Fund Selection

chiang_mai

I'm currently in new territory for me because I've married region specific trackers with a country specific fund in three different instances. In the UK, I hold the Smartgarp UK fund, which only covers about 65 companies and is overweight Financial Services. Despite its solid performance over time, I thought it wise to back that up with a FTSE UK All Share tracker in order to capture a greater slice of the market and balance things out.

I've done similar in Europe. After I gave up my Smartgarp Europe holdings, I bought a Europe tracker that gives me broad European exposure. I also hold a couple of global funds that have specific Europe holdings hence my investments in Europe are both targetted and broad brush.

I let the L&G US Index take care of the broad brush United States, but of course elements of my global funds target speific US companies.  I do similar with Japan. 

The logic here is that targetted managed funds, if chosen correctly and if they perform as expected, will produce returns in excess of the indicies. If they do not, the fall back is the broad brush company/regional tracker which is something of a safety net I suppose. Of course, if there is a serious crash and contagion takes hold, no option will survive unscathed, but at least the targetted funds should return to profit more quickly. 

OldScientist

chiang_mai said:

Bostonerimus1 said:

chiang_mai said:

My last post for the day, a quick word about indicies falling faster than managed funds.

The Artemis Smartgarp European Equities fund (for example) has an upside capture ratio of 109 and a downside capture ratio of -9.  

The L&G Europe index fund (for example) has an upside of 92 and a downside of 74.

"Upside Capture Ratio measures a manager's performance in up-markets relative to the index. A value over 100 indicates that an investment has outperformed the benchmark during periods of positive returns for the benchmark.

Downside Capture Ratio measures the manager's performance in down-markets relative to the index. A value of less than 100 indicates that an investment has lost less than its benchmark when the benchmark has been in the red".

I've never put much stock in horoscopes, numerology or the attempts of people to read the tea leaves of the markets. 

These are mathematical performance measurements, not guess work!

Just to clarify, what you are talking about are mathematical past performance measurements in the same way returns and standard deviation (i.e., volatility) are mathematically sound measurements of past performance. As a scientist and engineer I spent my entire working life trying to predict the future performance of various systems based on physical principles that are well understood, but in some cases the underlying physics produces stochastic (i.e., random) outcomes, so that the system performance then becomes probabilistic (e.g., failure rates can be predicted but not when failures will occur - except that "sod's law" tell us it will be at the most inconvenient time!).

To take a relatively simple fund selection case. If you are in the market for a gilt fund what fund should you choose? Short duration (e.g., 'under 5 year gilts'), intermediate duration ('under 10 year gilts'), or long (over 15 year gilts). The common 'all stocks' fund lies somewhere between intermediate and long.

In a rising yield environment (e.g., historically from about 1940-1980), the short duration will do best and the long duration worst.

In a falling yield environment (roughly from 1980 to 2020), the long duration will do best and the short duration worst.

In a roughly constant yield environment, then assuming a non-inverted yield curve (i.e., yields increase with maturity as currently) then long duration will do best and short worst and vice versa for a inverted yield curve (where yields decrease with increasing maturity - as it was a year or so ago).

'Standard' passive 'advice' (e.g., bogleheads) is that in the absence of accurate predictions of future changes in yields then choosing an intermediate duration fund will work reasonably well (not best and not worst) in a variety of future yield environments and has an intermediate volatility (larger than short duration and smaller than long duration).

For the active fixed income investor, a prediction of future yield movements is required with consequent changes to the duration of the bonds held (shorten if yields are predicted to rise and vice versa)*. Professional managers also tend to introduce lower quality bonds (i.e., below investment grade) to juice returns with the risk that they will default.

I do not know whether there are any models that attempt to predict future movements of yields or (more importantly) what accuracy they do so with.

*FWIW and for full disclosure: Fixed income is the only area where I am an moderately active investor (I set the average duration of the fixed income funds I hold to somewhere between 1 and 2 years and change this towards the lower or upper end as I see fit) since this scratches an urge to tinker and, in the long-term, will have very little effect (i.e., it is mostly harmless).

OldScientist

chiang_mai said:

OldScientist said:

It may also be because for many of us investing is as simple as picking:
1) A world equity index fund, but possibly adding some tilt (e.g., small caps or REITS)
2) A fixed income index fund (e.g., global bonds, UK gilts, MMF, or other cash), but possibly using more than one fixed income fund to tailor the overall duration.
3) Other things such as small amounts of gold, other commodities, crypto, etc. to taste.

