Woodford anyone?

[Derek Chevalier]

Helicopter123 said:

Different managers, with differing styles, will outperform at different stages of any investment cycle.

When adjusted for factor exposure and relative risk, I've not seen evidence to suggest this is the case.

Helicopter123 said:

A blend of well researched, actively managed funds, adjusted when required should still outperform passives, in virtually all markets.

Ditto

Helicopter123 said:

Don't forget, if you held Woodford since the 1990s, and sold when he starting going off piste, he would have absolutely thrashed a UK tracker fund for you.

Ditto

https://www.aqr.com/Insights/Research/White-Papers...

[Helicopter123]

Derek Chevalier said:

Helicopter123 said:

Different managers, with differing styles, will outperform at different stages of any investment cycle.

When adjusted for factor exposure and relative risk, I've not seen evidence to suggest this is the case.

Helicopter123 said:

A blend of well researched, actively managed funds, adjusted when required should still outperform passives, in virtually all markets.

Ditto

Helicopter123 said:

Don't forget, if you held Woodford since the 1990s, and sold when he starting going off piste, he would have absolutely thrashed a UK tracker fund for you.

Ditto

https://www.aqr.com/Insights/Research/White-Papers...

Do you have access to FE Analytics?

The evidence can be found quite readily.

Beware the cult of the passives, of course they have a role but to ignore active funds entirely is a mistake.

[Derek Chevalier]

Helicopter123 said:

Derek Chevalier said:

Helicopter123 said:

Different managers, with differing styles, will outperform at different stages of any investment cycle.

When adjusted for factor exposure and relative risk, I've not seen evidence to suggest this is the case.

Helicopter123 said:

A blend of well researched, actively managed funds, adjusted when required should still outperform passives, in virtually all markets.

Ditto

Helicopter123 said:

Don't forget, if you held Woodford since the 1990s, and sold when he starting going off piste, he would have absolutely thrashed a UK tracker fund for you.

Ditto

https://www.aqr.com/Insights/Research/White-Papers...

Do you have access to FE Analytics?

The evidence can be found quite readily.

Beware the cult of the passives, of course they have a role but to ignore active funds entirely is a mistake.

Yes, I have access to FE but see my comments - analysis has already been done. Need to ensure benchmark is appropriate

Of course one needs to have an open mind, but the evidence is overwhelming. Where does a fund manager gain his edge over the competition?

[Helicopter123]

Derek Chevalier said:

Helicopter123 said:

Derek Chevalier said:

Helicopter123 said:

Different managers, with differing styles, will outperform at different stages of any investment cycle.

When adjusted for factor exposure and relative risk, I've not seen evidence to suggest this is the case.

Helicopter123 said:

A blend of well researched, actively managed funds, adjusted when required should still outperform passives, in virtually all markets.

Ditto

Helicopter123 said:

Don't forget, if you held Woodford since the 1990s, and sold when he starting going off piste, he would have absolutely thrashed a UK tracker fund for you.

Ditto

https://www.aqr.com/Insights/Research/White-Papers...

Do you have access to FE Analytics?

The evidence can be found quite readily.

Beware the cult of the passives, of course they have a role but to ignore active funds entirely is a mistake.

Yes, I have access to FE but see my comments - analysis has already been done. Need to ensure benchmark is appropriate

Of course one needs to have an open mind, but the evidence is overwhelming. Where does a fund manager gain his edge over the competition?

I’m not comparing Woodford against his peer group, I’m pointing out his significant outperformance against UK passive funds up to 2017 when he really went rogue. That’s a 20 year time frame when he was just a money printing machine for investors.

On the wider active v passive debate there is evidence to support both positions. In highly liquid markets where efficiency is greater then passives a good choice, but in less efficient markets, or market sectors a good active manager does add value.

A balance in portfolios is therefore appropriate wouldn’t you agree?

[Derek Chevalier]

Helicopter123 said:

I’m not comparing Woodford against his peer group, I’m pointing out his significant outperformance against UK passive funds up to 2017 when he really went rogue. That’s a 20 year time frame when he was just a money printing machine for investors.

But you're taking completely different risks to the passive investors. And it goes back to my point of being able to replicate his returns (using currently available products) by taking the same factor tilts as him (which would also have beaten a plain tracker).

