Low Beta - Whats the downside/upside?

[Spe]

Hello fellow forum people! I need some help in defining my investment strategy.

Im not an experienced investor, but I currently invest in mainly low cost global index funds in search of financial freedom.
I have been reading about a low beta global "index" fund which has performed better than the index fund I currently have and the fund also has lower fees (0,25% as opposed to 0,3% that I have now).

So naturally im thinking about changing my investment strategy, but I dont really understand what different type of risk (or upside) a low beta fund has as opposed to a normal index fund.

Im norwegian so the main index fund im investing in today is this: http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F00000MKD8

And the low-beta fund I want to invest in is this one: http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F00000RW2R

Any help is appreciated :)

[adamwoods137]

Beta is a financial measure of volatility in the past.  A beta of 1 means that in the past, this fund's components had volatility similar to the US stock market.  Beta is in general a good predictor of future returns, more volatile assets generally have greater returns.  While the low beta fund may have performed better than the index fund that you currently have, the likely scenario is that it will underperform a Beta = 1 fund.  A low beta fund is thought to have less risk.  However, if the beta of components of the fund change, that could increase turnover and result in higher fees and more taxes (at least if the Norwegian tax system works similarly to the US).  The low beta fund also removes your exposure to emerging markets.  If you simply invested in KLP AksjeGlobal indeks 1 A you'd be able to reduce your ongoing fee from 0.3% to 0.1% (though watch out for the 0.25% transaction fee, you'll want to leave the money in for at least 2 years to balance out the difference, the low beta fund has the same fee).  You'd also lose your exposure to emerging markets, but you'd retain a beta near 1 which should mean higher volatility and return in the future.  One year of data in investing is not simply meaningless; using it is actively dangerous to your financial health.  To regain your emerging markets exposure invest 10% into KLP Aksje Fremvoksende Markeder Indeks I.  (Again watch out for that transaction fee).  If you buy and hold these funds you'll get the same results as what you are currently invested in and pay between 30-60% less in fees. 

Most importantly however your investment strategy should be based on financial science, and where that fails historical returns over the course of decades to hundreds of years.  One year of underperformance should never change your idea of what indexes to invest in.  Only if your understanding of how investment works changes, should you change your investment plan.  My apologies if you were using substantially more than one year of data, that was all I could find on the website you linked and I assumed that was what you were basing your judgement off of. 

[Spe]

Thanks. That was a good answer.
So I will not buy a low beta fund, even though the administrative fees are marginally smaller.

I looked into that fund KLP Aksjeglobal indeks 1 A - I wish I coould invest there, but the minimum volume for buying the fund is 10 million kr (1,3million dollars) and its a little too much for me :D

I can tell you my whole fund saving structure.

82% of my index funds are klp aksjeverden - means like ~50% us stock, ~20% european ~15% emerging markets, and the rest japan and oceania etc.

I have 3% in http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F000002489 - it mirrors the norwegian stock exchange index.

And the remaining funds are superfondet norge, sverige, danmark, suomi. Here is superfondet Norge: http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F00000TH8U

These funds mirrow development of the 25-100 biggest stocks on the scandinavian stock exchange. And there are no fees. No administration cost, no selling or buying cost except for 0,25% currency cost when buying/selling the swedish, danish or finnish funds.
So thats why I love those funds, but maybe im overexposed to the scandinavian market when almost 20% of my portfolio is exposed on those markets..?

[Scandium]

I agree, the low beta fund seems to basically replace a lot of technology sector stock with consumer defensive. I'd stick to the strict index.

Do those funds have a purchase and sales charge? It seems to say 1% for each? That's pretty bad. The best index fund I found in norway was DNB Global index, if you have access to that: 0.32% and no load
http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F00000JORS
or
https://www.dnb.no/en/personal/savings-and-investments/funds/prices-intl-equity-funds.html#
I don't invest in norway though so haven't look that much. You might want to research some more

I'd say you're maybe a bit overweight scandinavia with 20%. Especially since (presumably) your job/house etc is somewhat dependent on the economy there. And the superfonded norge is 32% just in two companies, Statoil and telenor, not very diverse even within the fund!

Actually it looks like all the KLP funds have at least 0.25% sales/purchase load? I would consider finding other funds. At least for new investments.

[Norwegian72]

Just want to chime in that Skandiabanken bank that I use for purchasing funds does not seem to charge purchase fees for most funds, including KLP Aksje Verden and KLP Lav Beta I. Seems Nordnet has the same arrangement.

From Skandiabanken web page (Norwegian only), basically explains that there are purchase or sales charge:
"
Du betaler ingen kjøpsgebyr når du handler fond i Skandiabanken, og vi tar heller ingen salgsgebyr.

Men alle verdipapirfond belastes med et årlig forvaltningshonorar. Dette honoraret går til forvaltningsselskapet, som betaling for forvaltning og administrasjon av midlene i fondet. Forvaltningshonoraret oppgis i en årlig prosentsats, og er høyere for aktivt forvaltede fond enn for indeksfond. Prisen varierer i dag fra 0,12 % - 2,75 %. 
"

[Norwegian72]

One more try :) There are NO purchase or sales charge

[Scandium]

Just want to chime in that Skandiabanken bank that I use for purchasing funds does not seem to charge purchase fees for most funds, including KLP Aksje Verden and KLP Lav Beta I. Seems Nordnet has the same arrangement.

From Skandiabanken web page (Norwegian only), basically explains that there are purchase or sales charge:
"
Du betaler ingen kjøpsgebyr når du handler fond i Skandiabanken, og vi tar heller ingen salgsgebyr.

