Spotting turning points

[Avantegarde]

I have had a portfolio of investment trusts for about eight years now. Looking back, it is interesting to see how many once-popular (and quite successful) trusts I have sold off in these years: Aberdeen Asian Income, BMO Global Smaller Companies, City of London, Henderson Far East Income, Henderson International Income, Merchants, Murray International, North American Income, Witan Pacific. Some I sold because they plainly were doing no better than a relevant and cheaper index tracker. Others were simply giving poor total returns compared to other similar trusts fishing in the same pond. Seven have lost money (on a TR basis) in the past three years, one has made hardly any money and only one (Witan Pacific) has made investors a noticeable profit. Looking back, what I found difficult was judging the precise point at which it was clear that a trust's "downturn" was happening. I find it easy to make that judgement with a lot of hindsight, for instance by comparing the 10-, 5- and 3-year total returns (from the AIC website) with those of their peers or with the returns of relevant trackers. But I'm sure I could have come to the same decisions (and all the decisions were justified in my view) if I had been able to keep a closer eye on the trusts in question. I feel that my selling decisions could, in retrospect, have been made at least a year earlier than was actually the case. My questions are this: what statistics, exactly, should I have been watching to detect that a trust was going off the boil and was a candidate for replacement? Are there any published stats for the momentum (up or down) in a trust's total returns? Surely it must have been possible to detect a tipping point at which one year's poor performance was becoming a trend?

[Dod101]

Well. If we knew that.......... I doubt that there is a way to understand the turning point. |f only........

Dod

[DavidM13]

Maybe instead of looking at 1y performance if you look at discrete 1m performance then you can draw conclusions more quickly and have more observations to work with. Each observation will have less weight of course and since these investments really should be held with a medium to long term view this method could take you off trusts that go on to provide stellar performances.

[Bagger46]

I agree with Dod, if only it was that simple.

Generally alarm bells are ringing, and I think the OP is a perfect example of what not to do with ITs in particular. The advice from our AIC friend looks strange to me too.

The OP needs to urgently review his investing philosophy/approach imho.

Some of these ITs look like really good ones for holding long term which over the last few years have been begging to be topped up. For example my wife holds HFEL, and her XIRR on this is more than satisfactory.

No time to say more as I will be out all day. But I might come back to flesh this up about our approach to ITs, which make up around 39% of our investing wealth.

Bagger

[DavidM13]

I agree with Dod, if only it was that simple.

Generally alarm bells are ringing, and I think the OP is a perfect example of what not to do with ITs in particular. The advice from our AIC friend looks strange to me too.

The OP needs to urgently review his investing philosophy/approach imho.

Some of these ITs look like really good ones for holding long term which over the last few years have been begging to be topped up. For example my wife holds HFEL, and her XIRR on this is more than satisfactory.

No time to say more as I will be out all day. But I might come back to flesh this up about our approach to ITs, which make up around 39% of our investing wealth.

Bagger

I wouldnt do it!!!! The guy was after ideas of how one can spot trends quicker. Logically the way to do that would be to look at shorter periods! I dont advocate it and wouldnt do it I just said that is an option. Sorry, it certainly wasn't "advice" it was just a logical way of increasing number of observations, each one clearly carrying far less weight. As I also suggested, it would take out good players because periods too short.

[Nocton]

Yes, I agree with Bagger. For the last 10 years I have held 10 ITs covering a good spectrum of interest. Most are generalist, including SMT, Witan and F&C, just two are specific - for the US and Europe. Since I am paying the managers to manage I leave them to do it, even though I would not always agree with their decisions. Some years some do better or worse than others, but over the 10 years I have only changed one due to under-performance/failing to deliver what was promised. And the overall return has been at least 10%pa, with re-investing the income on only one IT - Aberdeen Diversified Income & Growth.

[dspp]

I have had a portfolio of investment trusts for about eight years now. Looking back, it is interesting to see how many once-popular (and quite successful) trusts I have sold off in these years: Aberdeen Asian Income, BMO Global Smaller Companies, City of London, Henderson Far East Income, Henderson International Income, Merchants, Murray International, North American Income, Witan Pacific. Some I sold because they plainly were doing no better than a relevant and cheaper index tracker. Others were simply giving poor total returns compared to other similar trusts fishing in the same pond. Seven have lost money (on a TR basis) in the past three years, one has made hardly any money and only one (Witan Pacific) has made investors a noticeable profit. Looking back, what I found difficult was judging the precise point at which it was clear that a trust's "downturn" was happening. I find it easy to make that judgement with a lot of hindsight, for instance by comparing the 10-, 5- and 3-year total returns (from the AIC website) with those of their peers or with the returns of relevant trackers. But I'm sure I could have come to the same decisions (and all the decisions were justified in my view) if I had been able to keep a closer eye on the trusts in question. I feel that my selling decisions could, in retrospect, have been made at least a year earlier than was actually the case. My questions are this: what statistics, exactly, should I have been watching to detect that a trust was going off the boil and was a candidate for replacement? Are there any published stats for the momentum (up or down) in a trust's total returns? Surely it must have been possible to detect a tipping point at which one year's poor performance was becoming a trend?

