Beating the market

Dominic Thomas
May 2023 • 12 min read

Beating the market

Hopefully as a client, you understand my views about investing over the long term. One of the many constant challenges to investing is the fear of missing out. This is particularly apparent when you see a chart or data revealing the outperformance of a particular Fund Manager (these are known as active fund managers). There is a tendency to imply that the Fund Manager is particularly skilled and should be looking after your life savings.

The problem is that invariably you learn this after the fact. After the outperformance has been achieved, investing at the beginning was no ‘sure thing’, but it all appears all so obvious in hindsight. The Fund Manager now sits towards the top of the tables and you probably ask yourself “why haven’t I got any of that?”.

Well, because it’s difficult to pick winning fund managers. It’s even harder to pick one that provides continued success, they invariably tend to revert to average. I get emails every day from Fund Management groups attempting to change my mind and use their funds, which have of course performed rather well lately, picking up awards along the way, (otherwise they would have nothing to say). I might argue that this is like awarding someone that has simply tossed a coin a few times – a bit unfair, but not miles off the truth. What I find amusing is their commentary about how they are positioning their fund for the new current conditions. In other words, all the choices that resulted in that great performance is changing, underpinned by a belief that they have unique insight into the future. So do they?

Standard and Poors (S&P) are one of the agencies that rate funds and assess performance data. So in the interest of proving my point of view (I am aware of bias). S&P assessed European Funds (including the UK). I quote:

Very few actively managed equity and fixed income funds managed to maintain consistent outperformance relative to their peers over the three or five-year periods ending in December 2022
Of the actively managed Europe Equity and U.S. Equity funds whose 12-month performance placed them in in the top quartile of their respective category as of December 2020, not a single fund maintained its top-quartile performance over the next two 12-month intervals
Over a five-year horizon, it was statistically nearly impossible to find consistent outperformance. Among the 1,102 actively managed funds whose performance over the 12-month period ending December 2018 placed them in the top quartile in one of our reported categories, just two funds remained in the top quartile in each of the five subsequent one-year periods ending December 2022
Over discrete five-year periods, a greater-than-expected proportion of funds in three of six equity categories and two of four fixed income categories maintained relative outperformance. If performance were purely random in terms of comparing funds to their peers, one would expect 50% of top-half funds to remain in the top half over a subsequent five-year period. Our scorecard reports that an unweighted average of 54% of top-half Emerging Markets Equity and High Yield Bond (EUR) funds remained in the top half for two consecutive five-year periods
Over the long term, poor performance has proven to be a reliable indicator of future fund closures. Across the 10 categories reported by our scorecard, an unweighted average of 37% of actively managed funds whose performance placed them in the bottom quartile in the five-year period ending December 2017, were subsequently merged or liquidated over the next five years, while the comparable figure for funds whose performance placed them in the top quartile of performance for their category over the five years ending December 2017 was just 20%

Source: SPIVA European Persistence Scorecard: Year-End 2022 (May 2023)

If you wish to see the S&P report, do click here!

In short, there is about as much skill as there is luck when it comes to picking the ‘right’ companies to invest in. Active funds cost a lot more than passive funds (a terrible way to describe patience). One of the few things that we can control is the cost of investing, we can minimise it. At Solomon’s, the portfolios we use are weighted to global market sizes and are very low cost. In fact, the cost of the mix of funds is lower than 99% of all others. The portfolios are not available to anyone, cannot be accessed as a DIY solution and represent extremely good value.

The returns will reflect market realities and how much of your portfolio is held in global shares or bonds and cash. This ‘asset allocation’ is where the bulk of investor returns reside over the long term.

The most important ‘normal’ investment experience is that of underperformance. Over the long term the vast majority of funds underperformed. Active management takes more risk with your money by being selective and charges more; the results are poor; the winners are rarely investors and I might suggest a cursory glance at the remuneration of fund managers may provide some insight into who is.

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Beating the marketJemima Thomas2023-12-01T12:12:32+00:00

How long are you investing?

Dominic Thomas
Feb 2023 • 8 min read

How long are you really investing?

As you know, we use a risk profiling tool, indeed if you have been a client for some years you will know that these have evolved over time. These all tend to test how you feel about investment loss. It’s a bit like throwing a snake into someone’s lap and asking them how they feel about snakes.

In all my time as an adviser I have never met anyone that likes to see the value of their investments reduce. Yet of course they do from time to time – and time is the key word, or perhaps concept.

