Why buy UK?

[AWOL]

For some reason I've never paid any attention to NASDAQ but looking at it now makes me wish I had a time machine!

[seekingbalance]

For some reason I've never paid any attention to NASDAQ but looking at it now makes me wish I had a time machine!

2.5 years later - and no Time Machine needed.

In the last 2 years the Vanguard accumulation FTSE100 ETF is up 11%. The Amundi Nasdaq 100 accumulation tracker etf is up 31%

Over 3 yrs its 27% vs 46%, over 5 it’s 31% vs 154%

[AWOL]

2.5 years later - and no Time Machine needed.

In the last 2 years the Vanguard accumulation FTSE100 ETF is up 11%. The Amundi Nasdaq 100 accumulation tracker etf is up 31%

Over 3 yrs its 27% vs 46%, over 5 it’s 31% vs 154%

Yet I remain largely in MSCI World and staring at my overweight THRG holding and praying for a recovery in UK small caps so I can ditch my last active investment. I am a victim of my own biases! Still my biases are more comfortable than someone elses.

[GeoffF100]

FTSE 100 is now cheap in relation to the US market, and particularly the tech stocks. Everyone seems to be saying that the US market is great and the Footsie is rubbish. When that is happening, it is usually a good idea to stocki up on the underdog. VUKE has beaten VWRL over the last three months in total return. Perhaps that is a good omen for the Footsie.

[spasmodicus]

FTSE 100 is now cheap in relation to the US market, and particularly the tech stocks. Everyone seems to be saying that the US market is great and the Footsie is rubbish. When that is happening, it is usually a good idea to stock up on the underdog. VUKE has beaten VWRL over the last three months in total return. Perhaps that is a good omen for the Footsie.

I would qualify that by saying that sometimes it may be a good idea to stock up on the underdog.
Back in 2020 I sought to spice up my global portfolio by adding some China(HMCH,IASH) and an Eastern Europe ETF (IEER) - both disasters.
Fortunately, I didn't bet the farm on either of them and the losses were offset to some extent by judicious rebalancing during the covid crash. However, I would have done better by simply buying VWRL in the first place. Similarly, I have a large holding in ISF which has performed remarkably feebly over the last 10 years, to say the least.

SInce 2015, rolling XIRR calculation, from a fixed investment in 2015 to end 2023 with dividends reinvested at the end of each year looks like
VWRL 10.8%
ISF (FTSE 100) 1.87%
VUSA (S&P500) 13.3%
EQGB (Nasdaq GBP hedged) 16.8%
HMCH (China "A") 0.3%
XNIF (top 50 India) 9.8%

That's because VWRL is about 60% weighted towards the USA, and the USA has outperformed even its own long term average growth over the last 10 years or so. Global market cap is about $109 trillion and the S&P 500 is about $43 trillion and it has always seemed to me that VWRL has excessive USA bias.
More than 10% of it is invested in the big 7 Amazon Meta Apple etc.
The total UK LSE market cap is by comparison a paltry $4 trillion, so cap. weighting would suggest that ISF should form only 4% of one's portfolio. China's companies have the second largest global market cap, coming in at around $10 trillion and have performed worse than our own FTSE 100. India is interesting as XNIF has put in a pretty solid performance averaged over 10m years, with a similar market cap. to the LSE. Could the USA perform as badly over the next 10 years as China did in the last 10 years? I dunno, but I certainly cannot see the rationale behind market cap. weighting for balancing ones ETFs.
S

[JohnW]

'it has always seemed to me that VWRL has excessive USA bias'.

Unilever, in the FTSE100 is three times as big as Barclays. Is there a Unilever excessive bias in the FTSE100?
And what sort of bias is excessive in a cap weighted index fund? Indeed how can there be any bias that's not an appropriate weighting in a cap weighted fund that is cap weighted?

'I certainly cannot see the rationale behind market cap. weighting for balancing ones ETFs.'

Isn't the rationale the efficient market hypothesis, that cap weighting should give the best risk adjusted return of any stock allocation?

[spasmodicus]

'it has always seemed to me that VWRL has excessive USA bias'.

Unilever, in the FTSE100 is three times as big as Barclays. Is there a Unilever excessive bias in the FTSE100?
And what sort of bias is excessive in a cap weighted index fund? Indeed how can there be any bias that's not an appropriate weighting in a cap weighted fund that is cap weighted?

