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I am a bit ignorant on funds?
Frenchman 96
Posted: 04 March 2017 12:01:52(UTC)
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Hi There

I do self execution with HL and I buy footsie 100 shares only. But since starting a SMALL monthly management plan for my grandson aged 5, I use it to buy Fundsmith Equity, and since I started it 2 years ago, it has done very well.

Because of this, I have added to my 15 shares, a small amount in 3 funds, which are Fundsmith, Lindsell Train Global, and L & G USA Index.

So, my question is, when I read more experienced people than me talking so much about annual fund charges being dear when in the region of .75% to 1.5%, as most of the well known funds average WAY ABOVE the charges above, I feel I am missing something.

What I am trying to say, if for example Fundsmith charges say 1% yearly but produces figures like >>

24% 8% 30% 14% 32% Surely his charges, and others like him are insignificant.

I must stress, I am a novice and am asking the question to learn, as I think I would like to go more into funds for a better spread.
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john brace on 06/03/2017(UTC)
King Lodos
Posted: 04 March 2017 12:33:55(UTC)
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It depends...

Fundsmith's performance so far is slightly ahead of the US index .. i.e. both have been very good investments in recent years.

But this has been during a bull market (everything's been going up) .. At some point we'll find ourselves in a bear market, and the average return you get on a fund like Fundsmith will be brought down.

In fact the average annual real return on the US stock market, with dividends, is about 5.7% .. Slightly higher since the 1950s.

Take a platform fee of 0.5% and let's round it down to 5%.

Assume that's what we should expect going forwards, and that 1% fee is actually 20% of your annual return above inflation.

Consider fees effectively compound too, and before long your investment's only half the size it could be.

But the fee is included in the fund's performance .. So if you can pick funds that outperform over a full market cycle, then it's been money well spent (and average active funds do add *some* value, it's just usually not quite as much as the fee – which means you need some ability to pick outperforming funds).

So in all, there are good reasons to invest as cheaply as possible ... But at the same time, people love certainty, and have clutched onto low-cost index investing like it's the Holy Grail ... You can make just as strong arguments that it's lack of diversification that's going to kill most people's returns going forwards.

S Dobbo
Posted: 04 March 2017 13:25:24(UTC)
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Quote:
So in all, there are good reasons to invest as cheaply as possible ... But at the same time, people love certainty, and have clutched onto low-cost index investing like it's the Holy Grail ... You can make just as strong arguments that it's lack of diversification that's going to kill most people's returns going forwards.


The thing is there are so many index funds & ETF's covering every asset and sector, there is no reason why you cant be diversified using just physical trackers.

How about core trackers:-
Global Large Cap Tracker
Global Small Cap Tracker
Global Consumer Staples ETF (These tend to heavily weighted to US)
Regional trackers as desired.
High Yield Bond Tracker.
Gold Tracker.

Satellite trackers:-
Health care
Commodities
Etc.

Some areas it might be worth using IT's or OEICS where proven track records are higher. And a capital preservation fund as well PNL, Trojan or RICA). Having trackers for the core and where possible must be beneficial, this is why Lifestrategy has taken off so much.






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dlp6666 on 06/03/2017(UTC)
Raj K
Posted: 04 March 2017 14:37:28(UTC)
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Frenchman 96;44069 wrote:
Hi There

I do self execution with HL and I buy footsie 100 shares only. But since starting a SMALL monthly management plan for my grandson aged 5, I use it to buy Fundsmith Equity, and since I started it 2 years ago, it has done very well.

Because of this, I have added to my 15 shares, a small amount in 3 funds, which are Fundsmith, Lindsell Train Global, and L & G USA Index.

So, my question is, when I read more experienced people than me talking so much about annual fund charges being dear when in the region of .75% to 1.5%, as most of the well known funds average WAY ABOVE the charges above, I feel I am missing something.

What I am trying to say, if for example Fundsmith charges say 1% yearly but produces figures like >>

24% 8% 30% 14% 32% Surely his charges, and others like him are insignificant.

I must stress, I am a novice and am asking the question to learn, as I think I would like to go more into funds for a better spread.


