Defensive v sit on cash?

[bitchstewie]

Interested in views on two views I run into when exploring what to do with my S&S ISA.

I'll prefix by saying the money I'm putting in is money I shouldn't need for minimum 10 years and plan on adding to for 10-20 years so I aim to be in this for the long term, and I believe right now I'm very much "accumulating".

One view is to be to have a balanced set of holdings so that in good times one part prospers and in bad times another part hopefully holds up to make up for the losses elsewhere, funds such as Troy Trojan and Ruffer get mentioned a lot and I guess it can be summed up as what's the equity allocation.

The other view is that if you're accumulating don't worry so much about balance, rather just hold back cash as that's your best diversifier because it means you can be "greedy when others are fearful" to borrow a phrase.

[JulianPH]

As you are talking about a minimum of 10 years and potentially 20 to 30 years - and assuming you already have an adequate cash 'buffer' in savings - you should really be looking at a well diversified and low cost model portfolio.

Equally you can easily afford to take a higher degree of risk/reward right now, lowing this the closer you get to wanting to access the funds.

Most Discretionary Fund Managers offer model portfolios that a far lower in cost to their DFM services and will contain various different asset classes and geographical exposure to minimise risk. These are constantly monitored and updated (in line with the 'house' view at any given point) and your portfolio is regularly rebalanced for you so nothing runs away with itself! I like the 'passive' versions.

A cheaper alternative would be to use a Vanguard fund (or selection of funds), the Lifestyle ones are popular. These are completely passive however without an investment manager.

This means they don't have the ability to stray from the remit of the fund, whereas model portfolios can take any action they like (within their risk/reward remit) to go overweight on something or avoid something else altogether.

So these are my preferred choice. Not as expensive as active fund management, not as cheap as passive trackers, but a very good middle ground where costs can still be low but an investment manager is in place to add value with asset allocation decisions (rather than stock picking).

Cheers

[bitchstewie]

Thanks Julian, for the moment I'm foregoing the "asset classes" and rather than try and balance things such as gold and bonds I'm simply keeping cash back and focussing on equities and "style" of investment where I am trying to ensure I have reasonable diversification.

[JulianPH]

bhstewie said:

Thanks Julian, for the moment I'm foregoing the "asset classes" and rather than try and balance things such as gold and bonds I'm simply keeping cash back and focussing on equities and "style" of investment where I am trying to ensure I have reasonable diversification.

Hi Stewie, no problem, you have a good time frame ahead of you for investment so equities make sense with you keeping a cash 'buffer'. diversification is obviously important but if you overdo it you could end up diluting long term returns. Try and strike a balance so your investment style can show itself over benchmark returns.

[ringram]

The cash component maybe should/can be kept in bonds or at the minimum interest bearing account. Some S&S ISA providers pay interest on cash. IMO. Short term government bonds are next best depending on interest rate. They are liquid and in panic situation are very unlikely to lose capital.

I hope you only have a minimal amount in gold. More for speculation than investment IMO.

That being said I have a fair bit with NS and I waiting for fear to hit.. I suspect more should be in bonds. But interest rates are too rubbish at present and NS and I beats short term govt bonds.

[bitchstewie]

Thank you both, I wouldn't claim to have an investment "style" but I have noticed when playing around with backtesting that the more things you add into the mix suddenly the returns start to look an awful lot like a world tracker so I completely get the point about diluting too much.

I won't be giving it all to Terry Smith but I can just about understand the approach Fundsmith and a couple of similar themed funds take, buy quality companies then do as little as possible, so for now my ongoing intention is to hold three such funds.

I already have a chunk in RCP which is an interesting one, never sure how much it's defence v attack but it is massively diluted so if i feel the need to do so I can add to that.

[JulianPH]

bhstewie said:

I won't be giving it all to Terry Smith but I can just about understand the approach Fundsmith and a couple of similar themed funds take, buy quality companies then do as little as possible, so for now my ongoing intention is to hold three such funds.

I had dinner with Terry when he launched Fundsmith and was looking for early investors. Whilst you cannot fault his performance he told me he would never, ever, invest in tech companies.

I pointed out that one of his largest holdings was Microsoft and he told me he did not consider Microsoft to be a tech company. Alarm bells rang!

He gave me an explanation that didn't quite stack up saying the Microsoft was completely different to other tech companies that had no real value, such as Facebook (which is also now in his top 10 largest holdings).

Today, tech firms represent the largest sector exposure of his entire fund - 34.3%.

As I said, his strategy works and this cannot be doubted. I was simply put off with his stance of saying he was going to avoid an entire sector whilst not actually doing this.

Obviously, I should have invested though!

[bitchstewie]

I think I trust him to know enough, the track record seems to be there pre-Fundsmith.

I don't have all my eggs in the Terry Smith basket, call it smart or cowardice but there's room for similar approaches to dilute the fund manager should he go a bit nuts after a heavy lunch

[Testaburger]

JulianPH said:

I had dinner with Terry when he launched Fundsmith and was looking for early investors. Whilst you cannot fault his performance he told me he would never, ever, invest in tech companies.

I pointed out that one of his largest holdings was Microsoft and he told me he did not consider Microsoft to be a tech company. Alarm bells rang!

He gave me an explanation that didn't quite stack up saying the Microsoft was completely different to other tech companies that had no real value, such as Facebook (which is also now in his top 10 largest holdings).

Today, tech firms represent the largest sector exposure of his entire fund - 34.3%.