I think you are asking exactly the right question, but the answer is likely to be that the individual investor who a) does not want to have to keep too close an eye on performance, but b) also does not want to hold any IT through the down-cycles to full-cycle because it may turn out to not be a cycle at all, simply a bad'n gone wrong, is going to be disappointed.

To really know what is going on inside an IT you would need to track the constituents at a fairly reasonable level of granularity and form your own view in parallel to the market. Looking at it once per year (or whatever) is unlikely to be sufficiently frequent. So this creates both a granularity and a frequency problem. As an example if that Bailie Gifford IT that holds a wodge of TSLA were to be impacted by some overnight decline in TSLA share price then it would not be good enough to wait until the IT reports its results in the rear view mirror. Yet running tracker portfolios of the IT constituents, and inspecting them closely and frequently, and understanding those constituents and forming a view, is imho unrealistic. At least it would be for me as I have a day job, and a busy life, and I am not in the swim of the City. Since the downwards corrections tend to be much sharper and more savage than the gradual uplifts I would be at risk of selling off the IT-du-jour just after it has absorbed most of its markdown.

It is thinking like this that has led to my personal solution which is to load up on the big diversified index trackers, i.e. buy the market. I then add a layer of individual stuff on top where I have the hubris to think I can follow it and have an alpha-edge. Regrettably I am wrong as often as I am right in that respect, but at least I try to protect myself from my own worst efforts.

By the way I could make very similar criticisms of any equity-based portfolio such as (but not only) HYP-flavoured ones. Again, in order to really know what is going on inside any significantly large and complex company, one has to look frequently and finely and form a view. Doing it in the rear view mirror after the correction has been absorbed into the market price, too often leads to tears. It doesn't really matter whether the IT/equity/whatever reports monthly, quarterly, annually, or whatever as the market is almost always assessing it one order of magnitude more finely and more frequently than any of us as individual (small-beer) investors can hope to do if we are spreading our investments across a suitably diversified pool.

regards, dspp

[88V8]

....... where I have the hubris to think I can follow it and have an alpha-edge

What a superb post, and a pithy summary of why we sometimes buy individual shares.

I think it impossible to detect a trend until it's well established.
A trend? An oscillation? A bump?
As said, one is likely to sell near the bottom.

For me, the worry with ITs is a change of manager. Even keeping track of that is more than enough botheration.

I have no research to back it up, but I casually wonder whether a change of Trust name is not an indication of negativity. Perhaps that too would be long after the event.

As an income investor I stick mainly to the ITs with a long track record of no cuts. So far, so good.

V8

[UncleEbenezer]

Of the trusts you list as having sold out of, my only exposure is Witan Pacific. I can identify its exact turning point for me.

It had marginally underperformed its index for some years, and I was pondering what to switch to, when the turning point came. Not an improvement as such, but the announcement that if they failed to correct the underperformance in [I forget how long] they'd wind up and return money to investors. Given that the discount was wider than a few years (very marginal) underperformance, I held on, and still hold.

[bluedonkey]

As alluded to above, thinking in terms of at least part of your portfolio being "ballast" is a good idea. In the case of an IT portfolio, this might be holdings in say, F&C, Witan or CTY. These would generally not get touched, perhaps only every 10 years say. Or the ballast could instead be trackers (as mentioned above) with more specific ITs around it.

[Dod101]

Witan Pacific is about to be managed by Baillie Gifford and renamed Baillie Gifford China Growth Trust, so I guess that will be a turning point.

Dod

[bluedonkey]

Witan Pacific is about to be managed by Baillie Gifford and renamed Baillie Gifford China Growth Trust, so I guess that will be a turning point.

Dod

That could be spicy!

[Dod101]

Witan Pacific is about to be managed by Baillie Gifford and renamed Baillie Gifford China Growth Trust, so I guess that will be a turning point.

Dod

That could be spicy!

If you are looking for growth rather than income, I think this could be a good opportunity, but bear in mind that from what they have said, this will be very much a China trust. Could be a good thing and BG have an active office in Shanghai.

Dod

[Avantegarde]

Maybe instead of looking at 1y performance if you look at discrete 1m performance then you can draw conclusions more quickly and have more observations to work with. Each observation will have less weight of course and since these investments really should be held with a medium to long term view this method could take you off trusts that go on to provide stellar performances.

Thank you. Perusing 1mth discrete returns should give me an earlier warning. I must say I disagree that trusts that go "off" for a year or two then necessarily come back to provide "stellar returns." My personal observation is that once they become dull, they usually stay dull. Looking back at my old holdings that is certainly the case, especially when compared to the returns provided by comparative index trackers. I think "reversion to the mean" is the fancy statistical/investment term.