Investment returns come from companies providing “solutions” to society at large. This results in products and services being sold for a profit and investors in those companies share the rewards of the endeavour. Wherever you are now, take a moment to consider all the things in front of you, to your left and right, including your attire, and perhaps the medication and food you have already ingested today. It’s made, but almost none of it is made by you.

Risky business?

Almost all investment theory works on the assumption that whatever can reduce in value the most is more “risky”. Cash tends not to reduce in value much, except for the impact of inflation or the bank failing. Shares can alter in price dramatically in the course of a few hours. So to simplify, shares are classified as high risk and cash low risk, with Bonds (and there are numerous types) classified as a little higher risk than cash as they provide return of capital and fixed income, much like cash.

Getting the balance between how much you should hold in cash, bonds and shares will dictate your returns (we call this asset allocation). How long you invest for is also a key part of the results. Unfortunately we live in a world obsessed with the short-term and immediate, yet you will almost certainly be investing for the remainder of your life, which I hope is a rather long time.

The interactive chart below shows 1 year returns, 5, 10 and 20 year returns with increased allocation towards shares from Bonds. In this instance the chart uses purely UK data for UK shares and UK Bonds, our portfolios are actually global, but this will hopefully provide some help with long-term thinking and what “risk” really is.

Figures reflect back-tested data for the period 1926-2020. In cases where the minimum return is a positive number, the red bar still portrays the min return but with a positive percentage.

You can draw your own conclusions, using the intelligence bestowed upon you, or you can listen to the the latest ideas about what will happen in the next 12 months, I would advise and suggest taking a much longer-term approach. For the record, the UK stock market is only about 5%-7% of the world stock market, depending on the value of the pound, which is why our clients invest globally.

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How long are you investing?Jemima Thomas2023-12-01T12:12:37+00:00

CONTEXT IS EVERYTHING

TODAY’S BLOG

CONTEXT IS EVERYTHING

Whatever your view about coronavirus, I would prefer to trust explaining and treatment of any virus to a properly qualified medical expert rather than a member of Parliament. The focus on deaths is purely one measure of the virus, nothing more. As yet there is no (or very little) data about the long-term impact of the virus on individuals. A life lesson I learned many years ago is that investors over-estimate the short-term and under-estimate the long-term. That is true of everyone, not simply investors. We have short, flawed memories.

As for covid, many suffer ongoing symptoms months (currently known as long covid) after first contracting the illness. To measure the danger of virus based purely on deaths is rather like measuring road traffic deaths and concluding that they are low.

A NEW GREEN CROSS CODE FOR HEALTH

In 2018 in the whole of Britain 1,784 people were killed in reported road traffic accidents, yet there were 25,511 (14x) seriously injured casualties and a further 133,302 (74x) slightly injured casualties. Focus on the number that died out of a population of about 66.27million does not mean that just because “only” 0.003% died none of us should wear seatbelts or observe the highway code.

The uncomfortable truth is that we do not yet know the long-term (or even short-term) impact of covid on public health. We hope and look forward to a vaccine. However as with road accidents, there are a great (vast) number of people that will be impacted with poorer health.

BEYOND HEADLINES

In a related theme I noticed a fairly stark statement by a local politician. “10,000 deaths a year in London from air pollution”. Let me be clear, I am not a climate change denier, but I didn’t believe the statement. Instinctively it didn’t feel right. So I checked. In London (inner and outer) there are about 50,000 deaths a year in total. That’s everything from infant mortality, “old age”, cancer, road deaths, murder, suicide – the works. There is no way that 20% of those are due to air pollution. Everyone dies in the end.

IN A HAZE

Certainly you may notice the air quality in London being poor or awful at times, there is room for improvement (always). However, this is to forget the context. Take the Great Smog 5-9 December 1952. Estimates at the time were that 4,000 people died as a direct result, with 100,000 made ill, some of them very seriously indeed. Actions were taken to improve the quality of London air and have been ever since. The number of deaths registered in London has fallen enormously over the years. I have found data to 1966, some 14 years after the Great Smog there were 87,991 deaths (London) in 1966 some 5 years later this has reduced to 84,990 in 1971. Thereafter each subsequent decade later the numbers reduce. By 2011 the number had fallen to 46,685. Last year the figure stood at 49,007. Admittedly increased since 2011, but then so has the population from about 47.9m in 1966 (England and Wales) to 57.4m by 2014.

