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How many managed funds to invest in?

Discussion in 'Managed Funds & Index Funds' started by learning, 24th May, 2007.

  1. learning

    learning Member

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    Hello all,

    Is there any such things as investing in too many managed funds? I currently have a few with with CFS, but am thinking of buying into more funds, probably not CFS, in order to spread spread my risks, to invest into higher risk funds, and to borrow against them. But, if most managed funds invest in the same/similar sector and it falls in value, surely all managed funds that invest in that fund would all fall in value together wouldn't they? Thus, the idea of buying into more funds to reduce risk wouldn't really work would it?

    I want to segregate my funds into 4 different types:
    Conservative managed funds (funds with 7 year returns upto 10% year)
    Growth funds (funds with 7 year returns of between 10% - 20%)
    High risk/agressive funds (geared funds/other funds with 7 year returns > 20%/30%)
    Leave my current funds alone.

    Any thoughts?

    Thanks




    Learning..............
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think you can overdo it.

    Think of it this way ... if you are aiming for diversification - take it to the extreme and put a little bit of money in every share in every market in every country in the world. Your returns will just be the average return of everything you've invested in ... good and bad. That's an extreme example - but it shows you the danger of over-diversification.

    I think you should focus on choosing 4-6 funds that have performed consistently well over the past 5+ years and put your money in them. If the funds you already have aren't performing - ditch them and put your money in a fund that is.

    I currently have 7 funds - all with different sectors, different markets or different investment styles. I have two funds that I would consider volatile, and two that I consider relatively stable - the others are somewhere inbetween. Two of those funds are showing poor short-medium term performance at the moment, so I've decreased my weightings in those funds and moved the money to other funds which are performing well.

    At one stage I had 11 funds and I found that I was just not getting anywhere ... I didn't have a strategy or a goal, and I was holding funds that weren't performing compared to the rest of my portfolio. Once I started focussing my efforts, my returns increased dramatically.
     
  3. MJK

    MJK Well-Known Member

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    Sim,

    How long do you give an underperforming fund before you exit it?

    MJK:D
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I'm generally pretty ruthless with a fund - but I'm much more active in my fund investing than most people ... so I don't recommend people necessarily do what I do.

    My system (well, the current version anyway) works by tracking moving averages of unit price ... and if a fund's unit price drops below its 100 day moving average, I'll start watching it very carefully. If it stays below the 100 day moving average for more than a couple of days and looks like it is definitely trending down (as opposed to just a short term drop), I'll start reducing my exposure to it ... swap the money to another fund that is performing well now - or to cash if nothing is doing much.

    It's tricky to get right, and I have made mistakes by moving too soon (selling when it first crosses the 100 day MAV rather than waiting for confirmation like I was supposed to). It requires a judgement call - you can't know whether it will bounce right back up again, or stay flat, or continue to drift downwards.

    My general preference is to avoid selling unless it is obvious that your money could be put to better use elsewhere.

    My rationale for this active strategy is that I'd rather not have my money sitting around for 3+ months doing nothing - much better to re-allocate it to a fund that is performing consistently. Given that a few of my funds have been averaging 40%+ returns, in 3 months I could probably get 10%+ return on that money.

    For example - I sold out of CFS W/S Property Securities a couple of months ago, and have since made an average of about 8% on that money, while the fund has done less than 2% and is still not looking strong. I knew the property securities sector was going to come under pressure (commentators had been saying for a while that it was overpriced and needed to cool off a bit) ... so when the turn came, I felt it better to move out of that sector until things improved.

    So at the moment I'm down to 5 funds, with 2 funds on the sidelines (will re-invest when things start heading up again), and another 2 on the short list (will consider investing if they start consistently outperforming some of my other funds).

    I monitor the performance of my funds daily.
     
  5. learning

    learning Member

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    I think you can overdo it.

    Think of it this way ... if you are aiming for diversification - take it to the extreme and put a little bit of money in every share in every market in every country in the world. Your returns will just be the average return of everything you've invested in ... good and bad. That's an extreme example - but it shows you the danger of over-diversification.


