Munroman's rules of finance

[mc2fool]

Which investor beside the most green newbie doesn't understand the difference between dividends and yield?

I don't.

yield = dividend/price for a perpetual security of course...

Or if this is not what the poster meant, then what did he mean? colin chopped off my post where I said I did not understand the point being made.

The point OhNoNotimAgain (ex Munroman) was making was that whereas Colin had said he (Munroman) was promoting high yields, what he is actually advancing is high total dividends payouts. It's dividends his fund weights by, not yield.

E.g. HSBA is the largest holding in his fund not because it has the highest yield but because the around £8bn of dividends it pays out a year is more than any other FTSE 350 company (putting aside RDSA/RDSB). If he were running the fund in the US then Apple would be his biggest holding.

[Alaric]

It's dividends his fund weights by, not yield.

Conventionally an indexed fund applies a mechanical strategy whereby the stocks are selected and weighted by market capitalisation on the premise that an index formulated in this way best captures the aggregate performance of all investors.

Weighting by market dividends is a strategy, it remains to be seen whether it's more effective than the usual one.

[Lootman]

Now if you want to test his actual understanding, take a look at some threads on TMF where posters got exasperated explaining the simplest concepts to him, as Munroman.

I recall some of the threads but the Fool UK discussion boards posts no longer exist. Someone may have saved them at the WayBackMachine, of course, but I certainly haven't.

The specific discussions I recall from TMF, and I think here too, were Munro's insistence that (something like) over 90% of returns accrue from dividends. He maintained that position despite the best and brightest on TMF all telling him that that is a gross distortion of the truth. He was effectively confusing the mathematics of compounding with the nature of investment returns, hence the exasperation. And he rarely had a good word for any fund structure that wasn't a rules-based open-ended fund.

What made it worse is that he makes a living from selling a dividend-focused open-ended fund and so, to quote Mandy again, he would say that, wouldn't he? I do think that people here who personally profit from selling certain ideas, like Munro does with a fund and Bland does with his tip-sheet, should be held by us to a higher standard of integrity and honesty.

[OZYU]

Now if you want to test his actual understanding, take a look at some threads on TMF where posters got exasperated explaining the simplest concepts to him, as Munroman.

I recall some of the threads but the Fool UK discussion boards posts no longer exist. Someone may have saved them at the WayBackMachine, of course, but I certainly haven't.

The specific discussions I recall from TMF, and I think here too, were Munro's insistence that (something like) over 90% of returns accrue from dividends. He maintained that position despite the best and brightest on TMF all telling him that that is a gross distortion of the truth. He was effectively confusing the mathematics of compounding with the nature of investment returns, hence the exasperation. And he rarely had a good word for any fund structure that wasn't a rules-based open-ended fund.

What made it worse is that he makes a living from selling a dividend-focused open-ended fund and so, to quote Mandy again, he would say that, wouldn't he? I do think that people here who personally profit from selling certain ideas, like Munro does with a fund and Bland does with his tip-sheet, should be held by us to a higher standard of integrity and honesty.

Yes, that thread was shocking, but the worse I can remember was his total lack of understanding on how a private investor would maintain a market cap weighted portfolio. Quite a few very experienced investors kept , ably and patiently, pointing to this, fund manager of all people, the errors of his ways, to no avail. Unbelievable but true.

Ozyu

[GoSeigen]

The point OhNoNotimAgain (ex Munroman) was making was that whereas Colin had said he (Munroman) was promoting high yields, what he is actually advancing is high total dividends payouts. It's dividends his fund weights by, not yield.

Ah makes sense now. I had no idea OhNoNotIm was referring to Colin's post. [Is there a way to find which post is being replied to if the poster hasn't bother to quote in his reply?]

E.g. HSBA is the largest holding in his fund not because it has the highest yield but because the around £8bn of dividends it pays out a year is more than any other FTSE 350 company (putting aside RDSA/RDSB). If he were running the fund in the US then Apple would be his biggest holding.

Okay... then such a strategy would underperform if the market valued dividends above shareholder equity and if company distributions were excessively high. That's most likely occur when yields are low, like now. Conversely, the strategy is presumably flattered by back-testing over the high-yield years of the 60s to 80s... Haven't thought about it too much though...


GS

[GoSeigen]

What made it worse is that he makes a living from selling a dividend-focused open-ended fund and so, to quote Mandy again, he would say that, wouldn't he? I do think that people here who personally profit from selling certain ideas, like Munro does with a fund and Bland does with his tip-sheet, should be held by us to a higher standard of integrity and honesty.

Yes, that thread was shocking, but the worse I can remember was his total lack of understanding on how a private investor would maintain a market cap weighted portfolio. Quite a few very experienced investors kept , ably and patiently, pointing to this, fund manager of all people, the errors of his ways, to no avail. Unbelievable but true.

Ozyu

I wouldn't want to be too hard on him as compounding is quite difficult to get your head around -- harder than the difference between yield and dividend anyway -- and MunroMan as good as admitted that he has no background in maths, which puts any investor at something of a disadvantage.

I think the repeated references to him stem from two points: recognising that he is a professional and should be held to a professional standard; and to make readers aware of the potential conflicts of interest arising from his vested interest in promoting a particular point of view.

GS

[mc2fool]

The point OhNoNotimAgain (ex Munroman) was making was that whereas Colin had said he (Munroman) was promoting high yields, what he is actually advancing is high total dividends payouts. It's dividends his fund weights by, not yield.

Ah makes sense now. I had no idea OhNoNotIm was referring to Colin's post. [Is there a way to find which post is being replied to if the poster hasn't bother to quote in his reply?]

