Reinvesting in winners

[Arborbridge]

I'm mulling over what for me, is an age old question. I'm thinking in the context of OEICS but it could just as easily be ITs.

I have a portfolio devoted entirely to income OEICs, as some of you will remember. When there is spare cash I top up into what I see as the best "winner" at the time. Normally, I look at the past three years TR (on HL's website), the yield and the XIRR record for each one. Finally, I stick a finger in the air and prod the buy button accordingly.

More lately, I've cutting the waffle and going for the fund which has the best XIRR experience in my basket. One which has knocked out a consistent top place, or nearly so, is likely to get the nod. In the recent couple of years this has been dominated by either global or Asian contenders, with the result that these funds are fed more cash and have grown proportionally larger.

Maybe this isn't a problem, but I working towards ending up with quite an unbalanced basket. And of course, always putting reinvestment cash in the "winners" means that if they crash or the "losers" start bucking the trend, I'm not playing it right.

I know there's no answer until it's too late, but I just wanted to bounce these thoughts into our echo chamber.

Arb.

[swill453]

I have a portfolio devoted entirely to income OEICs, as some of you will remember. When there is spare cash I top up into what I see as the best "winner" at the time. Normally, I look at the past three years TR (on HL's website), the yield and the XIRR record for each one. Finally, I stick a finger in the air and prod the buy button accordingly.

I might tend to do my reinvestment into the losers, rather than the winners.

If you start with the premise that they're all worth having (otherwise why have them?) then buying at a "discount" is surely better than buying at a "premium"?

If you've got time to kill and some historical records you could back-test strategies.

Scott.

[kempiejon]

Good musings. To check, you're picking a winner from your existing income portfolio for more money. You'll top up the holding that has beaten the other holdings, your benchmark being the pot of all your holdings? It's a backwards looking selection but what else is there to look at? Seems a fair plan.
However, how do these holdings compare to others you do not hold? Or against the global market or the UK market or US etc.
This is my bias for now, I've done my time stock and IT picking and I buy Vanguard global developed VEVE or VWRP the global accumulating etfs. I do reinvest dividends back into my HYP stocks. There it's mostly HYP rules on yield, portfolio balance and a glance at rate of increase of dividends.

[LooseCannon101]

Is 3 years long enough? I would think that 10+ years would be a better indicator of long-term growth in capital and income.

As others have said, it would be a good idea to compare total returns against a benchmark e.g. FTSE All World TR Index.

Momentum investing is great until Mr. Market ('The Intelligent Investor') decides to go into reverse.

[88V8]

Normally, I look at the past three years TR (on HL's website), the yield and the XIRR record for each one. Finally, I stick a finger in the air and prod the buy button accordingly.
Maybe this isn't a problem, but I am working towards ending up with quite an unbalanced basket.

I try to buy or top up ITs when at a discount.
And although I've reached that tax point where buying more income is not sensible, leaving that aside I would buy 4% yield or better.
So that's my starting point.

Istm very wise to use XIRR, and I say that despite arguing against TR when it was the buzzword a few years ago, because some of my highest yielders would be a disaster if I ran XIRR - HFEL, AEI for instance - and are unlikely ever to be topped up.

Yes, you will probably end up unbalanced, and may need to set limits. One merit of having multi portfolios is that if one is too out of kilter one can go and top up another.

I would not look back more than three years in making a choice... the past is another place.

V8

[staffordian]

A good question Arb, to which I don't have a useful answer.

When I started building my IT portfolio, based on one of Luni's Baskets, but with a couple of growth ITs in addition, my top up process was to simply rotate the buys, so the only criterion was to equalise the purchase cost. My theory being that any which are out of favour and therefore currently cheaper would in the fullness of time have their day in the sun, so over the long term, the portfolio would tend towards staying balanced.

Of course, this never works, and my subjective prejudices tend to come into play. So these days, I just glance at yields, relative performances and relative values and reach a totally unscientific decision.