There's always someone on the other side of the trade, so a growth fund manager would be unlikely to "outperform" the same time as a value fund manager, all things being equal.

Helicopter123 said:

On the wider active v passive debate there is evidence to support both positions.

Would love to see the evidence. Genuinely. No one has all the answers but I've not seen the active argument stand up to rigorous analysis.

Helicopter123 said:

but in less efficient markets, or market sectors a good active manager does add value.

The evidence would suggest otherwise

https://thebamalliance.com/blog/2018s-active-vs-in...

The stat arb funds (one of which I linked to earlier) would hoover up inefficiencies

Helicopter123 said:

A balance in portfolios is therefore appropriate wouldn’t you agree?

Given the current evidence, unfortunately not (don't wish to sound argumentative )

[Helicopter123]

Derek Chevalier said:

Helicopter123 said:

I’m not comparing Woodford against his peer group, I’m pointing out his significant outperformance against UK passive funds up to 2017 when he really went rogue. That’s a 20 year time frame when he was just a money printing machine for investors.

But you're taking completely different risks to the passive investors. And it goes back to my point of being able to replicate his returns (using currently available products) by taking the same factor tilts as him (which would also have beaten a plain tracker).

There's always someone on the other side of the trade, so a growth fund manager would be unlikely to "outperform" the same time as a value fund manager, all things being equal.

Helicopter123 said:

On the wider active v passive debate there is evidence to support both positions.

Would love to see the evidence. Genuinely. No one has all the answers but I've not seen the active argument stand up to rigorous analysis.

Helicopter123 said:

but in less efficient markets, or market sectors a good active manager does add value.

The evidence would suggest otherwise

https://thebamalliance.com/blog/2018s-active-vs-in...

The stat arb funds (one of which I linked to earlier) would hoover up inefficiencies

Helicopter123 said:

A balance in portfolios is therefore appropriate wouldn’t you agree?

Given the current evidence, unfortunately not (don't wish to sound argumentative )

Woodford was taking equity risk so comparison with an equity index tracker is appropriate.

There is plenty of evidence to support active investment. I suspect however (and again not wishing to be argumentative) that you have “chosen a side” and will only see evidence to support your view?

I use both passive and active and see the value of both.

[Derek Chevalier]

Helicopter123 said:

Derek Chevalier said:

Helicopter123 said:

I’m not comparing Woodford against his peer group, I’m pointing out his significant outperformance against UK passive funds up to 2017 when he really went rogue. That’s a 20 year time frame when he was just a money printing machine for investors.

But you're taking completely different risks to the passive investors. And it goes back to my point of being able to replicate his returns (using currently available products) by taking the same factor tilts as him (which would also have beaten a plain tracker).

There's always someone on the other side of the trade, so a growth fund manager would be unlikely to "outperform" the same time as a value fund manager, all things being equal.

Helicopter123 said:

On the wider active v passive debate there is evidence to support both positions.

Would love to see the evidence. Genuinely. No one has all the answers but I've not seen the active argument stand up to rigorous analysis.

Helicopter123 said:

but in less efficient markets, or market sectors a good active manager does add value.

The evidence would suggest otherwise

https://thebamalliance.com/blog/2018s-active-vs-in...

The stat arb funds (one of which I linked to earlier) would hoover up inefficiencies

Helicopter123 said:

A balance in portfolios is therefore appropriate wouldn’t you agree?

Given the current evidence, unfortunately not (don't wish to sound argumentative )

Woodford was taking equity risk so comparison with an equity index tracker is appropriate.

There is plenty of evidence to support active investment. I suspect however (and again not wishing to be argumentative) that you have “chosen a side” and will only see evidence to support your view?

I use both passive and active and see the value of both.

He was taking factor exposure in addition to equity risk.

Active fund Returns = market returns (adjusted for risk exposure) + returns due to factor loadings + alpha

Trackers will give market returns
Factor/smart beta will give you market + factor returns
Active fund manager will give you market + factor + alpha returns

In the "old days" if you wanted factor exposure you had to pay an active manager - these days it can be accessed for not much more than a "plain" tracker. The argument therefore is why take the risk with an active manager to potentially gain a small alpha (with the corresponding downside of manager style drift) when market and factor returns give you the vast majority of your overall returns?