As I said, his strategy works and this cannot be doubted. I was simply put off with his stance of saying he was going to avoid an entire sector whilst not actually doing this.

Obviously, I should have invested though!

Important question, Julian:

What did you have for dinner?

I'm planning on dripping into FS for a few months rather than my lifestrategy 100, due to their supposedly defensive portfolio.

I may have to pare it back, however, if he eats weird food. That would lead to trust issues!

[JulianPH]

Testaburger said:

Important question, Julian:

What did you have for dinner?

I'm planning on dripping into FS for a few months rather than my lifestrategy 100, due to their supposedly defensive portfolio.

I may have to pare it back, however, if he eats weird food. That would lead to trust issues!

I honestly can't remember! It was at Langar Hall though, which I can highly recommend!

I didn't mention this as a warning not to invest, as I said the performance speaks for itself.

I was just alarmed he said something that wasn't true and has subsequently gone against this statement significantly, removing (for me) the original attraction of the fund (i.e. not to be having major holdings in the likes of Facebook).

[bitchstewie]

Good watch (as are all the Fundsmith videos) https://youtu.be/Un9e5T0pxNI

[Derek Chevalier]

Testaburger said:

I'm planning on dripping into FS for a few months rather than my lifestrategy 100, due to their supposedly defensive portfolio.

There are some (egg head!) people that analyse where fund performance returns come from - i.e. is it genuine stock picking skills generating great returns, or can this great performance be replicated by the "tilts" that the fund manager has chose to take (e.g. growth vs value, small cap vs large). Their belief is that returns are very much driven by the latter, and can be replicated in cheaper format (if that is indeed what you want) by "tilted" factor funds. Probably best to understand what tilts FS has and why you think that will be defensive

[Testaburger]

Derek Chevalier said:

There are some (egg head!) people that analyse where fund performance returns come from - i.e. is it genuine stock picking skills generating great returns, or can this great performance be replicated by the "tilts" that the fund manager has chose to take (e.g. growth vs value, small cap vs large). Their belief is that returns are very much driven by the latter, and can be replicated in cheaper format (if that is indeed what you want) by "tilted" factor funds. Probably best to understand what tilts FS has and why you think that will be defensive

Good points, which I'll try to do some learning with.

My understanding, and I speak as a total novice, is that much of the FS portfolio is comprised of defensive stocks (Unilever and the like) which generally generate revenues in down markets too. Granted, a fair percentage is now in tech - presumably because it was a small share but has outperformed and the fund hasn't been rebalanced.

Of course, FS in its current form hasn't been around in a down market, so nobody has seen his approach or results in such an environment.

I'd like to gain more knowledge on the subject, but quite honestly, I know that there is nigh-on zero chance of outperforming an established manager with a good record..

[bitchstewie]

Testaburger said:

Good points, which I'll try to do some learning with.

My understanding, and I speak as a total novice, is that much of the FS portfolio is comprised of defensive stocks (Unilever and the like) which generally generate revenues in down markets too. Granted, a fair percentage is now in tech - presumably because it was a small share but has outperformed and the fund hasn't been rebalanced.

Of course, FS in its current form hasn't been around in a down market, so nobody has seen his approach or results in such an environment.

I'd like to gain more knowledge on the subject, but quite honestly, I know that there is nigh-on zero chance of outperforming an established manager with a good record..

I listen to a lot of Terry Smith stuff as I try to expand my own knowledge.

You're right nobody knows how Fundsmith and similar will perform in a bear market but I think the basic logic is people will keep on cleaning their teeth whilst you might choose to run your car for another year or not buy that shiny new Samsung TV you want.

In Terry's case (like I said I have some held there but only an allocation) he has been around the block, there's a good video on Youtube around the Tullet Prebon pension fund - I think some people (HL?) make it sound as if he just woke up one day aged 60 and setup Fundsmith

[Testaburger]

bhstewie said:

I listen to a lot of Terry Smith stuff as I try to expand my own knowledge.

You're right nobody knows how Fundsmith and similar will perform in a bear market but I think the basic logic is people will keep on cleaning their teeth whilst you might choose to run your car for another year or not buy that shiny new Samsung TV you want.

In Terry's case (like I said I have some held there but only an allocation) he has been around the block, there's a good video on Youtube around the Tullet Prebon pension fund - I think some people (HL?) make it sound as if he just woke up one day aged 60 and setup Fundsmith

Quite - my reasons for joining the FS crowd, too.

That said, the fact that I've invested in it ought to be a signal for you to get out!

[JulianPH]

Testaburger said:

Important question, Julian:

What did you have for dinner?

I'm planning on dripping into FS for a few months rather than my lifestrategy 100, due to their supposedly defensive portfolio.

I may have to pare it back, however, if he eats weird food. That would lead to trust issues!

This is absolutely ridiculous - and they do say you never forget anything, just memory retrieval is the difficult thing - but your question must of stuck as completely out of the blue it just came to the front of my mind!

Twice baked cheese soufflé to start, venison for main and cheese after!!!

I think you are safe to fully invest!

[Testaburger]

JulianPH said:

This is absolutely ridiculous - and they do say you never forget anything, just memory retrieval is the difficult thing - but your question must of stuck as completely out of the blue it just came to the front of my mind!

Twice baked cheese soufflé to start, venison for main and cheese after!!!

I think you are safe to fully invest!

Considering this revelation, along with some minor points such as asset allocation and track record, this seems like a solid bet.