    Good point.

    I think you should focus on choosing 4-6 funds that have performed consistently well over the past 5+ years and put your money in them. If the funds you already have aren't performing - ditch them and put your money in a fund that is.

    In a way, I'm not a fan of totally ditching funds. Actually, I'm not that big a fan of selling. Take for example CFG Global Share Fund and the CFS Australian Share Fund. The Australian Share market has done pretty well over the last 3 - 5 years, whereas the Global Share Market had a bad period, and is just starting to recover. Long term, which one will do better? I think the global market will recover and long term do better than Australian shares. Having said that, i did diversify my account by selling some of my Global Shares and investing them into the Imputation fund.

    I currently have 7 funds - all with different sectors, different markets or different investment styles. I have two funds that I would consider volatile, and two that I consider relatively stable - the others are somewhere inbetween. Two of those funds are showing poor short-medium term performance at the moment, so I've decreased my weightings in those funds and moved the money to other funds which are performing well.

    Are your funds spread over multiple fund managers?

    My system (well, the current version anyway) works by tracking moving averages of unit price ... and if a fund's unit price drops below its 100 day moving average, I'll start watching it very carefully. If it stays below the 100 day moving average for more than a couple of days and looks like it is definitely trending down (as opposed to just a short term drop), I'll start reducing my exposure to it ... swap the money to another fund that is performing well now - or to cash if nothing is doing much.

    Would have saved some pain during 2000-2002. I wonder what sort of results someone would get if they never sold their funds, but used your method in the opposite direction, and buys when things go down?

    My rationale for this active strategy is that I'd rather not have my money sitting around for 3+ months doing nothing - much better to re-allocate it to a fund that is performing consistently. Given that a few of my funds have been averaging 40%+ returns, in 3 months I could probably get 10%+ return on that money.

    The above is good rationale/approach to have.

    For example - I sold out of CFS W/S Property Securities a couple of months ago, and have since made an average of about 8% on that money, while the fund has done less than 2% and is still not looking strong. I knew the property securities sector was going to come under pressure (commentators had been saying for a while that it was overpriced and needed to cool off a bit) ... so when the turn came, I felt it better to move out of that sector until things improved.

    So, if you knew a nice distribution was coming your way in a month, but your system told you to sell, would you consider not selling just to get the distributions?

    So at the moment I'm down to 5 funds, with 2 funds on the sidelines (will re-invest when things start heading up again), and another 2 on the short list (will consider investing if they start consistently outperforming some of my other funds).

    I monitor the performance of my funds daily.


    At the moment, I am in 6 funds. I was thinking of buying into probably 8-10 more funds. A bundle of 5 that have done very well over the last 7 years (>10% each year), and 3-5 funds that are high risk/high return(3-5 year returns >25%). But after reading your comments, I am going to have to think a bit harder about what I am going to do.

    I am trying not to develop a gamblers mentality, where I buy and sell on a regular basis in order to make a buck. And I am not implying that this is what you are doing. I know that if I tried, I would lose. Its just this gut feeling I have. I feel as though I am better off building groups of funds around core themes, like the ones above, and then continually invest in them for the long term.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Why is that ? Can you justify not selling ? I'm not criticising you here - just trying to get you to think beyond your current mindset and consider alternatives ... not that your approach is necessarily wrong or worse than any other!

    I use Colonial First State (5 funds), Platinum (1 fund with 2 on short list) and NavraInvest (1 fund) fund managers.

    Actually, the distributions are already built into the unit price - so if you sell just before a distribution is paid, you still get that distribution, but as capital growth rather than income.

    I agree totally ... "gambling" is a bad option. My strategy is to react to the current market conditions and go with the momentum. I don't sell on a regular basis - only when a fund is no longer performing or no longer meets my requirements. I do, however, buy regularly - every Monday (LVR permitting) :D

    At the end of the day - you have to do what you feel comfortable with.

    I think you will eventually do very well by choosing a range of quality funds, investing as much as you can, and holding onto them for the long term. There's nothing wrong with that as a good long term strategy in my opinion!
     