If you have evidence I would love to see it - the markets have been a passion of mine (on a personal and professional level) for decades.

[DoubleSix]

Helicopter123 said:

Woodford was taking equity risk so comparison with an equity index tracker is appropriate.

There is plenty of evidence to support active investment. I suspect however (and again not wishing to be argumentative) that you have “chosen a side” and will only see evidence to support your view?

I use both passive and active and see the value of both.

Quite.

A passive core with active 'satelite' as a means of creating Alpha has been a common strategy for the last two decades I've worked in IM. Not sure why people talk as if it's one or the other.

[Derek Chevalier]

DoubleSix said:

Not sure why people talk as if it's one or the other.

For the reasons given above.

Edited by Derek Chevalier on Friday 18th October 19:17

[NickCQ]

DoubleSix said:

A passive core with active 'satelite' as a means of creating Alpha has been a common strategy for the last two decades I've worked in IM. Not sure why people talk as if it's one or the other.

Unless the active and passive funds have low correlation and diversify each other it would be better to lean into whichever strategy you think is better.
Buying, for example, Lindsell Train as well as a developed markets equity tracker is nonsensical and wouldn't maximise the Sharpe ratio.

[DoubleSix]

NickCQ said:

DoubleSix said:

A passive core with active 'satelite' as a means of creating Alpha has been a common strategy for the last two decades I've worked in IM. Not sure why people talk as if it's one or the other.

Unless the active and passive funds have low correlation and diversify each other it would be better to lean into whichever strategy you think is better.
Buying, for example, Lindsell Train as well as a developed markets equity tracker is nonsensical and wouldn't maximise the Sharpe ratio.

Clients are far more sensitive to downside than up in the retail space. Taking a bath a la Woodford would not be easily absorbed by “I was trying to maximise the sharpe ratio of your portfolio”.

The point about mixing passive and active is to acknowledge you're giving something away, but then gaining significant cost savings and reducing the potential for relationship busting underperformance.

Edited by DoubleSix on Friday 18th October 19:51

[Derek Chevalier]

NickCQ said:

DoubleSix said:

A passive core with active 'satelite' as a means of creating Alpha has been a common strategy for the last two decades I've worked in IM. Not sure why people talk as if it's one or the other.

Unless the active and passive funds have low correlation and diversify each other it would be better to lean into whichever strategy you think is better.
Buying, for example, Lindsell Train as well as a developed markets equity tracker is nonsensical and wouldn't maximise the Sharpe ratio.

One other thing to add - even if a star manager has a long run of "outperformance", it's unlikely the average investor in the fund enjoys the same returns. Peter Lynch is one of the managers to have displayed genuine alpha

https://awealthofcommonsense.com/2016/07/peter-lyn...

"During his tenure Lynch trounced the market overall and beat it in most years, racking up a 29 percent annualized return. But Lynch himself pointed out a fly in the ointment. He calculated that the average investor in his fund made only around 7 percent during the same period. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery."

[DonkeyApple]

Derek Chevalier said:

Afternoon DA. I'm in rant mode today so apologies - happy to talk offline

DonkeyApple said:

There are times in the market cycle when such funds offer excellent returns over passive but you need to be much more active in knowing and understanding when that is.

Historically, alpha (excess risk adjusted returns) was believed to be commonplace. However, looking through a factor lens at this outperformance, be it the 3 factor model or additional factors such as momentum and quality, the outperformance tends to vanish, especially once adjusted for risk.

https://en.wikipedia.org/wiki/Fama–French_th...

An active fund may appear to outperform a plain-Jane vanilla tracker, but it's possible to buy factor exposure cheaply should you want to do that - e.g.

https://www.hl.co.uk/shares/shares-search-results/...

Alpha is now beta. Factors, like the market, are unpredictable, so you can't really plan when, for example, the value premium is going to make a comeback.

DonkeyApple said:

The problem from an IFA perspective is that popular brands of the moment are easier to sell

Hopefully there are fewer advisers that sell the dream of outperformance. The States are ahead of us

DonkeyApple said:

and in fairness to the IFA they are in that nasty trap that during the periods when active management is producing the best returns their AUM will fall heavily if they aren’t at the party with everyone else.