I did try a TJH type top up formula, but when there is a mix of growth and income ITs, it's not so good as the growth ones score so low on the yield side as to make the process favour the income ITs.

[Lootman]

I'm mulling over what for me, is an age old question. I'm thinking in the context of OEICS but it could just as easily be ITs.

If it was about shares then I think the idea of selling winners to buy losers is terrible. I know that the "Dogs of the Dow" method has its fans. But given that a fair number of shares go to zero that is not a strategy that appeals to me at all.

But with funds it might make more sense as they generally do not go to zero. But even so certain themes and trends persist for decades.

As an example suppose you wanted to only invest in the UK and US markets. You go 50% in a tracker in each market and every year you rebalance back to 50/50 by selling the winner and buying the loser.

For 30 years now that would have been a loser, as you diverted funds to the stagnant UK tracker whilst disinvesting in the dynamic US.

Now maybe year 31 is the start of a reversion to a mean. But is there anything that indicates that?

[tjh290633]

I did try a TJH type top up formula, but when there is a mix of growth and income ITs, it's not so good as the growth ones score so low on the yield side as to make the process favour the income ITs.

The reason is that it is aimed at increasing income. There is also the question of correcting imbalance. For a long time I just topped up the lowest value holding. Then I had that uneasy feeling when both LLOY and Zeneca rose above 10% by weight, which led me to my rule on trimming overweight shares. It was some time later that I decided on my method for top-up ranking.

For your purpose, topping up the lowest value holding would seem to be the simplest approach.

Incidentally in my wife's ISA, invested in several OEICS/UCATS, I simply reinvest dividends whence they came. I make no attempt to rebalance.

TJH

[JohnW]

Does it come down to considerations of return and risk?
You'll reinvest in a particular way to enhance returns if you think momentum is a thing, or another way if you think 'reversion to the median' is a thing, or another way if you're good at stock/fund picking.
You'll reinvest in a particular way to improve diversification if you want risk reduction.
Are you better at identifying winners, or would rather minimise risk?

[tjh290633]

Does it come down to considerations of return and risk?
You'll reinvest in a particular way to enhance returns if you think momentum is a thing, or another way if you think 'reversion to the median' is a thing, or another way if you're good at stock/fund picking.
You'll reinvest in a particular way to improve diversification if you want risk reduction.
Are you better at identifying winners, or would rather minimise risk?

It is not clear if you are asking me that question, as you don't provide a "quote" in your message. I have no special talent for spotting winners, which in my case means companies paying above average dividends, which increase at least in line with inflation. I obviously have had some success in this respect, as my unitised data shows. The unit value has beaten the FTSE100 and the dividend per income unit has beaten the RPI. There will be times when I lag the index, and when dividends have taken a hit. In the 2008 hiatus I disposed of some shares that had stopped paying dividends in favour of some more reliable payers. More recently when I needed some capital for roof repairs, I sold my two lowest yielding shares (MKS and CPG).

Yes, risk reduction is an important aspect. Having 35 holdings is one factor, and having self-imposed limits on holding weight, share of income and of share of portfolio cost is another. My activity is well documented in a topic on the HYP-Practical forum. I do not follow fashion, but continue on my well trod path. Like everybody I experience unexpected events, like problems with Marconi, Mapeley, Carillion and Cattles, and takeovers or demergers. There is enough resilience to accommodate these.

Just looking at dividends per unit, since 2000 they have been up to 50% ahead of the RPI, except in 2009-10, when they lagged by 25% and in 2020-21 went they lagged by about 5%. In the last financial year they were about 30% ahead. In terms of capital value, my income unit is 64% ahead of the FTSE100 since I started in 1987. It was barely 10% ahead in Dec 2008, but has recovered to the current level.

TJH

[gryffron]

always putting reinvestment cash in the "winners" means that if they crash or the "losers" start bucking the trend, I'm not playing it right.

The FT did a huge 5 year survey on funds. The one that found 75% of managed funds failed to beat a tracker over this time period (after costs).
They concluded that last year's "best performer" did no better than average going forwards.
Indeed, there was some evidence that last years "worst" actually did a bit better than average - reversion to mean. Although so many badly performing funds get wound up or merged it was hard to tell if this effect was real.