PAST, PRESENT, FUTURE

Data always requires a context and this invariably requires looking back. The main problem with financial planning is that we look forwards, often forgetting how far we have come. It is important to remember what things were like, this provides confidence that the future is hopeful. As for wondering if financial planning is important, think back to your own childhood and the cost of a stamp – look it up (if you were born before decimilisation you will have to convert imperial). One of the basics of financial planning is to keep your spending power rising or at least equal to inflation so that you can still afford your lifestyle, fear of the future is likely to be your worst enemy. Do not under-estimate the future or forget the past.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk
Call – 020 8542 8084

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PRIVACY POLICY | DATA PROTECTION

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY | DATA PROTECTION

CONTEXT IS EVERYTHINGDominic2023-12-01T12:13:13+00:00

“What have I missed about auto enrolment?”

What have I missed about auto enrolment?

Yesterday I suggested that auto enrolment was not really about pensions, that’s because despite it being about setting up a pension, the real emphasis is much more about communications with staff and with Government agencies. The new system is rather like PAYE, though nothing quite as simple. I have come up with 11, that’s eleven, key issues where auto enrolment will challenge your business or charity.

Contracts of employment

Contracts of employment will need to be altered reflecting the new pension arrangements; this may be a difficult discussion depending upon your type of business and workforce. Do you need to get the help of HR or even legal advice to do this properly?

Pay reviews and salary sacrifice

Some employers may use this as an opportunity to consider “salary sacrifice” or “salary exchange” this is a bizarre scenario where having a reduced gross income with the reduction paid into a pension, saves both employer and employee national insurance contributions and PAYE, yet invariably the net pay is a bit more, with more money going into a pension. Odd but true.

Payroll integration, live and up to date

Your payroll software will need to be able to integrate the new scheme, if you are a small firm and outsource this to your book keeper or Accountant; they need to be up to speed and have software that does the job.

IT overhaul

Schemes will be managed online and the Pension Regulator may demand data going back 6 years in a format that they can readily use). This therefore has implications for your IT systems and security and in particular how you hold and backup your data about staff.

Garbage in, garbage out?

Communication with staff is also a big deal. You need to be able to evidence that you have provided all of the relevant information to your staff, email is the most obvious and cheapest delivery option, but we all know that not everyone uses email or has provided you with an up to date email address, so do you need everyone in the business to have a company email address, and what happens when they leave? Do you maintain records properly?

Money Laundering

As a pension is an investment, there are issues about possible Money Laundering and politically exposed people. As an employer do you have evidence that you have done thorough identity and residency checks? Can you prove this? This will also identify any illegal immigrants or visa’s that have expired.

Staying silent and impartial

You might see auto enrolment as a valuable part of your staff package, however some see it as another tax and a whole lot of bureaucracy. You are not permitted to give advice about pensions or entice or discourage staff from joining the scheme. This isn’t just frowned on, it carries hefty financial penalties if revealed.

Disgruntled employees

Non compliance with the rules is a dangerous approach. You may believe that you know your staff, but perhaps you should reflect on what could go wrong for you if a member of staff falls out with you, or is just plain awkward anyway (these people do exist in 2014) so make sure you have complied and that you can demonstrate that you have done so. It is pointless to ask for a bullet proof vest after the event.

Tax triggers

You may not be aware that some people have very large pension scheme benefits. The Lifetime Allowance has reduced and will reduce again in April. Some people have protected their larger allowances, but should they accidentally enrol into a new pension, this would scupper their plans. This could trigger enormous tax penalties (55% of £1m for example) and you won’t be terribly popular with the employee that is presented with such a bill because you didn’t communicate well enough.

Honest guv….

The cynic in me might suggest that this is another way to join-up the Government agencies, which is fine if you are doing everything properly (unless you have concerns about information flow) but of course will catch out more people that have undeclared earnings anywhere.

Impacting your budgeting

Finally, don’t rely on your costs being 3% of your payroll. It is likely that contributions levels will be raised above 8%, in Australia (where they have had compulsory pensions since 1992) employers now contribute 9.25%. You ought to allow funds for the scheme and your systems to be reviewed and of course you might be wise to provide seminars or meetings for your staff to ensure that they understand their pension.

So, auto enrolment is about pensions… well yes, but it is also about rather more besides.

Dominic Thomas: Solomons IFA

“What have I missed about auto enrolment?”Dominic2023-12-01T12:38:57+00:00