The Lemon Fool

In sterling terms, what a stonking year for equities. The best for developed markets since 1999.

Various total returns in GBP, net of withholding taxes:



I have not yet been able to find a World index return including EM, but as global EM outperformed global developed, this would have been even better.

My own allocation suffered, principally because I was underweight US. My allocation is US 40%, Europe ex.UK 20%, UK 10%, Japan 10%, EM 10%, Pacific 7%, Canada 3%. I have tilts to small cap and value which complicates things, but ignoring those my mix would have delivered 24.23%.

Vanguard Life Strategy fund performance (retail accumulation units):



LS 100 underperformed the World index because of its overweight position in UK stocks (25% UK/75% World ex. UK). That was still better than my own allocation!

Does anyone know whether Vanguard currency hedge the bonds in the LS funds? If so that would also have dragged performance of LS 20-80 this year.

FredBloggs wrote:Food for thought. I have never bought into the thinking that you can't beat the index, but it seems as 2016 was difficult to call for most of us, then index funds were a good place to be.

Not the FTSE 250 though

Though of course 2015 was (relatively) much better. Swings and roundabouts.

Scott.

hiriskpaul wrote:In sterling terms, what a stonking year for equities. The best for developed markets since 1999.

Various total returns in GBP, net of withholding taxes:



I have not yet been able to find a World index return including EM, but as global EM outperformed global developed, this would have been even better.

My own allocation suffered, principally because I was underweight US. My allocation is US 40%, Europe ex.UK 20%, UK 10%, Japan 10%, EM 10%, Pacific 7%, Canada 3%. I have tilts to small cap and value which complicates things, but ignoring those my mix would have delivered 24.23%.

Do you have any passive Hedges (Bond ETFs etc) for your passive Equity Allocation or is your passive portfolio 100% Equity?

TimR

FredBloggs wrote:Food for thought. I have never bought into the thinking that you can't beat the index, but it seems as 2016 was difficult to call for most of us, then index funds were a good place to be.

It is not hard to beat the index (before costs). In fact historically, if you randomly picked a portfolio of say 20 stocks from a cap weighted index and looked at the result a year later, it is more likely than not that you would have beaten the index. There is of course a huge spread of returns across such randomly generated portfolios, but the average portfolio return is also likely to have been better than that of the index. This seemingly impossible outcome is down to additional risk factors in the market. Not all stocks carry the same risk and on average the more risky small cap and low value socks have outperformed large cap and high value stocks. When a portfolio is built randomly it so happens that these random portfolios are likely to be overweight small cap and value stocks compared to the index and so on average they outperform.

Despite it being relatively straightforward to beat the index, actively managed collectives (UTs, ITs, etc.) fail to consistently beat the index and over the long haul the vast majority of them fail to keep up*. Once you allow for risk, the situation is even more dire and the long term performance of most actively managed collectives is quite appalling. Why are fund managers so rubbish? The answer is that they are not rubbish, but are hamstrung by the costs incurred in running their funds.

The average returns received by retail investors are even worse than the performance of the funds/stocks they invest in. This is because the average retail investor has a habit of buying high and selling low, largely from rearview mirror investing strategies and not paying sufficient attention to costs.


*To be fair, trackers fail to consistently beat the index as well, but over the long term they deliver better returns than most actively managed funds, principally due to their lower running costs.

TimR wrote:
Do you have any passive Hedges (Bond ETFs etc) for your passive Equity Allocation or is your passive portfolio 100% Equity?

TimR

No. I actively manage my FI/cash investments, although I have invested in various bond trackers from time to time. The only one I hold now is the Vanguard Long Duration US Treasury ETF (VGLT) and I think I will probably sell that later this year.

My passive equity portfolio is about 25% of my portfolio excluding property. 50% is in an actively managed FI/cash portfolio, about 20% is cash for option trading, leaving about 5% or so in various odds and ends such as VCTs, US REITS and a few individual shares I have not got round to getting rid of. Even my 25% equity portfolio is not as passive as I would like it to be, with a few ITs in it for legacy and strategic reasons. My biggest non-passive holding is in Templeton Emerging Markets, but that is mainly because of the CGT I would have to pay to reduce my position. I am also happy to hold at present, speculating on the discount to NAV reducing.

hiriskpaul wrote:

TimR wrote:
Do you have any passive Hedges (Bond ETFs etc) for your passive Equity Allocation or is your passive portfolio 100% Equity?

TimR

No. I actively manage my FI/cash investments, although I have invested in various bond trackers from time to time. The only one I hold now is the Vanguard Long Duration US Treasury ETF (VGLT) and I think I will probably sell that later this year.

My passive equity portfolio is about 25% of my portfolio excluding property. 50% is in an actively managed FI/cash portfolio, about 20% is cash for option trading, leaving about 5% or so in various odds and ends such as VCTs, US REITS and a few individual shares I have not got round to getting rid of. Even my 25% equity portfolio is not as passive as I would like it to be, with a few ITs in it for legacy and strategic reasons. My biggest non-passive holding is in Templeton Emerging Markets, but that is mainly because of the CGT I would have to pay to reduce my position. I am also happy to hold at present, speculating on the discount to NAV reducing.

Do you think actively managed trusts (eg NCYF, IPE CMHY) are of value on the Fixed Income side.

I have limited options to hold cash on my ISA platform (Best Invest - 0 % interest for cash) my only other low risk options with a return are short dated Gov Bond ETF (GLTS) or ultrashort Corp Bond ETF (ERNS) or transfer the cash out of the platform to a bank account, Cash ISA or the likes of Ratesetter ?