Many years ago, I used to have separate funds by region (including an index fund and active fund for some regions) and by cap (for selected regions, e.g., UK small cap). If I remember rightly, the portfolio peaked at about 15 or so funds before I started a process of simplification (now in retirement I'm down to 5 funds plus cash - I'm considering removing two more). My criteria for picking the active funds were largely based on previous performance, ongoing costs, a low turnover (i.e., a buy and hold management style), and some difference in holdings from the index. I realised two things a) the amount of work needed to maintain it was not worth any performance or other gains and b) in the event of my death, my OH (who has little interest in these things) would not be able to manage such a complex portfolio even with detailed instructions.

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.  

It depends what you want out of your portfolio when retired. For me, all of my core expenditure and most of my adaptive expenditure is covered by guaranteed income sources (DB pension now, SP in due course), and we take variable withdrawals from our portfolio (so in good markets we withdraw more and can spend more and vice versa in bad markets). Once our SPs are in payment, we will have little need to withdraw from our portfolio and this will form part of our estate. I note that with single life RPI annuities currently paying 7.5% at 75yo (6.5% for joint), then building a strong floor of guaranteed income may be a good approach.

Furthermore, there is little evidence that active management can consistently beat index investing (after fees) even in bear markets. For example, https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2008.pdf suggests that the SP500 outperformed 71.9% of active large cap funds between 2004 and 2008. Continuing research from SPIVA (https://www.spglobal.com/spdji/en/research-insights/spiva/) has shown consistent outcomes - i.e., active management funds tend to do worse than the index. That's not to say that there aren't funds that have consistently outperformed the index (e.g., according to the second of the two links, 8% of funds in Europe have done so over the last 10 years) but whether that outperformance for an individual fund will persist in the future is unknown.

chiang_mai

OldScientist said:

Just to clarify, what you are talking about are mathematical past performance measurements in the same way returns and standard deviation (i.e., volatility) are mathematically sound measurements of past performance. 

An entirely valid point that is worth reinforcing. All the metrics such as volatility, performance and returns are rear-ward looking, it's been that way ever since crystal balls were outlawed in the industry.

More seriously, we are all reminded repeatedly that past performance is not a reliable indicator of the future. But I challenge anyone to say they don't look at the history and that it carries some weight and plays some roll in their decison making. The problem comes, I think, when over performance is expected to continue and it doesn't, which is why a long history of past performance can oftenm rationalise expectations.  

chiang_mai

OldScientist said:

It depends what you want out of your portfolio when retired. For me, all of my core expenditure and most of my adaptive expenditure is covered by guaranteed income sources (DB pension now, SP in due course), and we take variable withdrawals from our portfolio (so in good markets we withdraw more and can spend more and vice versa in bad markets). Once our SPs are in payment, we will have little need to withdraw from our portfolio and this will form part of our estate. I note that with single life RPI annuities currently paying 7.5% at 75yo (6.5% for joint), then building a strong floor of guaranteed income may be a good approach.

Furthermore, there is little evidence that active management can consistently beat index investing (after fees) even in bear markets. For example, https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2008.pdf suggests that the SP500 outperformed 71.9% of active large cap funds between 2004 and 2008. Continuing research from SPIVA (https://www.spglobal.com/spdji/en/research-insights/spiva/) has shown consistent outcomes - i.e., active management funds tend to do worse than the index. That's not to say that there aren't funds that have consistently outperformed the index (e.g., according to the second of the two links, 8% of funds in Europe have done so over the last 10 years) but whether that outperformance for an individual fund will persist in the future is unknown.

Once again, agreed. I think we've already had the discussion about nothing lasting forever and the need to be alert full time and willing to swap out and in of funds, as and when popularity wanes and emerges elsewhere. 

leosayer

Measuring the performance of your own fund selection and comparing to one or many benchmarks is not a trivial exercise as it requires a level of record keeping that is more than most are willing or able to do. 

chiang_mai

leosayer said:

Measuring the performance of your own fund selection and comparing to one or many benchmarks is not a trivial exercise as it requires a level of record keeping that is more than most are willing or able to do. 

I'm not sure I understand. Every fund already has its own benchmark, against which its performance is measured and reported every which way by a number of sites....Trustnet is particularly useful in this respect. The relevant benchamrk can always be found in the funds document.  

Bostonerimus1

ShinyStarlight1 said:

Bostonerimus1 said:

chiang_mai said:

Bostonerimus1 said:

chiang_mai said:

I don't know why you'd be so astonished, it's an obvious conclusion to draw! Forums such as these are often prone to members trying to maintain their "expert" status without ever putting forth anything really useful. And to be clear, I'm not courting views, it's more that I'm curious to see who actually understands what! It's easy enough to buy a global tracker or three and using the right lingo, say you understand it all. On the other hand, the likes of Morningstar gives us all these metrics and analytical data, it seems counter productive not to at least understand what it all means and wherever possible, use it. Of course you don't have to do that and chances are you may even obtain the same result, more easily, if you take the simple approach. But there again you may not. My experience is that it's better to understand the mechanics of what's under the hood, at a detail level, in whatever I do in life and investing is no different, it helps when you break down in the middle of nowhere.   

