FTSE100 best single year return since 2009.

OldScientist

chiang_mai said:

eskbanker said:

chiang_mai said:

I would argue that I have constructed my own tracker, which comprises an assortment of managed funds. My tracker has a different tilt to the off the shelf tracker, because the weightings and emphasis of the traditional tracker, don't suit my risk profile and I don't agree they are appropriate for my objectives. Plus, my tracker is managed, it has FM's who negotiate the parts of the obstacle course that I can't see or have the expertise to navigate. My "tracker' operates within predetermined guidelines and is subject to the same balancing routines that a regular tracker is, it just looks different.   

The problem is not the tracker, the problem is the index upon which the tracker is based. My "tracker" doesn't agree that the US market should hold a 60% share, that's a backwards looking metric. My "tracker" is forward looking, just as markets are, it believes the US debt levels are such a huge risk to the US economy that market share of my tracker should be limited to 25%, not 60%. It also believes that Japan should be 10%, not the 3% that traditional trackers employ and that China should be 8% not 3%....and so on.

Surely by that logic, every portfolio could be described as a "tracker", assuming they correlate with an individual's preferred allocation (accepting that the degree of design will vary widely)?

As long as the proportions are held and don't continually vary, and importantly, as long as there's a basis for its construction and weighting, that also do not frequently change. Todays global trackers are nothing more than fixed allocations and ratio's that have a basis for their construction. I question those allocations and ratio's but otherwise there is little difference. I don't think that a fluid portfolio that has no logical basis for its weighting or ratio's would qualify. I suspect most novice (and experienced) retail investors simply want to buy good coverage that has some rationale that underpins its construction and don't have firm views of their own about whether that underpinning is correct or not. Basing that construction on market share is as good as any I suppose but that doesn't mean its right or the only way to construct a tracker. The other part of this is that it's not possible for investors to tinker with the make up of an off the shelf global tracker, which is somewhat beneficial. They can influence weighting by adding other funds in order to tilt the weighting but for most people that might be too much trouble. 

Strictly speaking a 'tracker' fund is one that tracks an index. Index construction is a different question, but all are rule-based. The 'traditional' cap weighted index holds individual equities in proportion to their overall cap weight. This means that as the relative prices of different stocks vary, their weight in the index also varies - in other words, they are not fixed allocations. In the absence of cash in or out flows, one advantage of cap weighting is that it means that there are no transaction costs in an implementation of the index*.

The cap weighted index then represents the current market valuation of individual stocks, regions, etc. It makes no prediction as to future changes in the index and will merely follow those as they occur. In other words, if the SP500 crashes without affecting any other region or country (IMO, highly unlikely) then the fraction of US stocks in the cap weighted global tracker funds will decrease and the overall NAV will also decrease.

It is possible to construct indices on a different basis (e.g., equal weight) but transaction costs will always be higher. For example, an 'equal region' index consisting of 25% US, 25% Japan, 25% Europe, and 25% EM would have been doing a lot of rebalancing over the last 15 years or so.

The future performance of differently constructed indices is impossible to predict. In other words, tilting may turn out to be beneficial or it may not. As a relatively passive investor, expending effort with no guarantee of reward seems illogical to me.

* in practical terms, the constituents of the index are only updated every 6 months (IIRC - although in passing I note that bond indices are typically updated on a monthly basis) in order to stop excessive churn at the bottom end of large cap indices and the top end of small cap indices.

chiang_mai

Yes, you are of course correct. I will only add that when I wrote my "tracker", it was in quotes hence I did not mean to imply that what I have constructed, performs all the function of the real deal. 

masonic

chiang_mai said:

masonic said:

The fundamental property of an index tracker is precisely that it hands off responsibility to an external formula, not individual choice.

Multi-asset funds and other fund of funds are not index trackers, though they may use index trackers as building blocks.

So if you want a global tracker, you have to take what you're given, unless you elect to construct your own global tracker using regional trackers, in which case it's still a tracker but regional ratio's can be varied. However, if you try to do something similar using managed funds, you may achieve a similar end but it can't be called a tracker. 

Not quite. There are a few global indexes to choose from, including developed indexes (FTSE/MSCI World), developed and EM (FTSE All-World, MSCI ACWI), world ex-UK, world ex-US, ESG variants, smart-beta variants (value, momentum, growth, min volatility etc). Equal weight indexes also exist, maybe not for global.

If you, or a fund, does it's own thing in regard to components and/or weightings, using trackers or otherwise, where human discretion has been used rather than a mechanical formula, then it is not an index tracker.

chiang_mai

masonic said:

Not quite. There are a few global indexes to choose from, including developed indexes (FTSE/MSCI World), developed and EM (FTSE All-World, MSCI ACWI), world ex-UK, world ex-US, ESG variants, smart-beta variants (value, momentum, growth, min volatility etc). Equal weight indexes also exist, maybe not for global.

If you, or a fund, does it's own thing in regard to components and/or weightings, using trackers or otherwise, where human discretion has been used rather than a mechanical formula, then it is not an index tracker.