I'm not convinced. Twice in the last month I've heard someone say - I'm happy with my returns - I've got 15% over the last 3 years. They haven't felt the need to benchmark that against alternatives (probably just as well!)

DonkeyApple said:

How do you retain a client with passive funds at a time when the client is seeing much bigger returns being made in active funds.

The only number they should care about is am I getting enough return to deliver the financial plan. Traditional advisers (majority) that don't engage in financial planning may struggle as returns are all they can be judged on.

DonkeyApple said:

but the client has much more of a here and now outlook

I don't find that they do - once a retirement plan is built (all the way to >100) they see that short term is not important.

Hi Derek, I pretty much agree. I’ll try and respond to each point but it’s remarkably tricky on a phone.

Re the added risk for seeking alpha, I absolutely agree. That’s why I posited the view that you need to be prepared to actively manage such funds and track the cycles that get a fund onto a roll but will also usually be the factor in ending the out performance.

As you know, my line of business is on the trading side and at the end of the day I’m a glorified bookmaker in many regards although I’ve always structured by business to not be exposed to the book because of the type of clients that I’ve historically worked with. Active management funds have a lot in common with trading accounts in that much of the out performance stems from right time, right place and explicitly knowing when to leave. My issue with something like Woodford is that like penny share punters who seek performance from low liquidity pools, is that you can’t actually exit if you don’t jump ship before the rocks are even in sight. That’s a kind of risk that after two decades in my line of work you really recognise as a very serious potential risk that has sunk many firms who sat carrying that type of exposure.

Re conversations with clients, I think if you structure your business to attract a client type and you manage that client type within their expectations then you will see what you have seen. The flip side to that is that you will get a different client type if you position your business a different way.

In a way this brings us back to earlier discussions about how your industry has adopted so many of the facilities of my industry and that my industry developed these facilities and services so as to encourage clients to trade more.

I think it was on another thread that I took the view that one of the primary roles of an IFA these days was to act as a buffer and a retardant to the basic human nature to chop and change looking for greener grass when in most cases it is more prudent to create a specific and achievable plan and stick with it.

Personally, I’m very boring with my investments. I’m almost all passive. It’s mainly because I don’t have time to track everything and also the nature of the business that I am in, I see no upside in taking risks with my long term security. I’m simply not a gambler by nature and am more relaxed the more simple and clean things are. I love the KISS mantra.

Conversely, I have a very old friend who is brilliant at investing for alpha. He loves doing so and follows the market very closely. We have always worked well together because he is generally bearish in view like me and is highly risk averse like me. I find the way he goes about trying to outperform the market is quite. Interesting but again that’s because it’s something that I believe in which is that if you want to take on more risk for bigger performance then it’s safer to gear up the most boring, cyclical, least volatile blue chips to get that risk than it is to go looking at exotic markets or small caps that are expensive to deal in, to hold, require vast resources to research, can be price manipulated easily and have a much higher chance of going to zero.

[JulianPH]

DonkeyApple said:

OUR VIEW ON THIS FUND

The Wealth 50 is the list of what we believe are the best funds in each sector. If a fund is not within our Wealth 50 this is not necessarily a recommendation to sell. However, if you are thinking of adding to your investments we believe Wealth 50 funds are superior alternatives. View funds on the Wealth 50 »

https://www.hl.co.uk/funds/fund-discounts,-prices-...


PERFORMANCE ANALYSIS

Performance analysis for this fund is not available.
INVESTMENT PHILOSOPHY

Investment philosophy for this fund is not available.
PROCESS AND PORTFOLIO CONSTRUCTION

Process and portfolio construction for this fund are not available.
MANAGER TRACK RECORD BASED ON HL QUANTITATIVE RESEARCH

This information is currently unavailable.

A little hard to understand the research that has gone into recommending other investments ahead of thisnone if the reasoning isn’t made public?

I think the whole point though (as obviously this information is available on other recommended funds) is that what HL are doing here is giving advice. As such investors have the right to seek compensation when there are flaws in this advice.

This is actually an area where the FCA is remarkable clear:

FCA said:

PERG 8.82

Regulated advice includes any communication with the customer which, in the particular context in which it is given, goes beyond the mere provision of information and is objectively likely to influence the customer’s decision whether or not to buy or sell.