Can you - or anyone else - provide some good, recent examples of trusts that experienced a downturn in their total returns for 2-3 years, only to revive?

[richfool]

Maybe instead of looking at 1y performance if you look at discrete 1m performance then you can draw conclusions more quickly and have more observations to work with. Each observation will have less weight of course and since these investments really should be held with a medium to long term view this method could take you off trusts that go on to provide stellar performances.

Thank you. Perusing 1mth discrete returns should give me an earlier warning. I must say I disagree that trusts that go "off" for a year or two then necessarily come back to provide "stellar returns." My personal observation is that once they become dull, they usually stay dull. Looking back at my old holdings that is certainly the case, especially when compared to the returns provided by comparative index trackers. I think "reversion to the mean" is the fancy statistical/investment term.

Can you - or anyone else - provide some good, recent examples of trusts that experienced a downturn in their total returns for 2-3 years, only to revive?

I would tend to agree with Avantegarde. MYI and TMPL, for example, have been off the boil for some years (5 years in the case of MYI) and still haven't come back with even modest returns, let alone stellar ones.

I note with Baillie Gifford taking on Witan Pacific, BG also manage PHI (Pacific Horizon), which has a growth focus in Asia Pacific (China & HK 41%), but excludes Japan).

[Dod101]

Maybe instead of looking at 1y performance if you look at discrete 1m performance then you can draw conclusions more quickly and have more observations to work with. Each observation will have less weight of course and since these investments really should be held with a medium to long term view this method could take you off trusts that go on to provide stellar performances.

Thank you. Perusing 1mth discrete returns should give me an earlier warning. I must say I disagree that trusts that go "off" for a year or two then necessarily come back to provide "stellar returns." My personal observation is that once they become dull, they usually stay dull. Looking back at my old holdings that is certainly the case, especially when compared to the returns provided by comparative index trackers. I think "reversion to the mean" is the fancy statistical/investment term.

Can you - or anyone else - provide some good, recent examples of trusts that experienced a downturn in their total returns for 2-3 years, only to revive?

Certainly that applied to Monks which had several years of indifferent results and then changed managers within Baillie Gifford and has not looked back since. There are plenty in the other camp though, such as Hansa, Witan and Edinburgh to name but three. Knowing your manager and what they try to achieve helps greatly, and turning points can come with a change of manager.

Dod

[Jam2Day]

Might be worth monitoring John Baron's IT portfolio selections. He does periodically tweak and rotate and seemed to do OK last timed I had a shufty. I can only assume he consults those who are well informed about the positioning and strategy of the funds in the market. At the end of the day, you pays your money and takes your choice and the rest is in the hands of the manager and the market. We are of course sailing close to the passive versus active ding dong wind but it also depends on an investor's knowledge and understanding of the market and economic cogs. I personally favour an income fund with a good dividend growth record where possible and try to let the wonders of compounding do the rest. Start digging beneath the surface and it gets might complicated! Better still, select a balanced portfolio of funds and then try to outperform them over time with a DIY selective strategy. Always interesting and certainly educational.

[scotia]

As alluded to above, thinking in terms of at least part of your portfolio being "ballast" is a good idea. In the case of an IT portfolio, this might be holdings in say, F&C, Witan or CTY. These would generally not get touched, perhaps only every 10 years say. Or the ballast could instead be trackers (as mentioned above) with more specific ITs around it.

You certainly (unintentionally?) make a good case for ignoring the "brands" and going for a tracker!
on a 5 year total return :-
Vanguard World Tracker 87.4%
F&C Investment Trust 77%
Witan 39.9%
CTY 5.6%
Or to be more fair to CTY which is a UK Trust - a UK All Share Tracker returned 17.7%
And yet the four big brands as listed have many investors. It looks like they are not adept at spotting turning points.
I still think Dod's earlier response to the proposed question is the most appropriate
"Well. If we knew that.......... I doubt that there is a way to understand the turning point. |f only........
Dod"

[Dod101]

I was about to add yesterday that I would not regard City of London as any king of 'ballast' but I did not have its figures to hand and did not have time to look.. The numbers quoted in Scotia's post confirm my feeling that as ballast you need to have a big generalist such as those quoted to which I would add at least Alliance. It would be interesting to know if the under performance against a Worldwide tracker is the standard long term outcome for generalists. Of course one can get the occasional IT which will at least from to time outperform a tracker.

City of London, like Edinburgh, has been a hopeless performer in recent years.

On the fundamental point, I doubt that any of us can spot turning points, if indeed, they exist. All shares, never mind ITs, will have periods of underperformance and other times when they will do well. Some ITs are serial under performers and a few usually do well. They key is to know or discover which.

Dod

[bluedonkey]

On the fundamental point, I doubt that any of us can spot turning points, if indeed, they exist.Dod

Yes, we may be chasing the holy grail here. Lemon Fool and the Holy Grail.