Men alle verdipapirfond belastes med et årlig forvaltningshonorar. Dette honoraret går til forvaltningsselskapet, som betaling for forvaltning og administrasjon av midlene i fondet. Forvaltningshonoraret oppgis i en årlig prosentsats, og er høyere for aktivt forvaltede fond enn for indeksfond. Prisen varierer i dag fra 0,12 % - 2,75 %. 
"

I read that as Skandiabanken does not charge a load, but the fund might still charge one. So if you deposit 100 NOK you only buy 99 Nok into the fund. I would figure this out before anything else.

Saw that DNB also has a norway index fund with no load
https://www.dnb.no/en/personal/savings-and-investments/funds/prices-no-equity-funds.html#

[Spe]

Yes I do all my "shopping" of KLP funds through Skandiabanken and there are no buy or sell fees. Here you can see: https://secure.msse.se/SKANDIA/vips/no/funds/0P0000TJ54

Here is the specific document which says there are no purchase or selling fees: http://web.msse.se/document/skandiano/NO0010611817?idtype=8

The only fees for klp aksjeverden is 0,3% per year and 0,25% currency fee for buying and selling. Thats it. But I really wish we had Vanguard here in Norway and then I would really save some costs :)

So I think klp aksjeverden is cheaper than the dnb global index which costs 0,32 and its more diversified because it has 10-15% emerging markets. Thats why I chose that fund. Its the best diversified, but also the most expensive in my portfolio.

I didnt know superfondet norge was 32% statoil and telenor.. thats alot. But at the same time its the only fund in the portfolio with absolutely no fees and no tax as opposed klp aksjeverden (kildeskatt på reinvestert utbytte).

Having job and apartment in the same country can be risky, but on the flip side perhaps my portfolio has 7% norwegian stocks, but americans who do global equity index funds only will have over 50% of their portfolio in the same country as they work and live. And these things are not even highly correlated. I mean the stock market in America has sky rocketed for the last 10 years, while wages and housing prices have stagnated (im no expert, but its my impression).

Recently I have been trying to turn my stock exposure more towards the superfond's because the norwegian kroner is really weak because of the low oil price so its more expensive to buy klp aksjeverden right now. At the same time ECB's QE fund is gonna go live in march, they are gonna spend one norwegian oil fund per year and I want to position myself for the party and the superfond finland and denmark are either denominated in euros or pegged to euro. And sweden and Norway has their main exports to euro countries.

You guys definately convinced me not to do Low beta funds.. its so easy to get blinded by high return rates and to forget about the underlying assumptions. XD

[Scandium]

Yes I do all my "shopping" of KLP funds through Skandiabanken and there are no buy or sell fees. Here you can see: https://secure.msse.se/SKANDIA/vips/no/funds/0P0000TJ54

Here is the specific document which says there are no purchase or selling fees: http://web.msse.se/document/skandiano/NO0010611817?idtype=8

The only fees for klp aksjeverden is 0,3% per year and 0,25% currency fee for buying and selling. Thats it. But I really wish we had Vanguard here in Norway and then I would really save some costs :)

So I think klp aksjeverden is cheaper than the dnb global index which costs 0,32 and its more diversified because it has 10-15% emerging markets. Thats why I chose that fund. Its the best diversified, but also the most expensive in my portfolio.

I didnt know superfondet norge was 32% statoil and telenor.. thats alot. But at the same time its the only fund in the portfolio with absolutely no fees and no tax as opposed klp aksjeverden (kildeskatt på reinvestert utbytte).

Having job and apartment in the same country can be risky, but on the flip side perhaps my portfolio has 7% norwegian stocks, but americans who do global equity index funds only will have over 50% of their portfolio in the same country as they work and live. And these things are not even highly correlated. I mean the stock market in America has sky rocketed for the last 10 years, while wages and housing prices have stagnated (im no expert, but its my impression).

Recently I have been trying to turn my stock exposure more towards the superfond's because the norwegian kroner is really weak because of the low oil price so its more expensive to buy klp aksjeverden right now. At the same time ECB's QE fund is gonna go live in march, they are gonna spend one norwegian oil fund per year and I want to position myself for the party and the superfond finland and denmark are either denominated in euros or pegged to euro. And sweden and Norway has their main exports to euro countries.

You guys definately convinced me not to do Low beta funds.. its so easy to get blinded by high return rates and to forget about the underlying assumptions. XD

Well that looks straight forward enough. If there's no load on those funds the KLP world index looks good. Especially if it includes emerging markets.

Regarding local concentration I'd argue that the US economy make up about 50% of the world's total, and is highly diverse in itself. And its fortunes also drive the economies of other regions. Historically US investors have seen little gains from taking on the currency risk of international investments. In fact I'm reading Jack Bogle's book now and he's not even sure US investors should add international at all!

The norwegian economy on the other hand is relatively small on the global scale, and (my understanding) pretty dependent on oil, oil extraction tech, and a few other specific industries. I realize you have issues with the currency fluctuations though. Especially with the recent drop in the NOK value buying foreign funds won't seem like a good prospect. (Getting paid in USD, I on the other hand am now 30% richer when I visit the homeland. Not to rub it in or anything.. :).

Maybe somebody else here could chime in with how to allocate funds when investing from a smaller (in global terms) home economy? Perhaps look at some threads from Canadians and how they do it? As that is also a smaller economy, dependent on natural resources, and closely linked to a larger one. Just a thought. I'd be curious to see their local/world allocation split.

The point about EU QE is interesting, and one I haven't paid much attention to. We'll have to see if this triggers a stock rally there like it did in the US.

[defenestrate]

Beta is an indicator of risk. Lets say the Beta is .5 (low beta), this means that in general the stock will move .5 relative to the target index (typically the S&P 500). If you care more about losses than gains this is a good strategy--ask yourself if you want to eat well or sleep well. Low beta is for those who prefer to sleep well.