Yes it's good to understand what's in the black box, but for most people they simply don't need to and most importantly don't want to understand the workings of their funds. For those reasons we have multi-asset funds and "Lazy Portfolios". There will be some nerds, and I use the term with admiration and affection, that do want to understand all the "nuts and bolts", but that's simply not appropriate for most people. It's like some one buying a drone and needing or wanting to know the PID/PDF servo control on the propeller motors. Or someone with diabetes wanting to understand the PI3K/AKT pathway.

Your analogies are a bit extreme but I get your point. Whether or not it's approppriate to tilt more towards being a  nerd, depends on how comforrtable they are putting all their trust and faith in one or two trackers and handing all control and responsibility for your financial future, to the likes of Vanguard et al. But I suppose that approach has always worked well in the past so it must continue to work well in the future, right!  

Many people struggle with percentages, compound interest and the difference between tax-free and tax deferred. It's good that you are sharing your approach, but it will be too much for most people

Speaking as someone who understands very little about investing, and am unfamiliar with most of the terminology, I really appreciate the clarity and detail of Chiang_Mai’s posts. They are helping me to learn by demystifying the decision-making process. I enjoy the opportunity of looking under the bonnet and gradually teasing out the tangle beneath it. I also appreciate the effort and generosity that such detailed posts require.

If you think that such detailed analysis will help you then go ahead. I've concluded that it's just as likely to hurt as help. People love to hang onto the idea that they can beat the markets in some deterministic way and we get many posts from people who have excellent returns. However, we seldom see posts from people who's analysis and active management have caused them to lag the markets; they certainly exist but might be embarrassed. Long ago I decided that the only statistics to use when investing are long term and even they are backwards looking so proceed with caution. It's good to have an understanding of funds at a basic level, but beware of over interpretation and using dubious mathematics to reinforce your assumptions and desires.

chiang_mai

Every selection of every fund, involves some level of analysis, the question is how much analysis is appropriate and how much is right for you. All it takes for some people is knowing that their platform reported that XYZ Global Fund was the most profitable and the most heavily bought fund by its customers this year....that's good enough for me, I'll have some of that, they say, job done. Everyone down the pub will be impressed when they learn you're invested in a global index and how well the markets did today! 

But others actually want to know what countries or regions they're going to be invested in, because they don't like Region W.  Some people want to ensure there is no concentration of investment by sector or capitalisation.......yet others don't want this or that and yet more do want extra of this and that. All of those things require analysis at some level, unless you blindly accept what Invester Weekly recommends. My strongest and best guess is that most investers don't do much analysis because they don't know how and/or can't be bothered.......hands up if you knew that concentration risk was a major issue, before you read it here...I thought not! But wait, this book says I don't need to think about it, all I have to do is buy their product and everything will be good! Hmmm.

Investments in financial instruments such as funds are likely to be the second or third biggest investment a person makes in their lifetime, behind real estate and maybe vehicles. I don't know what others do but when I buy houses or cars, I put a fair amoiunt of time and effort into comparing what I'm going to buy, having it inspected and reported ion, test driven and generally scrutinised up one side and down the other. I don't see why the process needs to be that different when I spend large sums on investment funds.....or perhaps it's just me.

Look, you wont annoy me if you don't do any analysis or if you just do a little bit, that's your right and that approach suits many....go for it I say, if that's your thing. But you really shouldn't do that, just because you don't think there's another viable option and that additional learning and effort might help you better understand the things you're investing large sums of your hard earned money in. As they say in these parts....up to you.  
 

thunderroad88

Index trackers can coexist perfectly happily alongside managed funds in a portfolio…I wanted some more geographically diverse exposure to  value stocks  but I didn’t want a global value market cap tracker as I’d still be facing US concentration and a certain amount of duplication. I’m wasn’t looking for significant outperformance of a global tracker but more wanting some diversification in case US and growth took a downturn…I think they’ll all suffer in the event of a large correction but they might offer a chance of less drawdown. 

I wanted funds whose top10 holdings aren’t necessarily all the usual suspects , so I chose Ranmore, Artemis GI and Orbis to boost my exposure to Europe, UK and Asia for example, and Artemis Smartgarp UK to give me non FTSE100 UK value exposure which I have elsewhere. Over the last 18 months I’ve held them I’m pleased that they’re still outperforming as of course I’d researched them and hoped they might, but as long as they consistently do well enough and contribute to my overall goals, I won’t mind one bit if they fall back into the pack or don’t even surpass my other index funds. I will however get rid if I feel there is evidence that they are unlikely to consistently contribute in the future for whatever reason.