TimR wrote:

hiriskpaul wrote:

TimR wrote:
Do you have any passive Hedges (Bond ETFs etc) for your passive Equity Allocation or is your passive portfolio 100% Equity?

TimR

No. I actively manage my FI/cash investments, although I have invested in various bond trackers from time to time. The only one I hold now is the Vanguard Long Duration US Treasury ETF (VGLT) and I think I will probably sell that later this year.

My passive equity portfolio is about 25% of my portfolio excluding property. 50% is in an actively managed FI/cash portfolio, about 20% is cash for option trading, leaving about 5% or so in various odds and ends such as VCTs, US REITS and a few individual shares I have not got round to getting rid of. Even my 25% equity portfolio is not as passive as I would like it to be, with a few ITs in it for legacy and strategic reasons. My biggest non-passive holding is in Templeton Emerging Markets, but that is mainly because of the CGT I would have to pay to reduce my position. I am also happy to hold at present, speculating on the discount to NAV reducing.

Do you think actively managed trusts (eg NCYF, IPE CMHY) are of value on the Fixed Income side.

I have limited options to hold cash on my ISA platform (Best Invest - 0 % interest for cash) my only other low risk options with a return are short dated Gov Bond ETF (GLTS) or ultrashort Corp Bond ETF (ERNS) or transfer the cash out of the platform to a bank account, Cash ISA or the likes of Ratesetter ?

If you are asking whether those trusts will act as portfolio stabilisers in the way fixed income stocks are expected to, the short answer is no. They contain a heavy weighting in high yield bonds and movements of high yield bond portfolios are highly correlated to equities. You might find it interesting to look back to calendar year 2008 to see what returns were like that year compared to equities, GBP denominated investment grade bonds, gilts and US treasuries:



NCYF did better than UK equities, the other 2 much worse. On the whole though you would have been better off in a world tracker than any of these ITs. Investment grade corporates did better than equities, but you would still have lost money on them. When there are major problems, there is a flight to safety and that means top quality government bonds. Gilts were good, US Treasuries even better, but a lot of the outperformance of US Treasuries that year was due to a collapse of the pound. Cash of course would have also have delivered a positive return in 2008.

In less severe times, high yield bonds can be good diversifiers to equity portfolios. My personal opinion though is that these ITs carry too much risk for the likely returns and charge too much. Possibly good to buy after the next market meltdown if discounts to NAV significantly widen. Otherwise I would advise against investing.

I have added the FTSE World Market returns to the table. As expected, performance was better than just developed world. I have also added a column to show the USD returns. It all looks far less rosy once the 16% decline in GBP/USD is taken into consideration and $ investors actually lost money in the UK and Europe:

hiriskpaul wrote:

TimR wrote:

hiriskpaul wrote:

If you are asking whether those trusts will act as portfolio stabilisers in the way fixed income stocks are expected to, the short answer is no. They contain a heavy weighting in high yield bonds and movements of high yield bond portfolios are highly correlated to equities. You might find it interesting to look back to calendar year 2008 to see what returns were like that year compared to equities, GBP denominated investment grade bonds, gilts and US treasuries:



NCYF did better than UK equities, the other 2 much worse. On the whole though you would have been better off in a world tracker than any of these ITs. Investment grade corporates did better than equities, but you would still have lost money on them. When there are major problems, there is a flight to safety and that means top quality government bonds. Gilts were good, US Treasuries even better, but a lot of the outperformance of US Treasuries that year was due to a collapse of the pound. Cash of course would have also have delivered a positive return in 2008. .

Thanks for the comments. I hold these HY Investment Trusts as a legacy from a previous IT Portfolio I held which was loosely based on some of John Barron's picks. I am now well on the way to building and 'All world passive portfolio' using Vanguard Equity ETFs. Now I realise these legacy HY ITs are not helping as portfolio stabilisers for this new 'All world passive ETF portfolio' . However I do have a Cash ISA (in addition to emergency savings) as a portfolio stabiliser for part of the 'All world passive equity ETF portfolio' but I would like to add some more portfolio stabilisers to reduce the risk a bit further.

What do you use for portfolio stabilisers ?

TimR wrote:

hiriskpaul wrote:

TimR wrote:

Thanks for the comments. I hold these HY Investment Trusts as a legacy from a previous IT Portfolio I held which was loosely based on some of John Barron's picks. I am now well on the way to building and 'All world passive portfolio' using Vanguard Equity ETFs. Now I realise these legacy HY ITs are not helping as portfolio stabilisers for this new 'All world passive ETF portfolio' . However I do have a Cash ISA (in addition to emergency savings) as a portfolio stabiliser for part of the 'All world passive equity ETF portfolio' but I would like to add some more portfolio stabilisers to reduce the risk a bit further.

What do you use for portfolio stabilisers ?

As I only hold 25% in equities I don't need too much in the way of stabilisers. I hold cash, though not in ISAs, and a variety of fixed income products, mostly corporate bonds and preference shares. Maturity ranges from 9 months to 40 years, plus quite a few undated prefs. Highest quality is a US Treasuries ETF I hold in my SIPP. Lowest right now is probably Co-op Bank 11% 2023 Tier 2. Much of the FI paper I hold is issued by UK Banks/Building Societies and will do very badly if we get a repeat of the banking crisis, but I do have a few holdings elsewhere such as Balfour Beatty prefs, maturing in 2020 and a long dated Tesco bond.

I've been looking to invest a bit more in Global ETFs but as pound has dropped over the week this has made foreign ETFs assets more expensive now Perhaps I should wait or look at UK fixed income instead or what do other fools think hedged ETFs now the pound is so low.


Stan