Author Topic: [UK] - HELP! My gut says I should ditch this active fund  (Read 3886 times)

FreeOnABike

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[UK] - HELP! My gut says I should ditch this active fund
« on: October 07, 2014, 10:10:12 AM »
I'm a new MMMer, 35 years old in the UK, and thanks to MMM I'm now planning how to optimise my path to FI over the coming weeks, months and years.  I'm starting later than ideal, but step one is to understand where I'm at. 

The overall picture is out of scope for this question (I may do a more thorough breakdown on the forum one day), but basically I am debt-free except for mortgage, and although there have been no big financial mistakes I feel like I'm not as far ahead as I need to be.  In fact, I feel positively left behind compared to many on this forum!

My question:
I am confused about a fund that I have been drip-feeding into at 100/month since 2006.  It's an active fund (the logic of passive investing makes sense to me, but I didn't know about it then), and the fees are high.  3.5% initial charge on pay-in, and an annual charge of 1.69%.  Ouch! I didn't really know about the availability of low fee alternatives back then, and my advisor didn't tell me about them.  He's retired now.  He has a REALLY nice house. 

I have paid in for 102 months, a total of 10,200. 
The value fluctuates, but today is 13,627 (down from 14.1K a couple of weeks ago). 
I'm not sure how to calculate for weighted inflation over this period (are there any online tools out there?), but a tool I found suggested that 100 in 2006 was worth 130 in today's money, which would wipe out any gain at all. 

Everything I have learned on MMM suggests I should start moving this to a low-fee index of some kind.  My gut agrees, and I can see the logic that on average, no-one beats the average.  I am almost completely convinced that the person who got most rich here was not me.  But...

My problem:
I like to be able to understand the detail of what I'm getting myself into.  You know, with maths and stuff. 
I have attached two images.  One of this fund's performance for the period that I have invested (courtesy of google).  The second compares the same line to the FTSE100 (the fund is 70% UK equities). 

What method can I use to calculate this out?  This will help me make the leap, and sack my financial advisor's heir.  Sorry about the very basic question.  I feel well-educated, but still totally unable to make an analysis with data that will tell me to do one thing or another.  Can anyone advise?

LordSquidworth

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Re: [UK] - HELP! My gut says I should ditch this active fund
« Reply #1 on: October 07, 2014, 10:33:44 AM »
My problem:
I like to be able to understand the detail of what I'm getting myself into.  You know, with maths and stuff. 
I have attached two images.  One of this fund's performance for the period that I have invested (courtesy of google).  The second compares the same line to the FTSE100 (the fund is 70% UK equities). 

What method can I use to calculate this out?  This will help me make the leap, and sack my financial advisor's heir.  Sorry about the very basic question.  I feel well-educated, but still totally unable to make an analysis with data that will tell me to do one thing or another.  Can anyone advise?

Not really sure what your problem is. Both graphs are different ways of measuring the same return. One is a dollar return one is a percent. In the end, equals the same thing.

By the sounds of it, what you should be doing is looking to stop paying load fees. That would be the first step. In order to do that, you'll transfer your account elsewhere (ie: Vanguard, Fidelity. Not sure what's available in the UK).

Second step is to look at expense ratios. But can't really do that without the fund name, which you cut out. Though from first glance, what you have is doing better than the index you've compared it to, though its a really badly performing index.

Load fees are archaic. It's just the sales cut your salesman is getting (I increasingly don't use the word adviser with them, as I've met too many with the title that really know diddly about investing. They're salesman at the end of the day). If you're looking for motivation to ditch your salesman, you've got access to everything he uses to make decisions for you on the internet.
« Last Edit: October 07, 2014, 10:36:32 AM by LordSquidworth »

FreeOnABike

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Re: [UK] - HELP! My gut says I should ditch this active fund
« Reply #2 on: October 07, 2014, 11:05:04 AM »
Thanks LordSquid for the reply,

I didn't mean to cut the fund name out.  It's this one:
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR04S23

The FTSE100 is what I was thinking my index fund would track.  This is the largest 100 companies traded on the London Stock Exchange (similar to the Dow Jones or S&P 500).  Having compared to the Dow and S&P though, you're right, it has done badly.  I need to put some thought into choosing the right index to track too...

