Fund selection criteria

[EssDeeAitch]

My post has been redirected here as being in a more appropriate section - apologies for the duplication.

Hello All, any help gratefully received.

I have found that doing basic research on a fund is not too difficult. From the funds within the required sector, analyse the numbers such as historic returns; risk factors (Alpha, Beta, Sharpe, Volatility, change of manager, gearing and so on) and a short list of likely buys can be arrived at.

But what is the next step in evaluating which funds from a shortlist are best?

I know there cannot be any silver bullet in fund selection but what recommendations does anyone have?

[BrummieDave]

Correct, in the absence of said silver bullets, buy some funds/ITs, that's the next step.

Prevarication is the enemy of reinvested dividends.

[gryffron]

Price, price and price.

A Financial Times survey over many years concluded that last years best performers do no better than average next year. Therefore, looking at past performance of funds is useless.

Although there was evidence that some individual managers could consistently outperform. But the problem for investors is that the good ones get poached to different funds, with ever increasing fees to cancel out their abilities.

If you cannot predict performance, buy the tracker fund with the lowest fees. After costs, 75% of managed funds fail to beat trackers over just 5 years. Source: same FT survey

Gryff

[scotia]

Price, price and price.

A Financial Times survey over many years concluded that last years best performers do no better than average next year. Therefore, looking at past performance of funds is useless.

Although there was evidence that some individual managers could consistently outperform. But the problem for investors is that the good ones get poached to different funds, with ever increasing fees to cancel out their abilities.

If you cannot predict performance, buy the tracker fund with the lowest fees. After costs, 75% of managed funds fail to beat trackers over just 5 years. Source: same FT survey

Gryff

And you get the satisfaction of knowing that you are not contributing to the Fund manager's Bentley.

[StOmer]

I would read annual reports, latest updates and go through the relevant websites. Often you can get a good fell as to whether the investment would suit your objectives. Take head of those pushing trackers/passives but I find that a little bit of work results in easily and regularly outperforming the likes of Vanguard passives. However, my wife does not wish to do any portfolio work so we have agreed that she will switch to Vanguard Life Strategy at a later time.

In the meantime, investing is very interesting, keeps me aware of global politics and I enjoy doing okay at it.

[tjh290633]

Price, price and price.

A Financial Times survey over many years concluded that last years best performers do no better than average next year. Therefore, looking at past performance of funds is useless.

Although there was evidence that some individual managers could consistently outperform. But the problem for investors is that the good ones get poached to different funds, with ever increasing fees to cancel out their abilities.

If you cannot predict performance, buy the tracker fund with the lowest fees. After costs, 75% of managed funds fail to beat trackers over just 5 years. Source: same FT survey

Gryff

Johnson Fry effectively demonstrated that last year's Worst Performing Fund could also be this year's and even next year's.

TJH

[Backache]

Johnson Fry effectively demonstrated that last year's Worst Performing Fund could also be this year's and even next year's.

TJH

I have certainly seen research that suggests that under performance may persist but out performance doesn't.

[LooseCannon101]

I would pick one or more global equity investment trusts, and then check their individual portfolios for annual management charge, country weighting, gearing, range of small and large cap shares, .. etc. Performance should ideally be compared with a benchmark e.g. MSCI World Equity Index on a total return basis over at least 10 and preferably 20 years if such data is available.

Once a decent trust(s) has been found, the next problem is when to buy. Monthly savings schemes and dividend re-investment would be my preferred option, with money drip-fed in over many years. It takes discipline to keep on buying through market ups and downs, but in the end, you should make decent returns - almost certainly beating those who chop and change.

[hiriskpaul]

My post has been redirected here as being in a more appropriate section - apologies for the duplication.

Hello All, any help gratefully received.

I have found that doing basic research on a fund is not too difficult. From the funds within the required sector, analyse the numbers such as historic returns; risk factors (Alpha, Beta, Sharpe, Volatility, change of manager, gearing and so on) and a short list of likely buys can be arrived at.

But what is the next step in evaluating which funds from a shortlist are best?

I know there cannot be any silver bullet in fund selection but what recommendations does anyone have?

I would ignore historic returns when selecting actively managed funds. It is well established that this tells you nothing about future returns. As an example, the best performing Global IT 10 years ago was British Empire, but over the last 10 years it has been the third worst performer, with a total return of 112% compared with 200% for the MSCI World Index. The worst performer 10 years ago that is still around was Alliance Trust, but over the last 10 years it has beaten the market with a return of 218%. Instead of past returns I would focus on how they say they invest and whether you are comfortable with that and then look at what they have invested in to check the story. Good things to look for are low charges and for ITs a big discount to NAV, which often happens after a period of poor performance. Avoid ITs that are priced at a premium to NAV.