'I certainly cannot see the rationale behind market cap. weighting for balancing ones ETFs.'

Isn't the rationale the efficient market hypothesis, that cap weighting should give the best risk adjusted return of any stock allocation?

To the extent that the EMF holds under all circumstances - maybe.

The fact that bubbles happen suggests that there are times when groupthink overrides the efficiency of markets.
S

[Bubblesofearth]

Isn't the rationale the efficient market hypothesis, that cap weighting should give the best risk adjusted return of any stock allocation?

There are many examples of stocks with similar (volatility) risk but very different market caps. For example, Shell and Tesco have similar beta (0.57 and 0.52 respectively) but Shell has MC of £182bn whilst Tesco has a MC of £19.6bn. For a private investor what is the rationale for investing almost 10X as much in Shell as in Tesco?

BoE

[Lootman]

Isn't the rationale the efficient market hypothesis, that cap weighting should give the best risk adjusted return of any stock allocation?

There are many examples of stocks with similar (volatility) risk but very different market caps. For example, Shell and Tesco have similar beta (0.57 and 0.52 respectively) but Shell has MC of £182bn whilst Tesco has a MC of £19.6bn. For a private investor what is the rationale for investing almost 10X as much in Shell as in Tesco?

If Shell has ten times the earnings then that might be one reason to do that.

Also Shell is international and Tesco is domestic in nature.

You might as well ask why not invest equal amounts in Apple and the smallest cap AIM share that you can find. Although that is really only possible for a small investor anyway - most equal weight trackers are limited to a single market or sector precisely to avoid such problems.

[GeoffF100]

For a private investor what is the rationale for investing almost 10X as much in Shell as in Tesco?

The professionals cannot beat a market weighted tracker with any more than luck chance of success, so why should you be able to do better?

[Bubblesofearth]

The professionals cannot beat a market weighted tracker with any more than luck chance of success, so why should you be able to do better?

How do you know they can't? You are probably looking at funds rather than bespoke individual portfolios. Funds do worse than the market partly because of charges and partly because they cannot invest in the same way individuals can. For example, ss an individual investor I can set up a portfolio, equal weighted at inception and then left alone. That's not possible for a fund manager.

BoE

[Bubblesofearth]

If Shell has ten times the earnings then that might be one reason to do that.

Also Shell is international and Tesco is domestic in nature.

You might as well ask why not invest equal amounts in Apple and the smallest cap AIM share that you can find. Although that is really only possible for a small investor anyway - most equal weight trackers are limited to a single market or sector precisely to avoid such problems.

It's earnings/share that matters to an investor not total earnings.

The argument was that you can't beat the risk-adjusted market cap weighted index. If Tesco and Shell have the same risk then why invest more in Shell? The smallest cap aim share will likely have much higher volatility than Apple. However, even this risk can be mitigated by diversification across poorly correlated stocks.

BoE

[JohnW]

'The fact that bubbles happen suggests that there are times when groupthink overrides the efficiency of markets.'

If so, can we act on it to make better than market returns without adding risk (or getting more returns for not so much more risk)? Is there something to suggest I or the next mug could pull it off?

'. For example, Shell and Tesco have similar beta (0.57 and 0.52 respectively) ;

Sorry, don't know about beta.

'For example, ss an individual investor I can set up a portfolio, equal weighted at inception and then left alone. That's not possible for a fund manager.'

If it worked, why couldn't a fund manager do it? Are they excluded from investing approaches that really work?

'The argument was that you can't beat the risk-adjusted market cap weighted index'

There might be a mixing of expressions here: risk adjusted return, and cap weighted index. The index or fund isn't 'risk adjusted'; the returns are the best, or not the best risk adjusted returns.
But that wasn't the argument; the argument was put as 'cap weighting should give the best risk adjusted returns'.

'. If Tesco and Shell have the same risk then why invest more in Shell? '

I don't think I know the answer, but the risk you mention is measured from past results, it's past risk; the market is forward looking to what returns are anticipated. If the market thinks Shell has better prospects, in pours the money.

'even this risk can be mitigated by diversification across poorly correlated stocks.'

As an input to a strategy, correlation needs considerable care with its use I think. It's measured on past data; future data can make correlations change, and change they certainly do. I don't think they're to be relied on.

[GeoffF100]

For example, ss an individual investor I can set up a portfolio, equal weighted at inception and then left alone. That's not possible for a fund manager.