Fidelity Special Situations: +75% (minus fees)
S&P 500: +54%
Dow Jones:  +51%
FTSE100: 10%

Valean

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Re: [UK] - HELP! My gut says I should ditch this active fund
« Reply #3 on: October 07, 2014, 11:48:33 AM »
Those fees (especially the load fees) are high. I have a few aggressive small-cap emerging market funds for which I pay such fees, but not for replicating the FTSE 100.

Don't beat yourself over the head for the FTSE underperforming the S&P - if you could predict such things, you can graduate from this forum and turn dollars into millions at the stock exchange. That said, my philosophy nowadays is that I always invest in world-wide exposure (that's usually about 55% US shares) unless I think I have a reason not to. The argument is simple diversification, although the fact that these funds tend to be very cheap helps too.

Hugerat

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Re: [UK] - HELP! My gut says I should ditch this active fund
« Reply #4 on: October 07, 2014, 12:09:13 PM »
Take it from someone who is your age, been investing a long time, and worked in the fund business for many years (even some of your UCITs), dump all of your active managers! Being in the business I used to consider myself quite clever, and thought I had the ability to pick out good managers that would outpace their respective benchmarks. Some of them did, for a while, even by a lot. But the market always catches up to them and they will eventually start falling behind. One fund that I've owned for a long time crushed its benchmark for many years. But it's been underperforming now for three straight years, and recently lost 10% in a single day!

A couple points about your original post:

First, those graphs really aren't illuminating anything for you. They might show the total return of the fund over the period since your initial investment (is this an accumulation share class?), but those are emphatically not your returns. Your returns are cash flow weighted based on the 100 pounds you invest each month. Your first hundred pounds did experience this but the rest did not. Google "internal rate of return (IRR)" to try to get a handle on cash flow adjusted returns and to figure out how you've actually done in this fund.

Second, the words "Special Situations" in the fund's name make it sound suspiciously like a hedge fund, and looking at the blurb on Morningstar that is exactly what it is. It may make extensive use of derivatives and leverage and other complex instruments that could be very risky. If this is your only holding you absolutely must diversify now!

Third, yeah the fees are ridiculously high. This is partly just a fact of life for European investors. Fees on your funds are higher than this side of the pond, which is why many US managers (like Fidelity) love setting up subsidiaries in Europe. There are some cheap index funds available to you, including Ishares. As you know, fees eat away at your returns. This manager has to earn 1.69% each year just for you to get back to 0.

Lastly, despite all this, it looks like this particular manager has done very well for the past 8 years or so. Those charts should be net of fees so they do, in fact, show the actual return of a pound invested on the starting date. Consider yourself lucky that you've done this well, sell all shares of this fund, and move on. This is a high risk fund and it's not a matter of "if," but only when it all goes to hell.

Take your proceeds and allocate them to a variety of passive index-type funds. These can be ETFs as well. You should be allocating across a variety of markets, each of which will have it's own benchmark, so using only the FTSE 100 won't really show you much. Naturally a UK investor will have a UK bias, but your equity holdings should generally be something on the order of 80% developed markets (US, Europe, Japan) and not more than 20% emerging markets. You may even find a single fund that does all this for you. Something like the Vanguard Total World Stock Index. Allocate some to bonds and real estate as well.

The great thing about index investing is how little effort it requires. There is no second-guessing your decisions, no need to monitor your managers to make sure they are not taking undue risks, no worry about whether you are underperforming. You're always doing as well as the average, no more and no less.

Good luck!

LordSquidworth

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Re: [UK] - HELP! My gut says I should ditch this active fund
« Reply #5 on: October 07, 2014, 07:09:18 PM »
Thanks LordSquid for the reply,

I didn't mean to cut the fund name out.  It's this one:
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR04S23

The FTSE100 is what I was thinking my index fund would track.  This is the largest 100 companies traded on the London Stock Exchange (similar to the Dow Jones or S&P 500).  Having compared to the Dow and S&P though, you're right, it has done badly.  I need to put some thought into choosing the right index to track too...