When it comes to Fundsmith or other high performing funds or investment trusts the ultimate goal is the end result. Fundsmith has outperformed the S&P 500 over 3 years and 5 years on a total return basis. King Lodos often compares it to the consumer staples sector but as you are suggesting a US tracker as your third fund a comparison against the S&P 500 is more appropriate.

Cumulative performance
Investment 3 months 6 months 1 year 3 years 5 years
Fundsmith Equity I Acc 16.05% 11.65% 32.72% 99.01% 167.12%
S&P 500 12.66% 19.56% 40.12% 84.05% 142.55%
VANGUARD S&P500 12.61% 19.76% 41.79% 86.18%

As you can see it has done better over 3 and 5 years by some distance






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Guest on 04/03/2017(UTC), dlp6666 on 06/03/2017(UTC), Peter Sm on 12/03/2017(UTC)
King Lodos
Posted: 04 March 2017 16:23:59(UTC)
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S Dobbo;44073 wrote:
Quote:
So in all, there are good reasons to invest as cheaply as possible ... But at the same time, people love certainty, and have clutched onto low-cost index investing like it's the Holy Grail ... You can make just as strong arguments that it's lack of diversification that's going to kill most people's returns going forwards.


The thing is there are so many index funds & ETF's covering every asset and sector, there is no reason why you cant be diversified using just physical trackers.

How about core trackers:-
Global Large Cap Tracker
Global Small Cap Tracker
Global Consumer Staples ETF (These tend to heavily weighted to US)
Regional trackers as desired.
High Yield Bond Tracker.
Gold Tracker.

Satellite trackers:-
Health care
Commodities
Etc.

Some areas it might be worth using IT's or OEICS where proven track records are higher. And a capital preservation fund as well PNL, Trojan or RICA). Having trackers for the core and where possible must be beneficial, this is why Lifestrategy has taken off so much.


Oh of course. I use passive wherever possible because it takes manager risk out of the equation.

But over here we're still a little limited .. e.g. Value is the most robust way to generate long-term outperformance, but we have very few options in that space.

And even in the US, where people do buy Value and Small-Cap Value trackers, the MSCI Value index isn't constructed properly, and doesn't capture the Value premium. (The MSCI and Vanguard version is basically just the cheap half of the market, and to capture the premium you need to go for the really cheap end of the market.)

These are 'dumb' funds, but they can have some really dumb human management behind them .. They can also carry fees that don't make them much better than active funds pursuing the same closet strategies.

What I like about the active fund space is competition .. If you're not capturing the value premium properly, you'll hire a manager who does .. Sometimes that will justify a fee.





Frenchman 96
Posted: 04 March 2017 16:50:00(UTC)
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Thanks for replies guys, don't follow ALL of it but I get the gist, so I will follow up with more.

In the 2 years I have invested, it has all been self execution with HL, my aim being to earn around 5% income in dividends as I have a low income.

Although I change shares sometimes if I see a good profit, in the main, I keep for income and deal with mostly large cap.

Knowing I am hoping to make 5% per year, sometimes (right or wrongly) if a share is showing growth of say 10%, I will at least place a stop loss on it to guarantee the 10% or maybe sell it.

Comments welcome

AZN
BAE
BARRATT
BP
BATS
CNA
IMB
L/GEN
LLOY
PSN
RDS
RMG

FUNDSMITH
L/T GLOBAL CLASS D
L/G USA INDEX CLASS C
King Lodos
Posted: 04 March 2017 16:58:45(UTC)
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Just my opinion here ... But I think some of these dividend-paying stocks may be overpriced and vulnerable to a slow-down..

Bond yields have been pushed so low, everyone's been pushing into high-yielding stocks .. Which may mean if businesses slow (Brexit?) and dividends are cut, they lose a lot of share price value.

Also if and when government bonds yield 3% again (with no risk) that might lead to an exodus out of a lot of these stocks .. It's a common opinion, but there are no certainties .. So my preference is for funds like GAM Star Credit Opportunities (yields 4.5-5%), which sit somewhere between equities and bonds, so there should be less risk of dividends not being paid, and share prices falling.