Last question, after which I promise I'll stop anoying you. smile:

Theoretically speaking, is it possible to have a conventional global tracker where the country weights are different from the free float adusted market capitalisation rankings, or is the algorthim dependent on that scale? My dislike of global trackers stems not from the functions they perform, many of which I think can be/are undertaken by active fund mangers, albeit on a smaller scale, but by the countries ratios. It's that last part that I chose to tweak via a DIY approach. Presumably the only solution is a compilation of individual country/regional trackers, bought in the desired proprtions.

phlebas192

chiang_mai said:

masonic said:

Not quite. There are a few global indexes to choose from, including developed indexes (FTSE/MSCI World), developed and EM (FTSE All-World, MSCI ACWI), world ex-UK, world ex-US, ESG variants, smart-beta variants (value, momentum, growth, min volatility etc). Equal weight indexes also exist, maybe not for global.

If you, or a fund, does it's own thing in regard to components and/or weightings, using trackers or otherwise, where human discretion has been used rather than a mechanical formula, then it is not an index tracker.

Last question, after which I promise I'll stop anoying you. smile:

Theoretically speaking, is it possible to have a conventional global tracker where the country weights are different from the free float adusted market capitalisation rankings, or is the algorthim dependent on that scale? My dislike of global trackers stems not from the functions they perform, many of which I think can be/are undertaken by active fund mangers, albeit on a smaller scale, but by the countries ratios. It's that last part that I chose to tweak via a DIY approach. Presumably the only solution is a compilation of individual country/regional trackers, bought in the desired proprtions.

In theory, there is no reason why there couldn't be a near infinite number of trackers that tracked using every possible weighting of countries,  industry sectors, etc. Aftrer all, a tracker is just something that attempts to replicate a measurable benchmark. But the real benefit of trackers are not that "passive" is somehow magically better than "active" but that buying & selling via a set formula only in response to capital inflows / outflows or index changes is a lot cheaper than employing a team of people to make - and justify - decisions. But every fund has a fixed cost base and the more niche the benchmark being tracked the higher those base costs are going to be relative to its size. If the "passive" costs aren't noticeably lower than the "active" ones then there is absolutely no justification for the passive tracker to exist.

Your argument is largely why I object to the very concept of "passive" when it comes to trackers. Choosing to track an index is very much an active decision - you are specifically choosing to buy individual companies using the sole criteria of their relative market valuations withing that index. On the surface that is probably one of the worst possible reason for buying shares in individual companies (eg it does not even slightly consider the worth of a company's future cashflows), but it has the distinct benefit of being cheaper than paying for a management team. And since managers do not beat the index over time once you allow for costs you might as well go for the lowest cost solution. On balance you are not going to do worse than going with an active fund and probably better than most of them over sufficiently long periods.

In my view, as soon as you are opting for an approach that is not a simple global tracker you are effectively making an active decision. You are making a judgment call that one region / market / economy / class of companies is going to do better than others. And if you are going for that - as indeed I am - then you might as well own it. There's nothing morally "good" about investing in a tracker. It's an active choice and we'll only know if it proves to be a good one long after the decision is made - but helped by its lower fees.

Ultimately, our investments need to be measured against our own benchmarks, not those of anyone else. Since we are retired with no dependants, the most suitable benchmark for us would be "produce an income higher than what we could achieve by cashing out and purchasing lifetime annuities". It's very much early days, but so far we are comfortably beating that benchmark. 

chiang_mai

phlebas192 said:

In theory, there is no reason why there couldn't be a near infinite number of trackers that tracked using every possible weighting of countries,  industry sectors, etc. Aftrer all, a tracker is just something that attempts to replicate a measurable benchmark. But the real benefit of trackers are not that "passive" is somehow magically better than "active" but that buying & selling via a set formula only in response to capital inflows / outflows or index changes is a lot cheaper than employing a team of people to make - and justify - decisions. But every fund has a fixed cost base and the more niche the benchmark being tracked the higher those base costs are going to be relative to its size. If the "passive" costs aren't noticeably lower than the "active" ones then there is absolutely no justification for the passive tracker to exist.

Your argument is largely why I object to the very concept of "passive" when it comes to trackers. Choosing to track an index is very much an active decision - you are specifically choosing to buy individual companies using the sole criteria of their relative market valuations withing that index. On the surface that is probably one of the worst possible reason for buying shares in individual companies (eg it does not even slightly consider the worth of a company's future cashflows), but it has the distinct benefit of being cheaper than paying for a management team. And since managers do not beat the index over time once you allow for costs you might as well go for the lowest cost solution. On balance you are not going to do worse than going with an active fund and probably better than most of them over sufficiently long periods.

In my view, as soon as you are opting for an approach that is not a simple global tracker you are effectively making an active decision. You are making a judgment call that one region / market / economy / class of companies is going to do better than others. And if you are going for that - as indeed I am - then you might as well own it. There's nothing morally "good" about investing in a tracker. It's an active choice and we'll only know if it proves to be a good one long after the decision is made - but helped by its lower fees.