Fidelity Special Situations: +75% (minus fees)
S&P 500: +54%
Dow Jones:  +51%
FTSE100: 10%

Is that the only fund you're in?

I personally prefer the S&P 500 for indexing purposes.

FreeOnABike

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Re: [UK] - HELP! My gut says I should ditch this active fund
« Reply #6 on: October 08, 2014, 02:14:23 AM »
First, those graphs really aren't illuminating anything for you. They might show the total return of the fund over the period since your initial investment (is this an accumulation share class?), but those are emphatically not your returns. Your returns are cash flow weighted based on the 100 pounds you invest each month. Your first hundred pounds did experience this but the rest did not. Google "internal rate of return (IRR)" to try to get a handle on cash flow adjusted returns and to figure out how you've actually done in this fund.

Second, the words "Special Situations" in the fund's name make it sound suspiciously like a hedge fund, and looking at the blurb on Morningstar that is exactly what it is. It may make extensive use of derivatives and leverage and other complex instruments that could be very risky. If this is your only holding you absolutely must diversify now!

Third, yeah the fees are ridiculously high. This is partly just a fact of life for European investors. Fees on your funds are higher than this side of the pond, which is why many US managers (like Fidelity) love setting up subsidiaries in Europe. There are some cheap index funds available to you, including Ishares. As you know, fees eat away at your returns. This manager has to earn 1.69% each year just for you to get back to 0.

Lastly, despite all this, it looks like this particular manager has done very well for the past 8 years or so. Those charts should be net of fees so they do, in fact, show the actual return of a pound invested on the starting date. Consider yourself lucky that you've done this well, sell all shares of this fund, and move on. This is a high risk fund and it's not a matter of "if," but only when it all goes to hell.
Hugerat,

Many thanks for pointing me towards IRR and cash flow adjusted returns.  I think some work around that will help me get the confidence I need. 

Your 2nd, 3rd, and last points all reinforce what my gut feel is telling me.  The manager has done well, certainly better than indexes, but even so I don't seem to be too far ahead.  I'm confident when I get the result of the calculation I want to do, that I will switch very quickly. 

Many thanks for your point of view, especially given your experience in the industry...

FreeOnABike

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Re: [UK] - HELP! My gut says I should ditch this active fund
« Reply #7 on: October 08, 2014, 02:25:24 AM »
Is that the only fund you're in?

Yes and no. 

It's my only independently invested fund, but I also have a total of 25K in two defined contribution pension schemes.  I will be getting to those soon, because I strongly suspect they are also making other people richer than me.  I've done my reading on asset allocation, and now just need to get the confidence to make the changes...

I'm massively behind where I need to be, but I've seen the error of my ways and I intend to catch up with the average for my age over the next 3 years or so, and move ahead in the years following that. 

Kaspian

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Re: [UK] - HELP! My gut says I should ditch this active fund
« Reply #8 on: October 10, 2014, 12:47:40 PM »
Let me ask you a simple question:  Would you buy more of it?  If the answer is "No", then you're suffering from what's called "framing" the idea.  Not selling an investment you're worried about versus buying more of it are essentially the same question.  Just see it as a pile of money which is yours and worth no more or less than it currently is.

Here's another example:  Somebody inherits $500,000 in cash.  You ask them if they'd dump it all in the stock market today and they say, "No way".  Same person inherits $500,000 in investments.  You ask them if they'd cash it all out immediately and they answer, "No way."  Well, why not?  Because either way they're afraid of losing something.  It's essentially the same question and is valued at $500,000 either way.

FreeOnABike

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Re: [UK] - HELP! My gut says I should ditch this active fund
« Reply #9 on: November 05, 2014, 08:07:01 AM »
Quick update:

I've started the wheels in motion to move this investment to indexing.  I've separated my account from my advisor, chosen an investment platform, and will shortly be making the transfer to my newly-decided asset allocation. 

I didn't really get to the bottom of a returns comparison, but instead I realised I was procrastinating.  If I don't do it, it won't ever be done. 

Thanks for your help!