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S Dobbo on 05/03/2017(UTC)
Frenchman 96
Posted: 04 March 2017 18:14:35(UTC)
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King Lodus

makes sense all you say, and I do take it in, but will say a few things.

1- I am investing purely for income, so if shares go down on paper, but are capable of recovering, I wont feel my money is at risk.

2-again, I try to place a stop loss on my shares, so hopefully, I wont lose money .

3-am interested which ones you are referring to.

4-one thing I don't know how to do, is judge when a share is looked on as " good value), does it mean when they are much lower than their year high?
Richard T
Posted: 04 March 2017 18:24:58(UTC)
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King Lodos;44084 wrote:

Assume that's what we should expect going forwards, and that 1% fee is actually 20% of your annual return above inflation.

Consider fees effectively compound too, and before long your investment's only half the size it could be.


King Lodos;44084 wrote:

So my preference is for funds like GAM Star Credit Opportunities (yields 4.5-5%), which sit somewhere between equities and bonds, so there should be less risk of dividends not being paid, and share prices falling.


I'm ignorant and just trying to pick things up, so please try and forgive my questions if they're daft! The OCF for that GAM fund is 1.18%. It is 75% in bonds, 18% in "Non-Classified", and some cash. Is the non-classified portion actually equities then? Presumably this is an example where the high fees are earned by performance over a full cycle? I can only see five years on HL, which I guess is not long enough. Has it a good record over a longer timespan?

Richard
Dennis .
Posted: 04 March 2017 19:20:51(UTC)
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I have a block of Fundsmith with HL but I have also have a block in Fundsmith directly and they don't charge a management fee. The difference is

in HL you have the I class shares 0.98% and a 0.45% HL fee

in Fundsmith Direct T class shares 1.08% fee and no management costs so your save 0.35%

that's £350/year on a £100k holding

I plan to use my own plus my wife's ISA allowances to move another £40k into Fundsmith ISA direct in April.

PS it's done about 8% this year so far.
S Dobbo
Posted: 04 March 2017 22:49:03(UTC)
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Dennis .;44090 wrote:
I have a block of Fundsmith with HL but I have also have a block in Fundsmith directly and they don't charge a management fee. The difference is

in HL you have the I class shares 0.98% and a 0.45% HL fee

in Fundsmith Direct T class shares 1.08% fee and no management costs so your save 0.35%

that's £350/year on a £100k holding

I plan to use my own plus my wife's ISA allowances to move another £40k into Fundsmith ISA direct in April.

PS it's done about 8% this year so far.


With II you can get I class at 0.98% with no extra charges to your account, the more I hear the more II looks better!


http://www.iii.co.uk/inv...6/fundsmith-equity-i-acc
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dlp6666 on 06/03/2017(UTC)
King Lodos
Posted: 04 March 2017 23:18:15(UTC)
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Frenchman 96;44088 wrote:
King Lodus

makes sense all you say, and I do take it in, but will say a few things.

1- I am investing purely for income, so if shares go down on paper, but are capable of recovering, I wont feel my money is at risk.

2-again, I try to place a stop loss on my shares, so hopefully, I wont lose money .

3-am interested which ones you are referring to.

4-one thing I don't know how to do, is judge when a share is looked on as " good value), does it mean when they are much lower than their year high?


1. Well basically there are three levels of income-paying assets you can buy in a company: stocks, bonds and preferred stock.

In order of priority, a company has to pay out bonds first, preferred stock second, and common stock third.

So I'd say don't overlook corporate bonds and preferred stock (both things the GAM Star fund invests in) for income. They may be more reliable.


2. A stop-loss *might* be a good idea .. But it depends .. As an income investor, as a stock falls, its dividend yields goes up .. So if you stick to quality companies, you may want to buy on price weakness rather than sell.


4. There's no simple formula to value a company properly .. But you can use valuation metrics (Price/Earnings, Price/Cash-flow, Price/Book, etc.) to get an idea of what people are paying for something at the moment.

Year highs are absolutely meaningless (unless you're a technicals investor – which I am) .. Value is always Price divided by some quantifiable measure of the business, such as Earnings.

