Risky to invest heavily in 1 fund?
Discussion
WindyCommon said:
Fred, without picking on your well diversified and interesting portfolio I'd like to use one of your holdings to illustrate a point.
According to FE Trustnet the L&G UK 100 Index Fund C Class has returned 20.7% over 3 years vs an index return of 21.9% and a sector average of 27.0%. It is ranked #301 in a peer group of 540 funds that includes 58 passives.
The share class that you own is a "special" for HL with its OCF discounted from 0.10% to 0.06%. For the privilege of accessing this discount you are paying HL 0.45%, roughly 0.20% higher than elsewhere.
Whilst a fund OCF of 0.06% is certainly cheap, it is not so clear that it represents good value!
Neil Veitch of SVM (a well regarded fund manager) said recently: "In some respects, there is an element of investors being ‘penny-wise, pound-foolish' with this focus on OCFs, but it is not going to go away because of the way the market is structured. There is an ever decreasing value chain within the asset management industry and everyone wants a piece. But there is a disproportionate emphasis on the fund management groups compared to other parts of the value chain. Ultimately, price is what you pay, but value is what you get. This emphasis on price in the industry instead of value is encouraging sub-optimal outcomes."
Whilst I use passive funds at times myself I am somewhat dismissive of the religion of low costs that has been grown around them. The passive industry has marketed itself well on the premise that active managers frequently fail to match index returns. But its dirty secret is that passive funds generally fail the same test themselves. In this example, only 7 of the 58 UK All Companies sector passive funds have matched the index return over the last 3 years.
I am not trying to argue that active is better than passive, only to observe that thoughtful investors need to look deeper and more sceptically at the self-serving claims of the passive industry.
Why is this unexpected, given that tracking an index inevitably involves trading costs? Surely the key issue is by how much a passive fund has underperformed an index - it should be very little!According to FE Trustnet the L&G UK 100 Index Fund C Class has returned 20.7% over 3 years vs an index return of 21.9% and a sector average of 27.0%. It is ranked #301 in a peer group of 540 funds that includes 58 passives.
The share class that you own is a "special" for HL with its OCF discounted from 0.10% to 0.06%. For the privilege of accessing this discount you are paying HL 0.45%, roughly 0.20% higher than elsewhere.
Whilst a fund OCF of 0.06% is certainly cheap, it is not so clear that it represents good value!
Neil Veitch of SVM (a well regarded fund manager) said recently: "In some respects, there is an element of investors being ‘penny-wise, pound-foolish' with this focus on OCFs, but it is not going to go away because of the way the market is structured. There is an ever decreasing value chain within the asset management industry and everyone wants a piece. But there is a disproportionate emphasis on the fund management groups compared to other parts of the value chain. Ultimately, price is what you pay, but value is what you get. This emphasis on price in the industry instead of value is encouraging sub-optimal outcomes."
Whilst I use passive funds at times myself I am somewhat dismissive of the religion of low costs that has been grown around them. The passive industry has marketed itself well on the premise that active managers frequently fail to match index returns. But its dirty secret is that passive funds generally fail the same test themselves. In this example, only 7 of the 58 UK All Companies sector passive funds have matched the index return over the last 3 years.
I am not trying to argue that active is better than passive, only to observe that thoughtful investors need to look deeper and more sceptically at the self-serving claims of the passive industry.
Edited by WindyCommon on Tuesday 16th May 22:30
WindyCommon said:
Fred, without picking on your well diversified and interesting portfolio I'd like to use one of your holdings to illustrate a point.
According to FE Trustnet the L&G UK 100 Index Fund C Class has returned 20.7% over 3 years vs an index return of 21.9% and a sector average of 27.0%. It is ranked #301 in a peer group of 540 funds that includes 58 passives.
The share class that you own is a "special" for HL with its OCF discounted from 0.10% to 0.06%. For the privilege of accessing this discount you are paying HL 0.45%, roughly 0.20% higher than elsewhere.
Whilst a fund OCF of 0.06% is certainly cheap, it is not so clear that it represents good value!