Well there's only two posts above OhNoNotimAgain's that mention yield, so it had to be that or Lootman's (and I don't think it was to the latter).

As there's only the two Post Reply (without quoting) buttons on each page there's no way of knowing for sure which post the poster was looking at and/or thinking of when they clicked one of those buttons, one can only try and intuit....

[Lootman]

The point OhNoNotimAgain (ex Munroman) was making was that whereas Colin had said he (Munroman) was promoting high yields, what he is actually advancing is high total dividends payouts. It's dividends his fund weights by, not yield.

Ah makes sense now. I had no idea OhNoNotIm was referring to Colin's post.

I believe that his fund actually weights by forecast dividends rather than historical dividends. So right now it is estimates of 2019 dividends that drive weightings and not actual 2018 payouts. That introduces another opportunity for error, since forecasts can turn out to be wrong.

Okay... then such a strategy would underperform if the market valued dividends above shareholder equity and if company distributions were excessively high. That's most likely occur when yields are low, like now. Conversely, the strategy is presumably flattered by back-testing over the high-yield years of the 60s to 80s... Haven't thought about it too much though...

I think there are a few factors that drive returns with such an approach. Clearly it favours the very largest companies, since they typically pay the biggest dividends. If large-caps under-perform, so will this fund.

Dividends partially correlate to value, so this fund might do well when value is doing well, but lag when growth out-performs.

In terms of risk, it is a UK-only fund, so you have single-country risks like political risk, regulatory risk etc. And there are some important sectors that are hard to find in the UK; the sectoral profile is skewed towards natural resources in particular, pharma and financials.

What would worry me right now is that dividend cover is low and many of these types of company can barely support their dividends out of earnings. The opportunity for dividend growth is therefore muted, and dividend cuts could happen. The strategy takes no account of how much of a struggle it is for a company to pay that dividend. In fact it doesn't look at earnings at all, nor various quality factors that can drive returns.

It's a one-dimensional approach to investing. You have to believe that dividends and only dividends drive returns, and that everything else can be ignored.

[GoSeigen]

The point OhNoNotimAgain (ex Munroman) was making was that whereas Colin had said he (Munroman) was promoting high yields, what he is actually advancing is high total dividends payouts. It's dividends his fund weights by, not yield.

Ah makes sense now. I had no idea OhNoNotIm was referring to Colin's post. [Is there a way to find which post is being replied to if the poster hasn't bother to quote in his reply?]

Well there's only two posts above OhNoNotimAgain's that mention yield, so it had to be that or Lootman's (and I don't think it was to the latter).

mc2fool, in this case there were two posts; but I don't make it a habit to read all the way back through (sometimes long) threads to figure out the context when a poster has been too lazy to quote: I simply take the post on its own merits.

If you are too lazy to quote and too lazy to explain yourself fully then sometimes people are not going to know what you are talking about!

As there's only the two Post Reply (without quoting) buttons on each page there's no way of knowing for sure which post the poster was looking at and/or thinking of when they clicked one of those buttons, one can only try and intuit....

Ah, I practically never use those myself -- I use the quote button next to the relevant post and delete automatically quoted text if necessary. Even with that method I've not found a way to track back through the replies as you could do in the old days on TMF.

GS

[colin]

Be sure to understsand the difference between dividends and yield, it is important. Yield is a function of share price, dividends are not; they are directly related to the finances of the company. The value that the stock market places on them can vary enormously.

Well that would seem a reasonable methodology for selecting investments, far less risky than IUKD for example, but who buys it with those high fees?
I remember that you once posted a justification for smart Beta funds charging .75% by claiming that they could be expected deliver more than an index tracking fund. Well maybe your fund might do so if you did not take so much money out of it?

[Lootman]

Be sure to understsand the difference between dividends and yield, it is important. Yield is a function of share price, dividends are not; they are directly related to the finances of the company. The value that the stock market places on them can vary enormously.

Well that would seem a reasonable methodology for selecting investments, far less risky than IUKD for example, but who buys it with those high fees?

I remember that you once posted a justification for smart Beta funds charging .75% by claiming that they could be expected deliver more than an index tracking fund. Well maybe your fund might do so if you did not take so much money out of it?

To be fair, Ohno/Munro only "takes out" 0.5% as a management charge. Given that his fund has about 6 million in assets, he presumably is supporting his family on 30K a year.

The real problem is the other expenses. They aren't income for Munro, but rather go to cover the fund's costs. According to Trustnet the OCF of the fund is 1.2% annually (including the 0.5% of course). I believe that gives it the dubious distinction of being the most expensive passive fund in the country, and more costly than many active funds.

That high expense ratio is a function of the small size of the fund, since some of the costs are fixed and so large relative to a small fund. Perhaps if Blackrock or Vanguard were running a fund with the same strategy then it would have far more assets and so the expense ratio would be much less. But as things are the position is that the expenses are high because the fund is small, and the fund stays small because the after-expenses returns aren't that great. It's a vicious circle. Even if Munro's rules pay off and beat the market, those costs will kill returns.

It's probably not a coincidence that most smart beta and passive funds these days are in an ETF format, which have drastically lower costs, as well as other advantages like intra-day trading. Being an OEIC is unfortunate in that respect, although I suspect that Munro had no choice but to launch it with that structure. It also means that Munro has to get the major funds platforms to feature and attract assets, and it's too small and insignificant for them to bother. Nor by its very nature is it going to top performance charts, which the platforms always love to see.

[colin]

Ah a cottage industry! That's nice.