If you want a simple book (with a decent strategy) for picking stocks and valuing companies, I'd recommend: The Little Book That Beats The Market, by Joel Greenblatt.

But bear in mind most people are terrible stock-pickers – and dealing fees from trading stocks can add up to £100s very quickly .. So I'd go for index funds (low fees means more income) or highly-rated equity income funds.


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S Dobbo on 05/03/2017(UTC)
King Lodos
Posted: 04 March 2017 23:37:24(UTC)
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Richard T;44089 wrote:
King Lodos;44084 wrote:

Assume that's what we should expect going forwards, and that 1% fee is actually 20% of your annual return above inflation.

Consider fees effectively compound too, and before long your investment's only half the size it could be.


King Lodos;44084 wrote:

So my preference is for funds like GAM Star Credit Opportunities (yields 4.5-5%), which sit somewhere between equities and bonds, so there should be less risk of dividends not being paid, and share prices falling.


I'm ignorant and just trying to pick things up, so please try and forgive my questions if they're daft! The OCF for that GAM fund is 1.18%. It is 75% in bonds, 18% in "Non-Classified", and some cash. Is the non-classified portion actually equities then? Presumably this is an example where the high fees are earned by performance over a full cycle? I can only see five years on HL, which I guess is not long enough. Has it a good record over a longer timespan?

Richard


It's quite tricky to classify the things GAM invests in .. Over half the fund is fixed-rate and fixed-to-inflation perpetual bonds (which are basically bonds that pay out forever, with higher priority to pay out than stocks .. basically preferred stock) .. Then the rest is in quality corporate bonds and inflation-linked corporate bonds.

As it's in some fairly niche areas of the debt market, I don't think there is a cheap/passive alternative .. You could consider investing directly in perpetual bonds (which you can find on HL), but you'd have to make sure dealing fees didn't eclipse the fund fee.

I'm always slightly reluctant to recommend specialist funds like this .. It is capable of losing money at similar times (and in similar amounts) to the kind of stocks you'll find in an equity income fund .. And it's quite concentrated in UK banks (so there may be some Brexit risk there) .. And some would say chasing yield is the most dangerous bubble around at the moment .. So I'd advise caution with this or any income-generating funds .. I'd probably reduce holdings (or even sell) if a recession looked likely .. But while stocks and the economy are steaming ahead, I'm seeing it as a low volatility analog to stock market exposure.

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Richard T on 05/03/2017(UTC), Guest on 07/03/2017(UTC)
Frenchman 96
Posted: 05 March 2017 12:13:49(UTC)
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King Lodus

I hope that saying "no such thing as a daft question" as I am about to ask one.

With reference to your comment on divi goes up when share value drops, I am putting this in a soft way.

share today of £10 and % is 5% I earn 50p per share
share drops to £5 say divi goes to 10% I still earn same amount.

Of course I am quoting silly figures, so what am I doing wrong with my maths
Micawber
Posted: 05 March 2017 12:47:03(UTC)
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Frenchman 96;44122 wrote:
King Lodus

I hope that saying "no such thing as a daft question" as I am about to ask one.

With reference to your comment on divi goes up when share value drops, I am putting this in a soft way.

share today of £10 and % is 5% I earn 50p per share
share drops to £5 say divi goes to 10% I still earn same amount.

Of course I am quoting silly figures, so what am I doing wrong with my maths



He probably meant yield goes up when share price drops. Easy to confuse dividend and yield.
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Frenchman 96 on 05/03/2017(UTC)
King Lodos
Posted: 05 March 2017 13:58:52(UTC)
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^^ Always good to have a few spellcheckers around here.

I should add, we're probably about to have the third rate hike this month..

10 out of 13 rate hiking cycles have led to a recession .. You usually get a pullback after the third hike "Three steps and a stumble."

But these are unusual times .. What it really comes down to is what point bond yields tempt investors back (in light of high stock valuations, and low yields).

So I think caution on stocks goes up after the third hike (which is why I'm moving a little more into corporate bonds, high-yield and preferred stock), but be aware the hiking cycle itself is likely to lead to the kind of recession you'd want to dump corporate/high-yield bonds prior to.