Ultimately, our investments need to be measured against our own benchmarks, not those of anyone else. Since we are retired with no dependants, the most suitable benchmark for us would be "produce an income higher than what we could achieve by cashing out and purchasing lifetime annuities". It's very much early days, but so far we are comfortably beating that benchmark. 

Thanks for that, it's reasuring to read some of those things. I own four managed funds that are country or region specific. All four have outperformed for the past year and have beaten the index by a wide margin. I've been able to build my other equities holdings around those core funds in order to diversify globally and fill in some gaps. I've supplemented my UK outperformer with an FTSE 350 index fund, simply because the outperfomer only has 70 companies and is not representative of the UK market overall. I used to hold an S&P 500 index tracker which I've abandoned in favour of an All World tracker, which allows me US index coverage but diluted by 40%, which is the other global markets. Those aquisitions have allowed me to construct a portfolio that has geographic ratios that suit me, I've added to it on occaison with some MA funds that have also outperformed but their acquisiton doesn't upset my prefered markets balance. 

The portfolio I own today is not durable but I am not looking to construct a forever portfolio, only one that meets my investing objectives for a twelve month period, after which I will revisit et al. In the past few months I've reduced my equities holdings to around 45% whilst still maintaining my out performers and my prefered geographic ratio's. This has involved reducing US markets exposure to 25% and increasing cash and bond holdings. If my views on a given country or region change, I can easily and quickly adjust my portfolio to emphasize or de-emphasize that entity whilst my FM's go about their business that they are trained in and understand, far better than me. I suppose what I am really tracking is my own bespoke markets model whilst being selctive on which managed funds to deploy. In doing so I'm seeing my desired 15% return but only uitiising 45% of my investments in equities.

masonic

chiang_mai said:

masonic said:

Not quite. There are a few global indexes to choose from, including developed indexes (FTSE/MSCI World), developed and EM (FTSE All-World, MSCI ACWI), world ex-UK, world ex-US, ESG variants, smart-beta variants (value, momentum, growth, min volatility etc). Equal weight indexes also exist, maybe not for global.

If you, or a fund, does it's own thing in regard to components and/or weightings, using trackers or otherwise, where human discretion has been used rather than a mechanical formula, then it is not an index tracker.

Last question, after which I promise I'll stop anoying you. smile:

Theoretically speaking, is it possible to have a conventional global tracker where the country weights are different from the free float adusted market capitalisation rankings, or is the algorthim dependent on that scale? My dislike of global trackers stems not from the functions they perform, many of which I think can be/are undertaken by active fund mangers, albeit on a smaller scale, but by the countries ratios. It's that last part that I chose to tweak via a DIY approach. Presumably the only solution is a compilation of individual country/regional trackers, bought in the desired proprtions.

If you could adequately codify the weightings as functions of other calculable metrics then you could create the Chiang Mai Global Index for which a tracker could be created. You do sometimes see benchmarks with fixed weightings such as 70% Index A and 30% Index B or even dynamic weightings based on market valuation (e.g. CAPE). You could derive an underlying index for Vanguard Lifestrategy funds for example (they don't as they leave themselves open to change), but not HSBC Global Strategy where there is active management under the hood. Deviating from strict market cap weighting means however, that regular rebalancing is required, which takes it away from a pure passive approach (where the only changes come when something drops out or gets promoted into the index).

I operate mostly on the basis of "alternative region weightings", but I wouldn't call what I do tracking because I adapt it over time based not on formula but a somewhat subjective view of how the portfolio aligns with my current objectives and risk tolerance. I take note of market valuations, but not in a rigid way, acting only at the extreme, and I reserve the right to be inconsistent

GazzaBloom

I cam across this one liner the other day:

Minimalist Investing Philosophy: own the world, keep fees low, stay the course.

It's hard to argue with as a lifetime investing philosophy and could be facilitated by simply holding a global market cap weighted index fund.

By the time I reach my 70s If I felt the need to be building my own trackers and making constant portfolio adjustments then it would suggest something went seriously wrong with my retirement planning.

InvesterJones

GazzaBloom said:

I cam across this one liner the other day:

Minimalist Investing Philosophy: own the world, keep fees low, stay the course.

It's hard to argue with as a lifetime investing philosophy and could be facilitated by simply holding a global market cap weighted index fund.

By the time I reach my 70s If I felt the need to be building my own trackers and making constant portfolio adjustments then it would suggest something went seriously wrong with my retirement planning.

For most it's a great strategy - but that's because it fits the needs of most (and it removes the main causes of under performance). But not all.

chiang_mai

GazzaBloom said:

I cam across this one liner the other day:

Minimalist Investing Philosophy: own the world, keep fees low, stay the course.

It's hard to argue with as a lifetime investing philosophy and could be facilitated by simply holding a global market cap weighted index fund.

By the time I reach my 70s If I felt the need to be building my own trackers and making constant portfolio adjustments then it would suggest something went seriously wrong with my retirement planning.

Without a doubt. The difficulty is, I'm already 75 and I don't have the recovery years ahead of me that will almost certainly be needed, if markets crash in a big way and those indicies fall far.