Backing winners is momentum investing. Which works, until it doesn't.
Backing losers is value investing. Which also works, until it doesn't. GEC

Gryff

[JohnW]

It is not clear if you are asking me that question,

Sorry for the ambiguity. I was addressing the original question.

[tjh290633]

always putting reinvestment cash in the "winners" means that if they crash or the "losers" start bucking the trend, I'm not playing it right.

The FT did a huge 5 year survey on funds. The one that found 75% of managed funds failed to beat a tracker over this time period (after costs).
They concluded that last year's "best performer" did no better than average going forwards.
Indeed, there was some evidence that last years "worst" actually did a bit better than average - reversion to mean. Although so many badly performing funds get wound up or merged it was hard to tell if this effect was real.

Backing winners is momentum investing. Which works, until it doesn't.
Backing losers is value investing. Which also works, until it doesn't. GEC

Gryff

You may recall the Johnson Fry Worst Performing Fund. It invested in the worst performing unit fund in each year and switched at the end of each year. It came unstuck when the Japanese market had a prolonged downturn in the 1990s.

TJH

[Arborbridge]

Is 3 years long enough? I would think that 10+ years would be a better indicator of long-term growth in capital and income.

As others have said, it would be a good idea to compare total returns against a benchmark e.g. FTSE All World TR Index.

Momentum investing is great until Mr. Market ('The Intelligent Investor') decides to go into reverse.

Three years was wrong. I'm comparing, initially, the growth shown over 1,3, and 5 years on HL - not sure why I said 3 years. In addition, I have my own TR experience over the length of ownership, which is usually much longer.

The All world TR has nothing to do with it - I'm interested in income OEICS which are not expected to be high TR, so what I am looking for is a compromise between income generated and TR.

Arb.

[Arborbridge]

Normally, I look at the past three years TR (on HL's website), the yield and the XIRR record for each one. Finally, I stick a finger in the air and prod the buy button accordingly.
Maybe this isn't a problem, but I am working towards ending up with quite an unbalanced basket.

I try to buy or top up ITs when at a discount.
And although I've reached that tax point where buying more income is not sensible, leaving that aside I would buy 4% yield or better.
So that's my starting point.

Istm very wise to use XIRR, and I say that despite arguing against TR when it was the buzzword a few years ago, because some of my highest yielders would be a disaster if I ran XIRR - HFEL, AEI for instance - and are unlikely ever to be topped up.

Yes, you will probably end up unbalanced, and may need to set limits. One merit of having multi portfolios is that if one is too out of kilter one can go and top up another.

I would not look back more than three years in making a choice... the past is another place.

V8

To be clear, I was referring mostly to my OEIC basket in this piece because I have some cash there to invest now, as it happens.
However, I do something similar with ITs as I mentioned. I've gorwn more cautious of discounts - they can last for decades! But 4% sounds a good guide if coupled with a reasonable TR.
But again, the real question is whether to always back winners, or buy the losers in a hope of reverting to mean. TMPL might have been an example - it got into a pickle but came back strongly. I would have made a good profit had I invested at the weak point - but, naturally one never knows!

[Mememe]

I think it depends on why the losers are losers. My emerging market and small cap stuff has been dire for 2/3 years, but is that the management or the sector? If it’s the sector then I’ll just top up back to my ideal allocation and hold my nose.

The risk with topping up the winner is that you end up with a lop sided portfolio. I appreciate you might be talking income but if you use growth for an easier comparison a few years back you would be loaded up on something like SMT and EWI, then all of a sudden it gets smashed. As someone else said it works until it doesn’t work but losses can be huge.

For me it’s better to stick to your overall allocation and if that means topping up parts of the portfolio that are ‘losers’ then so be it. As long as those losers are losers because of the overall economic environment and not because they are constantly making incorrect calls. Although you’ll miss out on some short term returns I think the risk management side of things is more important