That's just my thinking .. We may not get a hiking cycle .. But I think this is a market for trend followers – or well diversified buy-and-hold investors who don't mind losing money in the short-term.

http://www.valuewalk.com/2017/03/10-13-times-ended-badly-david-rosenberg/?all=1
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Mickey on 05/03/2017(UTC)
Frenchman 96
Posted: 05 March 2017 14:01:55(UTC)
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Hi Guys

Tremendous amount of help, very grateful, so I now want to make a small change to my portfolio.

I want to try the low cost route of tracker/index funds/ trusts, don't know the difference between them.

I fancy Scottish Mortgage
I fancy Japan
I fancy Europe

Where is the best company or platform to buy these to keep costs down please.
Frenchman 96
Posted: 05 March 2017 17:54:34(UTC)
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King Lodos

What a great book you recommended, am halfway through it, and as an ex self-employed businessman, I agreed with what he says, but most important, the b/w way he explains it.

One section was about finding" the big discount to value" and I now foolishly understand, that my method of buying a share when it was much below its "high" is not the correct way.

So if I am looking for that "margin of safety" which is in the same paragraph, can you/anyone give me a simple "step x step" way of testing it on any share in my portfolio.

I know I am asking a lot and sound lazy, but the method is probably second nature to you guys.
Alan Selwood
Posted: 05 March 2017 18:21:02(UTC)
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Scottish Mortgage investment trust - has just announced reduction in fees to an even lower level, and almost competitive with a tracker on charges, but with skill attached.

Japan - my favourite is Baille Gifford Shin Nippon investment trust [BGS] for exposure to smaller companies there (not the cheapest - their own fund is slightly cheaper than the investment trust - but it has produced stunning performance over the last few years).

Europe - Jupiter European Opportunities [JEO] is my favourite, and may be a bit cheaper to buy at the moment than it should be, judging by past discount/premium levels.
Also consider European Assets Trust [EAT] if you want smaller companies, and TR European Growth.
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Frenchman 96 on 05/03/2017(UTC), Mickey on 05/03/2017(UTC), c brown on 06/03/2017(UTC), dlp6666 on 06/03/2017(UTC)
King Lodos
Posted: 05 March 2017 18:24:03(UTC)
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Frenchman 96;44150 wrote:
King Lodos

What a great book you recommended, am halfway through it, and as an ex self-employed businessman, I agreed with what he says, but most important, the b/w way he explains it.

One section was about finding" the big discount to value" and I now foolishly understand, that my method of buying a share when it was much below its "high" is not the correct way.

So if I am looking for that "margin of safety" which is in the same paragraph, can you/anyone give me a simple "step x step" way of testing it on any share in my portfolio.

I know I am asking a lot and sound lazy, but the method is probably second nature to you guys.


Excellent – glad you're getting something out of it .. It is a classic .. And I *always* recommend The Art of Execution (for the other part of trading: when to buy and sell).

And yeah, a share price represents information we have about a company, plus future expectations ... So if a company becomes weaker, and the share price drops: that doesn't mean it's cheap ... Everything that goes to zero spends a lot of time falling in price too.

Margin of safety means you're buying at a discount (relative to your valuation of the underlying business), which means if things get worse, prices don't need to come down too much.

Two bits of advice:

- Use a site like Gurufocus to get your information (you'll learn about Earnings Yield and Return on Capital in that book) .. although it does cost to research UK stocks.

- Don't buy shares .. Stick with funds .. You can get the average market return just buying a Vanguard index tracker .. Very cheap, very easy .. *Some* people can do well buying shares .. But (in the nicest way) you'd already be telling me how they do it, if you were that type of person .. There are lots of other ways to invest.

Very useful reading books like those two – because knowledge is power .. But you're up against the smartest minds in the world, who do nothing but trade stocks and look at fundamentals, and just have access to much more information.
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Frenchman 96 on 05/03/2017(UTC), Margaret Driver on 14/03/2017(UTC), C Blockley on 12/04/2017(UTC)
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