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Fundsmith again.
Comments
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Yes, first time ever I took a 4k5 CGT hit for next tax year. At least it was just the small remainder, having got rid of most during the 12k allowance years (and some 6k allowance).
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I suppose a stopped clock is right twice a day.
It's good to have a strategy, but when it's an active one a customer might expect it to adapt to the market conditions to keep delivering "superior performance". When a team stops wining the crowd can turn nasty.
And so we beat on, boats against the current, borne back ceaselessly into the past.0 -
Sometimes the strategy will perform extremely well, sometimes it wont. It is nothing to do with the fund manager's skills,nor to funds going "off the boil".
That might be true of a factor ETF that is determined by algorithm, Linton, but not of actively managed funds. You pay the manager to use his skill; what other justification is there for his fee? I agree it puts him in a tricky position if, for example, he runs a growth fund while value is in fashion for a long period of time, but that's when he needs to finesse a little. Terry Smith seems to be coming to the realisation that sitting tight will no longer work... and naturally he is blaming the market for this.
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A human fund manager is just running a more complex (but often more erratic) algorithm. They will build a fairly rigid narrative early in their career and see the world through that lens. Also, by sticking to their style bias they can blame the market cycle for short term underperformance and avoid losing their job when their fund is out of favour for a time. But that doesn't work forever.
The "skilled" fund manager is one whose career spans a period of time that suits their bias. Few are lucky enough not to outlive this edge. Terry is over 10 years into borrowed time.
A mechanical algorithm tends to be preferable as it is cheaper, doesn't suffer from cognitive fatigue or career anxiety, and is much more transparent.
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Excellent post. You're on fire tonight!
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My main argument is not to compare active funds with passive but rather to disagree with the idea that poor performance in changing economic circumstances is evidence of something being wrong with a fund that can be resolved by moving to a different one.
That is not an active vs passive argument as it applies to all equity investing. The future is unknown and you need to accept that different funds will give different results in the short and medium term. There is no panacea.
Changing funds after each economic event will not improve your long term returns, if anything you lose out by selling low and buying high. Rather than focussing on individual funds you should base your choice on how they work together in your portfolio.
I never invested in Fundsmith even when it was performing very well not because I thought it was a bad fund but rather because it was difficult to see how it would naturally fit in with other investments to provide a complete portfolio..
Mechanical management has its own problems. These include a limited range of options with varying availability in different geographies. Another is simplistic implementation which in my usual example, IUKD, led to disaster in 2007/8 when sector diversification, surely an essential consideration fo fund managers, was clearly not a major factor in the algorithm.
“Style” is perhaps more useful than an algorithm as it provides some flexibility in dealing with unforeseen circumstances.
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There is no amount of skill that will enable a fund manager to predict the future. The best they can do for you is to invest consistently and openly following basic principles within their stated remit.
It is your responsibility to determine the structure of your portfolio in terms of choice of funds and % allocation that you believe will best meet your objectives.
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The issue here is that the fund manager is effectively changing style, leaving the investors who want the fund managed in the way they bought it for forced out, to appease those who want something different.
Quite possible that the late capitulation will come just in time to get the worst of both worlds.
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Smith says "… in the current momentum-driven market buying shares in companies which have hit a glitch is like trying to catch the proverbial falling knife. All we are getting is cut fingers as their downward share price spiral is exacerbated by the index momentum enhancement effect." Is that an excuse to cover appeasement, or does he have a valid point? The answer to that is above my pay grade, but if the latter he is justified in changing style. Whether the change will improve performance is of course another question.
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Fundsmith has had some years of underperformance, but their investing philosophy might actually be attractive to people looking to avoid the tech driven bubble. My indexing approach can't avoid the tech bubble, so maybe I should consider Fundsmith just because it has underperformed by not including much tech. The larger picture is that you should buy on investing fundamentals, not returns or an idea that you can consistently beat the market.
And so we beat on, boats against the current, borne back ceaselessly into the past.2
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