Fund Selection

chiang_mai

snarffie said:

chiang_mai said:

I like the idea of keeping things simple but my jury is still out as to whether that is the right way or not for me personally or indeed anyone over age 65 or so. I can't help but feel that index trackers, for older investers such as myself, represent a risk to the downside when the market turns down since there is no alternative but to take the ride down or to cash out at a loss. If I was 20 or 30 something there would be no argument from me, trackers are the way to go. But at 75, hmmm, there may be better alternatives plus it's never too late to learn new things.  

If you like the idea of keeping things simple and see trackers as the way to go if you are younger, why doesn’t this apply at the age of 65? You potentially have 20-30 years of investing in you.  As long as you have a good cash buffer to ride out downturns, you should be grand?  I wonder if at 75, assuming you don’t want to leave anything to an inheritance, maybe just look at annuities or an annuities/tracker mix?  It keeps things simple at an age where that might be a good thing.

I think that’s where I am right now, but I do try to understand alternative approaches because as you say, it's (almost) never too late to learn new things!  As others have mentioned, other forums might be a better resource (even consult with an IFA?) for more esoteric approaches?

When markets turn down during a correction or a crash, the time to recovery for an index fund may easily be longer than than the number years remaining in the investers life, the older the invester the higher the risk...I am 75.  I don't need the cash in my investment portfolio but I do want to leave it for my wife, in that respect I need to protect it just as if I needed the money to spend. I think that well chosen managed funds offer a better return than index funds but the invester needs to be alert and nimble and prepared to swap funds when a fund loses steam. I also think that a well chosen managed fund offers lower risk in the event of a markets crash because  there are fewer companies involved in the fund (compared to an index fund) plus the Fund Manager has the opportunity to take some mitigating action to avoid significant loss. And because there are fewer companies involved, the time to recovery is likely to be shorter than that of an entire index.

I'm very happy with my approach and where my investments are currently. Of course there will always be room for improvement but I don't have any real complaints at present, just niggles. A few inexperienced members have said recently that they would welcome a thread that provides basic knowledge about how to select a fund and would find that interesting and useful....that's where I'm at, trying to help supply some of that basic learning material rather than  telling people to watch youtube video's, read investopedia or to adopt a Bogglehead approach. Lastly, I come from a financial services, Big 4 and banking background so this kind of effort is not new to me. But I do live in Asia where we don't have IFA's and frankly if we did, I would look for alternatives to using them.

leosayer

TLDR - I found manager/fund selection too hard so now use index funds instead.

Here's the long version:

I worked for an investment manager most of my life and have been investing in their and other funds for over 30 years. 

Using the knowledge I gained I spent way too much time on manager/fund selection using various metrics including some of those mentioned before and also the quality of written material from the investment manager and their team. I would often invest in a fund largely because I liked the manager's investment philosophy and inevitably, many of those were funds from my employer.

However, often my analysis would end up with me going, for the want of a better phrase, up my own !!!!!! and having analysis paralysis that resulted in me failing to make decision I needed to make. Far too many times I would look back at my reasons for buying a fund and wondering what the hell I was thinking. I think I was favouring metrics that would help me to justify my gut feeling rather than being truly scientific. Alongside this, the idea of holding any kind of index tracking fund seemed anathema to me, partly because it was a threat to the industry.

The change came around 10 years ago when I started looking into the funds that were selected for me in our new company DC scheme and comparing them to what I already held. I realised that I was doing many irrational things such as having a home (UK) bias and ignoring whole regions and industries because I had no knowledge or understanding of them. From this point on I held a global market-cap weighted index tracker fund and 6 years ago it became my sole equity holding. More recently I supplemented this with a short-term gilt fund that helps me to manage sequence risk.