Neil Veitch of SVM (a well regarded fund manager) said recently: "In some respects, there is an element of investors being ‘penny-wise, pound-foolish' with this focus on OCFs, but it is not going to go away because of the way the market is structured. There is an ever decreasing value chain within the asset management industry and everyone wants a piece. But there is a disproportionate emphasis on the fund management groups compared to other parts of the value chain. Ultimately, price is what you pay, but value is what you get. This emphasis on price in the industry instead of value is encouraging sub-optimal outcomes."
Whilst I use passive funds at times myself I am somewhat dismissive of the religion of low costs that has been grown around them. The passive industry has marketed itself well on the premise that active managers frequently fail to match index returns. But its dirty secret is that passive funds generally fail the same test themselves. In this example, only 7 of the 58 UK All Companies sector passive funds have matched the index return over the last 3 years.
I am not trying to argue that active is better than passive, only to observe that thoughtful investors need to look deeper and more sceptically at the self-serving claims of the passive industry.
Yes,I hear what you are saying and agree, I'm not won over by the passive argument at all, even when they do represent great value, I am aware I have not picked brilliantly with some of my passive funds. I have been thinking about chopping that in for the LUK2 ETF or some other passive tracking ETF or either the IIT ot TMPL investment trust...According to FE Trustnet the L&G UK 100 Index Fund C Class has returned 20.7% over 3 years vs an index return of 21.9% and a sector average of 27.0%. It is ranked #301 in a peer group of 540 funds that includes 58 passives.
The share class that you own is a "special" for HL with its OCF discounted from 0.10% to 0.06%. For the privilege of accessing this discount you are paying HL 0.45%, roughly 0.20% higher than elsewhere.
Whilst a fund OCF of 0.06% is certainly cheap, it is not so clear that it represents good value!
Neil Veitch of SVM (a well regarded fund manager) said recently: "In some respects, there is an element of investors being ‘penny-wise, pound-foolish' with this focus on OCFs, but it is not going to go away because of the way the market is structured. There is an ever decreasing value chain within the asset management industry and everyone wants a piece. But there is a disproportionate emphasis on the fund management groups compared to other parts of the value chain. Ultimately, price is what you pay, but value is what you get. This emphasis on price in the industry instead of value is encouraging sub-optimal outcomes."
Whilst I use passive funds at times myself I am somewhat dismissive of the religion of low costs that has been grown around them. The passive industry has marketed itself well on the premise that active managers frequently fail to match index returns. But its dirty secret is that passive funds generally fail the same test themselves. In this example, only 7 of the 58 UK All Companies sector passive funds have matched the index return over the last 3 years.
I am not trying to argue that active is better than passive, only to observe that thoughtful investors need to look deeper and more sceptically at the self-serving claims of the passive industry.
Edited by WindyCommon on Tuesday 16th May 22:30
I am also aware that I have to stop tinkering with the thing though and just give it some time to brew.
I'm also male, approaching middle aged and northern so the thought of paying for professional help goes somewhat against the grain
WindyCommon said:
According to FE Trustnet the L&G UK 100 Index Fund C Class has returned 20.7% over 3 years vs an index return of 21.9% and a sector average of 27.0%. It is ranked #301 in a peer group of 540 funds that includes 58 passives.
Can you just elaborate on the "sector average" bit? How does that differ from the index? Genuine question, I'd have said they're the same if you'd asked me. I can see there are some costs which explains the difference between performance and the index return. sidicks said:
Why is this unexpected, given that tracking an index inevitably involves trading costs? Surely the key issue is by how much a passive fund has underperformed an index - it should be very little!
Nothing unexpected, just an observation that many investors fail to join the dots. "Active managers don't beat index returns; you're better off buying cheap passives" is a non sequitur, not the nugget of wisdom it is often presented as.RichS said:
Can you just elaborate on the "sector average" bit? How does that differ from the index? Genuine question, I'd have said they're the same if you'd asked me. I can see there are some costs which explains the difference between performance and the index return.
The key point is that the average fund return (whether defined as the return of the median fund or the average of all fund returns) can and will differ from the index return. This is because the market is not only made up of investment funds. Other buyers of securities include corporations themselves (through buybacks, acquisitions etc.), private investors, sovereign wealth funds etc.WindyCommon said:
The key point is that the average fund return (whether defined as the return of the median fund or the average of all fund returns) can and will differ from the index return. This is because the market is not only made up of investment funds. Other buyers of securities include corporations themselves (through buybacks, acquisitions etc.), private investors, sovereign wealth funds etc.