A key to the giving of advice is that the information:

(a) is either accompanied by comment or value judgment on the relevance of that information to the customer’s investment decision; or
(b) is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision.

Advice can still be regulated advice if the person receiving the advice:

(a) is free to follow or disregard the advice; or
(b) may receive further advice from another person (such as their usual financial adviser) before making a final decision.

This could have been written to describe exactly what HL is doing. It would be interesting to see a court test this as the FCA don't seem to be applying their own rules here...

[Derek Chevalier]

DonkeyApple said:

My issue with something like Woodford is that like penny share punters who seek performance from low liquidity pools, is that you can’t actually exit if you don’t jump ship before the rocks are even in sight. That’s a kind of risk that after two decades in my line of work you really recognise as a very serious potential risk that has sunk many firms who sat carrying that type of exposure.

Apologies for the brevity in my reply - a quick turnaround between games and I have to squeeze in a client call

Liquidity risk is key - agreed. You could argue that there is a premium for accepting liquidity risk which could further erode purported alpha in some cases.

[DonkeyApple]

JulianPH said:

DonkeyApple said:

OUR VIEW ON THIS FUND

The Wealth 50 is the list of what we believe are the best funds in each sector. If a fund is not within our Wealth 50 this is not necessarily a recommendation to sell. However, if you are thinking of adding to your investments we believe Wealth 50 funds are superior alternatives. View funds on the Wealth 50 »

https://www.hl.co.uk/funds/fund-discounts,-prices-...


PERFORMANCE ANALYSIS

Performance analysis for this fund is not available.
INVESTMENT PHILOSOPHY

Investment philosophy for this fund is not available.
PROCESS AND PORTFOLIO CONSTRUCTION

Process and portfolio construction for this fund are not available.
MANAGER TRACK RECORD BASED ON HL QUANTITATIVE RESEARCH

This information is currently unavailable.

A little hard to understand the research that has gone into recommending other investments ahead of thisnone if the reasoning isn’t made public?

I think the whole point though (as obviously this information is available on other recommended funds) is that what HL are doing here is giving advice. As such investors have the right to seek compensation when there are flaws in this advice.

This is actually an area where the FCA is remarkable clear:

FCA said:

PERG 8.82

Regulated advice includes any communication with the customer which, in the particular context in which it is given, goes beyond the mere provision of information and is objectively likely to influence the customer’s decision whether or not to buy or sell.

A key to the giving of advice is that the information:

(a) is either accompanied by comment or value judgment on the relevance of that information to the customer’s investment decision; or
(b) is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision.

Advice can still be regulated advice if the person receiving the advice:

(a) is free to follow or disregard the advice; or
(b) may receive further advice from another person (such as their usual financial adviser) before making a final decision.

This could have been written to describe exactly what HL is doing. It would be interesting to see a court test this as the FCA don't seem to be applying their own rules here...

My specific FCA education on this little aspect is old but I ran a business some years back that worked around the ‘advice’ element by delivering non tailored research. The regulatory guidance at the time was very explicit that in order for something to be classified as advice we had to have carried out a specific element of suitability and then tailor the trades to the clients’ suitability. As such, if we did not carry out those suitability checks and gave generic buy/sell instructions that never considered individuals suitability then it could not legally ever been categorised as ‘advice’ but came under the guidance of research.

This may have changed in recent years but so long as the information given by HL isn’t tailored and as long as HL aren’t carrying out the suitability checks required for advice then it cannot be advice.

Just pondering this in the haze of spending the morning watch blokes in white shirts play like traditional All Blacks and chaps in yellow playing like those in white of old, is it not more plausible that there is more a TCF risk in this situation than a risk of HL being deemed to have been giving advice when nothing was tailored so can’t be deemed advice? The TCF argument being that given their massive weight and power it would be known that there would be big impacts on client behaviour due to inclusion in the Wealth 50 over exclusion?

[JulianPH]

DonkeyApple said:

My specific FCA education on this little aspect is old but I ran a business some years back that worked around the ‘advice’ element by delivering non tailored research. The regulatory guidance at the time was very explicit that in order for something to be classified as advice we had to have carried out a specific element of suitability and then tailor the trades to the clients’ suitability. As such, if we did not carry out those suitability checks and gave generic buy/sell instructions that never considered individuals suitability then it could not legally ever been categorised as ‘advice’ but came under the guidance of research.