The time I saved has instead been focussed on developing my understanding of regime surrounding investing such as tax, pensions and financial planning and that has helped me to retire much earlier than I expected, albeit with a fair degree of luck due to recent good investment returns.

aroominyork

chiang_mai said:

snarffie said:

chiang_mai said:

I like the idea of keeping things simple but my jury is still out as to whether that is the right way or not for me personally or indeed anyone over age 65 or so. I can't help but feel that index trackers, for older investers such as myself, represent a risk to the downside when the market turns down since there is no alternative but to take the ride down or to cash out at a loss. If I was 20 or 30 something there would be no argument from me, trackers are the way to go. But at 75, hmmm, there may be better alternatives plus it's never too late to learn new things.  

If you like the idea of keeping things simple and see trackers as the way to go if you are younger, why doesn’t this apply at the age of 65? You potentially have 20-30 years of investing in you.  As long as you have a good cash buffer to ride out downturns, you should be grand?  I wonder if at 75, assuming you don’t want to leave anything to an inheritance, maybe just look at annuities or an annuities/tracker mix?  It keeps things simple at an age where that might be a good thing.

I think that’s where I am right now, but I do try to understand alternative approaches because as you say, it's (almost) never too late to learn new things!  As others have mentioned, other forums might be a better resource (even consult with an IFA?) for more esoteric approaches?

I also think that a well chosen managed fund offers lower risk in the event of a markets crash because  there are fewer companies involved in the fund (compared to an index fund) plus the Fund Manager has the opportunity to take some mitigating action to avoid significant loss. And because there are fewer companies involved, the time to recovery is likely to be shorter than that of an entire index.

Or longer.

Linton

chiang_mai said:

snarffie said:

chiang_mai said:

I like the idea of keeping things simple but my jury is still out as to whether that is the right way or not for me personally or indeed anyone over age 65 or so. I can't help but feel that index trackers, for older investers such as myself, represent a risk to the downside when the market turns down since there is no alternative but to take the ride down or to cash out at a loss. If I was 20 or 30 something there would be no argument from me, trackers are the way to go. But at 75, hmmm, there may be better alternatives plus it's never too late to learn new things.  

If you like the idea of keeping things simple and see trackers as the way to go if you are younger, why doesn’t this apply at the age of 65? You potentially have 20-30 years of investing in you.  As long as you have a good cash buffer to ride out downturns, you should be grand?  I wonder if at 75, assuming you don’t want to leave anything to an inheritance, maybe just look at annuities or an annuities/tracker mix?  It keeps things simple at an age where that might be a good thing.

I think that’s where I am right now, but I do try to understand alternative approaches because as you say, it's (almost) never too late to learn new things!  As others have mentioned, other forums might be a better resource (even consult with an IFA?) for more esoteric approaches?

When markets turn down during a correction or a crash, the time to recovery for an index fund may easily be longer than than the number years remaining in the investers life, the older the invester the higher the risk...I am 75.  I don't need the cash in my investment portfolio but I do want to leave it for my wife, in that respect I need to protect it just as if I needed the money to spend. I think that well chosen managed funds offer a better return than index funds but the invester needs to be alert and nimble and prepared to swap funds when a fund loses steam. I also think that a well chosen managed fund offers lower risk in the event of a markets crash because  there are fewer companies involved in the fund (compared to an index fund) plus the Fund Manager has the opportunity to take some mitigating action to avoid significant loss. And because there are fewer companies involved, the time to recovery is likely to be shorter than that of an entire index.

I'm very happy with my approach and where my investments are currently. Of course there will always be room for improvement but I don't have any real complaints at present, just niggles. A few inexperienced members have said recently that they would welcome a thread that provides basic knowledge about how to select a fund and would find that interesting and useful....that's where I'm at, trying to help supply some of that basic learning material rather than  telling people to watch youtube video's, read investopedia or to adopt a Bogglehead approach. Lastly, I come from a financial services, Big 4 and banking background so this kind of effort is not new to me. But I do live in Asia where we don't have IFA's and frankly if we did, I would look for alternatives to using them.