Ok thank you. But given you never know which fund (or indeed shares) you should have bought to gain the above-average returns in any one sector until after the event, isn't the average (less costs) about all you can hope for? Do you have any thoughts on the amount of exposure to equities is sensible? I've read 100- your age, and now it's seeming more prevalent to go for 120-your age because people will need to remain exposed to equities even after retirement.
RichS said:
Ok thank you. But given you never know which fund (or indeed shares) you should have bought to gain the above-average returns in any one sector until after the event, isn't the average (less costs) about all you can hope for?
Well, average (less costs) is all an index fund can deliver!In some ways this a question of outlook. Do you have children? If so, do you simply accept that being average in every way is all you can hope for for them? Why bother sending them to school and encouraging them to learn and compete then? For me the passive mantra is intrinsically defeatist. It is a denial of aspiration and of the reality that above average outcomes are achievable. As Wayne Gretsky put it - "You miss 100% of the shots you don't take".
I have been fortunate to work alongside some great investors. They have skills that cannot be reduced to a process or algorithm. They have an intuitive understanding of markets, companies and their portfolios that they themselves find hard to explain. We readily accept that some people have extraordinary musical/sporting/management talent; why not investment talent?
The existence of investment management talent is in no way disproved by statistics referencing averages. These statistics are simply valueless truisms. Of course the returns of the average fund are unremarkable. But there are in reality many very well run active funds that have delivered real returns over extended time periods. It is far from impossible to find these, many of them are regularly mentioned here. Of course there is no guarantee that ALL of them will continue to deliver such returns, but that is why we build diversified portfolios holding multiple funds.
A more fundamental question is why indices have apparently become so important. When we talk about index returns we can fail to spot that an index portfolio is often far from a sensible allocation of capital. Looking at the fund that prompted this discussion, the FTSE100 index is heavily weighted toward banks, oil & gas companies and miners. I'm not sure that that is how I'd invest my money today.
Ultimately, we are all seeking absolute real returns. We want to get back more than we invest; we want to protect and grow our purchasing power over the long term. It is not immediately clear to me that a commitment to passive investment in indices is the way to achieve this. Actively managed funds that are index agnostic (i.e. not constrained by an arbitrary index construction) can and have delivered strong returns for investors over extended timeframes. Blending such funds in a portfolio reduces the risk of single manager/strategy failures, which we must always accept are possible. Where such funds are hard to find but exposure is still desired, passives make good sense.
RichS said:
Do you have any thoughts on the amount of exposure to equities is sensible? I've read 100- your age, and now it's seeming more prevalent to go for 120-your age because people will need to remain exposed to equities even after retirement.
I think that any formula of this nature is useless as it entirely ignores valuation. If the principal alternative to equities is bonds, it's good to be aware that bond yields are still at all time lows. This (from Macrotrends) is the US 10 year:
I find it hard to believe that rates will stay as low as they are today (US rates are already rising, sort of...) so there will be a far better time to buy bonds. At present I don't believe that they are capable of performing the role in portfolios envisaged by simple allocation methodologies like the one referenced. As a result I don't hold any. In fact I own some funds that have net short exposures.
If then we are to allocate more to equities than bonds we would be aware that the attractiveness of equities is not evenly distributed. US large cap presently trades at valuation levels implying expected 10yr+ real returns that are half those of Developed Europe for example. My view is that US large cap equities do not represent good value at this point; again there will be a better time to buy exposure.
Here's a chart from Research Affiliates that frames this well. Note the -ve expected return for US bonds...
Sorry (all!) for the overly long post. TLDR version:
- Passive investment and the usefulness of indices may both be heavily oversold
- Carefully diversified portfolios that include actively managed index agnostic funds can deliver the real returns that investors seek
- Don't make asset allocation decisions without considering valuation
Edited by WindyCommon on Wednesday 17th May 11:09
Would be interested in learning which platforms you are all using.