[StOmer]

I wouldn't ignore historic returns, they can be very useful.

[toofast2live]

I wouldn't ignore historic returns, they can be very useful.

No, they’re meaningless for future performance.

I would focus on the conviction style of the manager. For example:

Scottish Mortgage - out and outgrowth bias.
Temple Bar - value investor
F&C Global Smaller Companies - small cap bias.
City of London IT - persistent dividend growth.

The other outperforming style is momentum but I can’t find a fund or trust that uses this style.

[Avantegarde]

"No, they’re meaningless for future performance."

Not quite. I have found it very useful indeed to use the AIC statistics to compare the rate at which individual trust raise their dividends each year. Some trusts with the word "income" in their titles, or which otherwise profess to be interested in generating a decent income for investors, often fail to raise their dividends faster than inflation. That is well worth knowing. In five years of my investment trust portfolio I have not yet found a trust that changes that trend or attribute, apart from the recent spate of JP Morgan trusts which now sell capital each year to raise dividends.

[colin]

Not quite. I have found it very useful indeed to use the AIC statistics to compare the rate at which individual trust raise their dividends each year

Those statistics alone are not much use for your intended purpose once you realize that for decades many investment trusts have put money aside into reserves, they generally pay out a lower than market dividend yield and use the money in the reserves to increase that dividend, which gives their promoters the opportunity to crow about how Queen Issabella's Mott and Bailey Trust has increased dividends every year for 1,000 years.
You can do the same just buying an all share tracker pocketing half the dividend and putting the other half in a low volatility 'reserve fund'

[tjh290633]

Not quite. I have found it very useful indeed to use the AIC statistics to compare the rate at which individual trust raise their dividends each year

Those statistics alone are not much use for your intended purpose once you realize that for decades many investment trusts have put money aside into reserves, they generally pay out a lower than market dividend yield and use the money in the reserves to increase that dividend, which gives their promoters the opportunity to crow about how Queen Issabella's Mott and Bailey Trust has increased dividends every year for 1,000 years.
You can do the same just buying an all share tracker pocketing half the dividend and putting the other half in a low volatility 'reserve fund'

Colin, you forgot to say that ITs are obliged to pay out a minimum of 85% of their dividend income.

TJH

[colin]

Colin, you forgot to say that ITs are obliged to pay out a minimum of 85% of their dividend income.

I did not know that, so how does that account for Capital gearing Trust which has a portfolio of bonds preference shares and other investment trusts but a dividend yield of .5%?

Perhaps you have been confused by the ability of investment trusts to hold back 15% of their income in reserves. but none of this matters to the point I was making which is that ITs can and do pay out more than 100% of their income and one needs to be mindful of how this is achieved.

[tjh290633]

Colin, you forgot to say that ITs are obliged to pay out a minimum of 85% of their dividend income.

I did not know that, so how does that account for Capital gearing Trust which has a portfolio of bonds preference shares and other investment trusts but a dividend yield of .5%?

Perhaps you have been confused by the ability of investment trusts to hold back 15% of their income in reserves. but none of this matters to the point I was making which is that ITs can and do pay out more than 100% of their income and one needs to be mindful of how this is achieved.

I've never heard of Capital Gearing Trust, but I bet that they have a good reason for such a low yield. Perhaps the word gearing is a clue.

You are no doubt aware that nowadays ITs are allowed to distribute some realised capital gains as dividends, if they wish to do so.

TJH

[colin]

I've never heard of Capital Gearing Trust,

???! Perhaps you should do some more research.

But back to the original point I was making, if you buy a fixed interest investment and simply re-invest some proportion of the income each year then your overall income will rise each year, Investment trusts which are touted as increasing their dividend every year for decades use pretty much the same trick.

[toofast2live]

“Gearing” is a misnomer. No or little Gearing. It’s mainly invested in index linkers, gold and some equity. It’s for capital preservation. TJH doesn’t worry about a 30% cut in capital and dividends because he knows things will recover, happily slicing his winners to top up his losers.

Others do not have his cojones as the Spanish would say. Most private punters sell after a 30% drop and buy after a 50% rise.

[mc2fool]

Colin, you forgot to say that ITs are obliged to pay out a minimum of 85% of their dividend income.

I did not know that

???! Perhaps you should do some more research.

[Raptor]

Moderator Message:
Can we keep to the point and be more civil to each other. Thank you. Raptor