It seems to me your logic is seriously flawed. ...
1) Fewer companies in a fund makes a large fall more likely, not less.   With fewer a major collapse (or boom)  in just one company would have a far more serious effect than in an index fund. Simlarly some companies will take a short time to recover others make take a long time, if they ever do.  If you arer lucky, great, otherwise tough. Thus the smaller the number of companies, the higher the risk.

2) A strategy of quickly selling in a falling market is unlikely to be beneficial in the long term and I would doubt that fund managers would adopt it.  The problems are that you dont know the market is falling sufficiently to justify a sell until it is too late, and conversely you are likely to rebuy after the the bounce-back has already occurred.

masonic

chiang_mai said:

Thank you for the tip. I personally am not looking for more indepth engagement on this subject but it struck me several times that many others do want to see the basics set out and have said as much on a couple of occiaisons. It was that thought that made me want to post up a straw man thinking that others who professed to be more seasoned investors, might chip in and help out. What more can be said, apart from oh well.

A few "seasoned" investors have contributed. I'd predict the few that have not are the ones who caution against engaging in such pursuits, so it is perhaps unsurprising they cannot give you any insight into what they'd likely consider a pointless exercise.

If it is helpful, here are my views on the individual items you bulleted earlier

• Overall asset allocation, e.g. equities vs MA vs Bonds etc. Most important
• Is the risk level appropriate for me and the gap I’m trying to fill, e.g. Morningstar, Kiid, Trustnet etc ratings. Consider this type of risk rating deeply flawed and wouldn't normally use
• Geographic allocations, e.g. Regions/countries. As a means to an end, some markets have different characteristics than others. Country of listing isn't necessarily meaningful beyond that.
• Capitalisation percentages of large, medium and small caps. Fairly important for overall composition, but would achieve using different funds
• Fund size and managed vs passive.. Don't care as long as it isn't so small it might not survive
• Sector allocations. Important
• Is the investing style appropriate for my needs, e.g. Value, Growth or Blend. Important
• Are the metrics in line with my needs, e.g. P/E, Beta, Alpha etc. Tend to avoid high valuation and high beta
• The number of companies in the fund, e.g. not a closet tracker. Tend to avoid concentration, prefer larger numbers with largest holdings as a small %
• Upside/Downside Capture Ratio’s, Aim for a fund that can achieve 1 with a high degree of confidence
• Investment flows. Don't care unless extreme
• Fund Manager experience and other funds managed. Generally consider active fund managers a risk to be avoided
• Previous performance against the Index, using trailing returns to understand anomalies. Avoid deviation from index
• Drawdown. Does this mean beta?
• Overlap with other holdings. Try to avoid multiple funds covering same sector/region

And ones you didn't

• Cost (both OCF and impact of fund type on platform fees)
• Liability matching
• Liquidity
• Domicile

chiang_mai

Linton said:

It seems to me your logic is seriously flawed. ...
1) Fewer companies in a fund makes a large fall more likely, not less.   With fewer a major collapse (or boom)  in just one company would have a far more serious effect than in an index fund. Simlarly some companies will take a short time to recover others make take a long time, if they ever do.  If you arer lucky, great, otherwise tough. Thus the smaller the number of companies, the higher the risk.

2) A strategy of quickly selling in a falling market is unlikely to be beneficial in the long term and I would doubt that fund managers would adopt it.  The problems are that you dont know the market is falling sufficiently to justify a sell until it is too late, and conversely you are likely to rebuy after the the bounce-back has already occurred.

We disagree on both points.

49 above average funds will fall less far and more slowly than the entire index, which is why upside and downside capture figures are inmportant in the selection process. 

Regarding the second point: a Fund Manager will have his ear closer to the ground, sooner hence they will be in a better position to react than the invester.  

chiang_mai

masonic said:

chiang_mai said:

Thank you for the tip. I personally am not looking for more indepth engagement on this subject but it struck me several times that many others do want to see the basics set out and have said as much on a couple of occiaisons. It was that thought that made me want to post up a straw man thinking that others who professed to be more seasoned investors, might chip in and help out. What more can be said, apart from oh well.