I see there is a thread on Vanguard now having its own, but of course only offering its own funds, so as much as their Lifestrategy range appears to be popular (even noted on this thread), I am thinking I will still need a different top-level SIPP provider CSD or AJ Bell perhaps) so as to have access to not just that, but other funds over time...
I see there is a thread on Vanguard now having its own, but of course only offering its own funds, so as much as their Lifestrategy range appears to be popular (even noted on this thread), I am thinking I will still need a different top-level SIPP provider CSD or AJ Bell perhaps) so as to have access to not just that, but other funds over time...
Croutons said:
^ Me or the OP?
I'm giving Richard Branson 1% for some sort of ftse all share stakeholder pension, which needs to change!
Sorry mate, you.I'm giving Richard Branson 1% for some sort of ftse all share stakeholder pension, which needs to change!
And yes, you would probably be advised to at least consider reviewing that fund. As trackers go, not only is it incoherently expensive, its tracking error is also off the wall. Sorry, but at least you have already identified the need.
RichS said:
I have a vaguely-not-very-scientific asset allocation:
20% bond funds (I'm 43 so this should be higher based on 100-your age, but I am willing to take more risk on equities, plus more FAs these days are saying 120-your age is the right allocation for equities)
15% UK funds (split between Fundsmith and Schroder small caps)
10% European fund ex UK (HSBC tracker)
30% US (Blackrock)
6% Japan (Legg Mason)
8% Emerging Markets (3 different funds)
8% India (Jupiter) (yes I know it's an emerging market too but I think it's worth a punt)
It would be remiss of me not to point out that Fundsmith is a global fund (with 63.9% in the US). You might want to rethink your allocation!20% bond funds (I'm 43 so this should be higher based on 100-your age, but I am willing to take more risk on equities, plus more FAs these days are saying 120-your age is the right allocation for equities)
15% UK funds (split between Fundsmith and Schroder small caps)
10% European fund ex UK (HSBC tracker)
30% US (Blackrock)
6% Japan (Legg Mason)
8% Emerging Markets (3 different funds)
8% India (Jupiter) (yes I know it's an emerging market too but I think it's worth a punt)
Risky to invest in one fund....it depends on the fund and your purpose.
If you are already where you want to be, then a large index fund or balanced fund could be OK.
Large fund, because of economies of scale. Fund companies aren't charities, they need to make a profit and a small fund can't compete.
If like most, and are still trying to amass your personal fortune it may pay to "go out and get it" and not rely on a single bourse index..
I am diversified albeit with one fund family, I own a lump of a US allocation fund as my core, currently at a low of 23% usually around 45%.
I nearly always hold a majority of these funds but I adjust the percentages for different regions and sectors.
While the Dollar was strong I increased my European and Asian funds, as the Dollar weakened (the Euro moved from 1.05 to 1.11) giving me a decent windfall to go along with the modest European recovery and the Asian funds increases.
The S & P is up 7.4% YTD 5/24/17, my funds are up just over 10% despite have 11% of sleeping cash and some contrarian holdings.
Below is the Morningstar portfolio manager with values blanked showing diversification.
(the AUG 14 is just the name of portfolio as I have another one called Car Fund, sadly much smaller)
If you are already where you want to be, then a large index fund or balanced fund could be OK.
Large fund, because of economies of scale. Fund companies aren't charities, they need to make a profit and a small fund can't compete.
If like most, and are still trying to amass your personal fortune it may pay to "go out and get it" and not rely on a single bourse index..
I am diversified albeit with one fund family, I own a lump of a US allocation fund as my core, currently at a low of 23% usually around 45%.
I nearly always hold a majority of these funds but I adjust the percentages for different regions and sectors.
While the Dollar was strong I increased my European and Asian funds, as the Dollar weakened (the Euro moved from 1.05 to 1.11) giving me a decent windfall to go along with the modest European recovery and the Asian funds increases.
The S & P is up 7.4% YTD 5/24/17, my funds are up just over 10% despite have 11% of sleeping cash and some contrarian holdings.
Below is the Morningstar portfolio manager with values blanked showing diversification.
(the AUG 14 is just the name of portfolio as I have another one called Car Fund, sadly much smaller)
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