  7. MJK

    MJK Well-Known Member

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    Thanks for your reply. I'm fairly active also, at least as far as monitoring goes. I have ditched a few funds but usually let them underperform for a year or so which is toooo Looong! If a fund is down a bit do you sell when the 100 day MAV is passed or wait for it to at least get up to your entry cost before switching. Or are you in favour of crystalising the loss and moving into better funds. Bearing in mind the buy sell spreads also?

    MJK:D
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    There is no connection between what I've paid for a fund and what its performance is now or will be in the future - thus I see no valid justification on "holding out" for any reason. I sell purely based on what the fund seems to be doing now.

    It doesn't always result in a loss - when I sold out of CFS W/S Property Securities because of poor performance, I did so with a reasonable profit.

    I also don't pay attention to buy-sell spreads - I'm not selling or swapping funds on a regular basis and not for expected returns for less than 1% ... thus the buy-sell spread is a very small cost compared to the expected gains.

    Put it this way ... on a sell spread of 0.15%, with an interest rate of 9% - it only takes 7 days of reduced interest payments to cover that cost ... meaning if I sold out of a fund and left the money as cash for 2 weeks, the money I would save in interest would be greater than the cost of selling.

    Given that the exact dollar figure you get for selling is completely variable because of unit price fluctuation, the whole argument about buy-sell spreads is pretty silly anyway - the time taken between when you put your sell order in and when it is executed could well see the unit price move by significantly more than 0.15% !!
     
  9. learning

    learning Member

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    I feel that you should always have a reason for investing in a fund, base your reasoning on strong fundamentals, and have a long term view (which is like forever). More easier to give an example. I will use the CFS Global Shares Fund. Pretty simply, long term, more of our money flows overseas, than comes in. Most products or services we buy or use are generated by overseas companies. Most businesses running a service use products made by overseas companies to provide a service. Even though the CFS fund has had a downturn, long term it will recover and possibly outperform Australian share funds.



    I did not realise this. You learn something new every day. Thanks for that point

    Same here, straight from my pay every 2nd week.

    I think we will all do well.
     
  10. coopranos

    coopranos Well-Known Member

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    Just something to think about though (and I think the basis for some of Sim's statements):
    IF it were somehow possible to time your entry and exits from funds in such a way that you caught as much as possible of the upswing (not all but a healthy majority) and bailed out of the investment at the start of the downswing and stayed out for a healthy majority of that, your returns may well go from above average to absolutely exceptional.
    This is why the idea of buying when a fund is trending down, dollar cost averaging, and portfolio balancing (in the traditional sense) make absolutely no sense to me. If instead of riding a downswing where you lost even 2% or 3% you sold out and either left the capital in the margin loan (thus giving you a ~7% "guaranteed return" through interest saving) or put it in a 5% savings account, your average return over the long term just from simply monitoring and adjusting your portfolio (selling bad performers, loading up one good ones) would be something pretty impressive.
    I consider this a reasonable theory
     
  11. CLK

    CLK Member

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    Last edited by a moderator: 26th May, 2007
  12. learning

    learning Member

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    Don't get me wrong, I think your theory is reasonable. Only problem is that its not suitable for everyone, and there is always some level of failure with each systematic approach to investing as such.

    To me, I feel that in order to do well people need to take action have a plan to invest, invest in things that will perform in the long term, buy when they have the money to buy, sell when they need to sell, invest regularily, monitor their portfolio, balance their portfolio, understand dollar cost averaging, and acheive their goals.

    As I have mentioned below, buying and selling on a regular basis probably doesn't suit me as well as it would suit other people, like maybe yourself and Sim.

    My plan is to not buy into 8-10 more funds, but I do plan to buy into 2 more funds, develop my plan, and stick to that. I also plan on starting to take a bit more interested in the funds themselves, and I may become a tad more proactive in the buying/selling/analysing of funds.
     
  13. coopranos

    coopranos Well-Known Member

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    That is fair, and I think it is important to find a strategy you are happy and confident with.
    As you have said, the most important thing is that you do something, do it consistently, and monitor and adjust where necessary.