A few "seasoned" investors have contributed. I'd predict the few that have not are the ones who caution against engaging in such pursuits, so it is perhaps unsurprising they cannot give you any insight into what they'd likely consider a pointless exercise.

"engaging in such pursuits"! Do you mean the analysis and selection of funds in a semi structured manner and helping more junior members learn?

If people do not want to help others learn and contribute to a useful discussion, that is of course their perogative. I would have thought the opportuinity to demonstrate their "knowledge and expertise" would only enhance their standing. But each top their own.    

chiang_mai

aroominyork said:

Or longer.

That possibility certainly exists but not if the fund and the fund manager are above average and chosen wisely. That is after all what we pay for  when we buy a managed fund.

masonic

chiang_mai said:

masonic said:

chiang_mai said:

Thank you for the tip. I personally am not looking for more indepth engagement on this subject but it struck me several times that many others do want to see the basics set out and have said as much on a couple of occiaisons. It was that thought that made me want to post up a straw man thinking that others who professed to be more seasoned investors, might chip in and help out. What more can be said, apart from oh well.

A few "seasoned" investors have contributed. I'd predict the few that have not are the ones who caution against engaging in such pursuits, so it is perhaps unsurprising they cannot give you any insight into what they'd likely consider a pointless exercise.

"engaging in such pursuits"! Do you mean the analysis and selection of funds in a semi structured manner and helping more junior members learn?

If people do not want to help others learn and contribute to a useful discussion, that is of course their perogative. I would have thought the opportuinity to demonstrate their "knowledge and expertise" would only enhance their standing. But each top their own.    

No I do not mean that at all. I'm astonished you would jump to such a conclusion! That is quite a dim view to take of those whose input you were previously courting.

What I meant was that a large part of the process you outlined would be considered a pointless exercise, and therefore they'd view it as counter-productive for junior members to learn about. Clearly these people do want to help others learn, as the evidence is all over the forum where they have contributed their simple approach that does not involve many of the considerations you have in your process. I added to my post above the extent I use or don't use the original factors you outlined.

I do not sit at the end of the spectrum where I just buy the market using a simple passive multi-asset fund, though that is a great place to start for beginners, and I'd not consider it a bad thing not to make things any more complex. But my accumulated knowledge and experience has led me progressively further from trying to pick an active manager or use past performance to predict future returns. I've seen time and time again the active fund do worse in a falling market because it was just surreptitiously harvesting beta, or enjoying a period where its investment style was in fashion. Top down asset allocation, diversification and control of costs are the factors I advocate when helping others learn.

Bostonerimus1

Right from the start you should define your investing goals and time horizons as that's going to inform your asset allocation. I started to invest in my mid 20s when I got my first paying job and the goals were to buy a home and be financially independent by my 50s and retire early. So I set about ensuring I would have a guaranteed base income from state pensions and a small deferred annuity (I'm in the USA). I later augmented this by taking a job with a good DB pension plan starting at age 55, and now I have more than enough to cover my retirement expenses. I also made sure that I entered retirement, which I did at age 52, with zero debt...including the mortgage.

Now to investments. I just couldn't put in the work that seems to be involved in the OP's recommendations, much of which I also believe is unnecessary to be successful. Anyway most people will have to choose from a restricted set of funds offered in their DC pensions and only after that in say SIPPS and ISAs will the whole cosmos of funds be available. I followed a basic 4 index-fund "Lazy Portfolio" as advocated by Bogleheads. I set some guard rails for rebalancing between bonds and equities and US and Global equities and that was it. I've managed 9% average annual return over the last 35 years with very little mental effort, although rebalancing through several crashes took some gut level effort. I have been frugal and always put retirement savings high up on my budget...oh I've always kept a budget so I know roughly where my money is being spent. But my ethos has always been to minimize debt, prioritize savings and investing and to live within my means. Before you think about the alpha and beta of funds make sure you are following Mr. Micawber's advice:

"Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery."

Investing doesn't need to be complicated, but it isn't necessarily easy either.