This may have changed in recent years but so long as the information given by HL isn’t tailored and as long as HL aren’t carrying out the suitability checks required for advice then it cannot be advice.

Just pondering this in the haze of spending the morning watch blokes in white shirts play like traditional All Blacks and chaps in yellow playing like those in white of old, is it not more plausible that there is more a TCF risk in this situation than a risk of HL being deemed to have been giving advice when nothing was tailored so can’t be deemed advice? The TCF argument being that given their massive weight and power it would be known that there would be big impacts on client behaviour due to inclusion in the Wealth 50 over exclusion?

Yes, it was a fantastic game and the right result. Watching now to see if Ireland can hold up to the ABs, I hope so, but wouldn't bet on it!

The rules for retail investments have changed quite significantly over the year. It used to focus on what you had to do for it to be classed as advice whereas now what you have to not do in order that it not classed as advice.

Basically it is much tighter these days, to the extent that if a client even feels they had been given advice then it is deemed that they have been (crazy, but I have seen this happen).

I think the rules are very clear:

Regulated advice includes any communication with the customer which, in the particular context in which it is given, goes beyond the mere provision of information and is objectively likely to influence the customer’s decision whether or not to buy or sell.

A key to the giving of advice is that the information:

(a) is either accompanied by comment or value judgment on the relevance of that information to the customer’s investment decision; or
(b) is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision.


I can't see how what HL does is not classed as advice under this rule.

They go beyond the mere provision of information are likely to objectively influence whether customers buy or sell a particular fund.

A fund recommendation is certainly a value judgement too and of course the entire Wealth 50 is the product of a process of selection that requires a value judgement and is designed to influence decision making.

Ho hum!

Ireland getting destroyed already I see.

[anonymous-user]

I think this should be the Radio 4 link, https://www.bbc.co.uk/programmes/m0009jbw

[anonymous-user]

JulianPH said:

They go beyond the mere provision of information are likely to objectively influence whether customers buy or sell a particular fund.

People want "help" sifting the hundreds of funds available. The whole point of buying a fund is to avoid having to do all the homework yourself so it's pretty pointless if you have to do as much homework sifting through funds as you would have to do sifting through shares.

That is surely the whole point of IM sponsorship of this forum - not to scare customers away but to draw them in to IM funds. There certainly seems to me to be information (such as IM vs Vanguard comparison in the IM thread) which could influence whether customers buy or sell a particular fund. I don't see a problem with it - facts are facts.

I was on the motorway around midday today so switched on BBC news to catch the headlines. It was immediately followed by a MoneyBox program which opened with discussion of the Woodford situation. (It may be available on iPlayer link posted above.) Their commentator's view was much the same as mine - namely that HL customers might rightly feel let down by HL's enthusiastic promotion of Woodford but it's difficult to say that HL stepped over the line, however close to it they may have been running. Similarly Woodford is highly unlikely to have operated outside the permitted remit of the fund, however close to the edge he may have run. Inevitably people who have lost money want to find someone to blame so they can get "compensation".

IMO at the end of the day if you decide to run equity risk and choose a fund talked about in a publication which clearly states "We are not advising you to buy these funds and past performance is no guarantee" then you must live with your decisions.

As it happens, I choose to suppress what I call "manager risk" by having two (or more) funds in each category. So if I held any Woodford, I would only be taking half of the damage currently flying around.

In the case of Woodford it's regrettable that Mr & Mrs Investor just want their cash out a.s.a.p. so are making the fund a forced seller of relatively illiquid assets. A bonanza for the bottom feeders.

[Derek Chevalier]

rockin said:

There certainly seems to me to be information (such as IM vs Vanguard comparison in the IM thread) which could influence whether customers buy or sell a particular fund. I don't see a problem with it - facts are facts.

As long as people are looking at the headline returns in the context of corresponding risk levels I don't see a problem either, but I wonder how many people look beyond raw return numbers.

If one fund is showing greater returns it is likely to be taking more risk. That doesn't mean it is better or worse, just that looking in returns in isolation is meaningless.