He is thought to be among the best investors around.

1 That’s why I put ‘expert’ in quotation marks.
2. see above.
3. Agreed, but I used his name to illustrate a range of knowledge.