There is no evidence that will consistently beat the market, or that anyone can reliably predict when it will. Of course it is possible for a fund manager to do that. They do not because they do not believe it would work or sell their fund.

[GeoffF100]

It's earnings/share that matters to an investor not total earnings.

A company's earnings per share is completely irrelevant. If a company does a two for one share split, that halves the earnings per share, but it does not affect the valuation of the company, its total earnings or its prospects of future earnings growth.

[tjh290633]

'The fact that bubbles happen suggests that there are times when groupthink overrides the efficiency of markets.'

If so, can we act on it to make better than market returns without adding risk (or getting more returns for not so much more risk)? Is there something to suggest I or the next mug could pull it off?

'. For example, Shell and Tesco have similar beta (0.57 and 0.52 respectively) ;

Sorry, don't know about beta.

'For example, ss an individual investor I can set up a portfolio, equal weighted at inception and then left alone. That's not possible for a fund manager.'

If it worked, why couldn't a fund manager do it? Are they excluded from investing approaches that really work?

'The argument was that you can't beat the risk-adjusted market cap weighted index'

There might be a mixing of expressions here: risk adjusted return, and cap weighted index. The index or fund isn't 'risk adjusted'; the returns are the best, or not the best risk adjusted returns.
But that wasn't the argument; the argument was put as 'cap weighting should give the best risk adjusted returns'.

'. If Tesco and Shell have the same risk then why invest more in Shell? '

I don't think I know the answer, but the risk you mention is measured from past results, it's past risk; the market is forward looking to what returns are anticipated. If the market thinks Shell has better prospects, in pours the money.

'even this risk can be mitigated by diversification across poorly correlated stocks.'

As an input to a strategy, correlation needs considerable care with its use I think. It's measured on past data; future data can make correlations change, and change they certainly do. I don't think they're to be relied on.

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TJH

[GeoffF100]

For example, ss an individual investor I can set up a portfolio, equal weighted at inception and then left alone. That's not possible for a fund manager.

Your hypothesis here seems to be that buying and equal weighted portfolio and leaving it alone is a market beating strategy. If that were so, it would be a market beating strategy not only for the original investor, but any investor who replicated that portfolio later on. It would also follow that any portfolio that I can construct that was equally weighted at some time in the past, would also be market beating. I think you would have difficulty selling that one.

[Bubblesofearth]

It's earnings/share that matters to an investor not total earnings.

A company's earnings per share is completely irrelevant. If a company does a two for one share split, that halves the earnings per share, but it does not affect the valuation of the company, its total earnings or its prospects of future earnings growth.

Sorry, posted that in haste. It should read earnings per amount invested that matters. If I invest £5000 in either Tesco or Shell then it's the return on that money that matters, not the earnings/return on the whole company.

BoE

[Bubblesofearth]

Sorry, don't know about beta.

beta refers to the shares volatility compared to whole market volatility - the higher beta is the more volatile vs the market. A beta of 1 is taken as equivalent volatility to the market.

If it worked, why couldn't a fund manager do it? Are they excluded from investing approaches that really work?

It would be tricky because each individual investor would have a different portfolio depending on when they invested - market evolution would force this. You are then into the territory of wealth, rather than fund, management with all the higher costs that go with that.

I don't think I know the answer, but the risk you mention is measured from past results, it's past risk; the market is forward looking to what returns are anticipated. If the market thinks Shell has better prospects, in pours the money.

Sure, to the point where the expected return matches that of Tesco. With similar expected returns and risk (you only have the past volatility to go on here) the question once again is 'why invest 10X as much in Shell?' I haven't seen anyone give a satisfactory answer to this.

As an input to a strategy, correlation needs considerable care with its use I think. It's measured on past data; future data can make correlations change, and change they certainly do. I don't think they're to be relied on.

Nothing can be totally relied on but selecting shares from different business sectors should continue to work to reduce risk by minimising correlations. Unless you think Tesco are going to start drilling for oil? And, yes, I know they sell petrol!

BoE

[Adamski]

The ftse 100 has been having a good run since November. Interestingly it has gone up this morning 1.4% - I realise this is just one day - but after a Tech sell off on Friday afternoon. It is moving in the other direction. Could possibly be a sign of rotation from Tech into safer sectors and the less sexy Ftse? Or maybe I'm deluding myself!