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Trading managed funds

Discussion in 'Managed Funds & Index Funds' started by Simon Hampel, 12th Oct, 2006.

  1. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Based on the discussion that evolved from this thread, I thought I would start a new discussion about "trading" managed funds.

    By this, I mean not just buy-and-hold long term ... but rather buying into and out of funds as the market dictates.

    Does anyone currently do this ? If so - how do you determine when to sell (and when to buy) ?

    Has anyone developed a system that they are actively using for trading funds ?

    Discussion about the pros-and-cons of trading rather than buy-and-hold are welcome too.

    PS. I have my own thoughts and theories - but I wanted some open discussion.
     
  2. Smartypants

    Smartypants Well-Known Member

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    Hi Sim.

    Think it was myself that suggested to you that I thought you were already doing that, i.e buying into and out of funds. Your subsequent reply indicated that you work on a slightly different system.

    I think buying into and out of mgd funds would be akin to trading shares, trying to pick the highs and lows and acting accordingly.

    Sounds a bit risky to me, but then again I consider myself to be fairly conservative and not knowledgeable enough to be contemplating such a strategy. In saying that though, I'm aware of many individuals who trade shares on a daily basis, so trading mgd funds is probably doable for those inclined.
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

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    I recall Steve telling me one time that a client of his had achieved exceptional returns by "navra-ing" NavraInvest, I.e. By dollar cost trading into and out of one of the NI funds.

    I think it could work, but the problem is the the additional investment and redemption process can take a couple of days so it's a bit of a blunt trading tool. Add further delays iif you're doing it on margin...

    I guess the buy-sell spread would also have to be factored in.

    Cheers
    N
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I originally thought the same - and was very much against the idea - especially (as Nigel mentioned) since you have fairly limited control as to the actual price you buy and sell at, given instructions are not acted on immediately but in several days time - by which time the price may have changed significantly.

    It's not as if you can set stop-losses to sell out after a recent peak and then buy back once prices start to rise again - you simply don't have that much control over your funds.

    However, since I've been thinking about it more lately, there's another factor which has been mentioned to me a number of times - and especially given the performance of some previously well performing funds over the last 6 months, I thought it worth discussing further.

    That factor is ... making sure your money is always working for you.

    When a fund has an extended down period, or an extended period of trending sideways, your money isn't doing terribly much. For example, by my calculations (and assuming reinvested distributions), anyone who bought into the NavraInvest AUS funds in early-mid may (or again in early July), has only just started to see their investment move into positive territory in the last few days.

    In the meantime, other funds (eg CFS Property Securities) have gone up 18% since July !!!! So the choice is to either hold on and wait for things to improve, or else to move some (or all) of your money into a better performing fund to maximise returns.

    Naturally there is a risk in doing so - there is no guarantee that a fund that has been recently performing well will continue to do so - but then again, having your money make no return where it is, is also a risk to be considered.

    However, I see two different "phases" of investment that could require quite different approaches to managing your investment.

    The first is accumulation phase - when you are actively investing new money into your portfolio (whether through external capital, or through gearing up via margin).

    The second is when you have stopped adding additional funds (because you either don't have additional capital available, or because you have reached a self-imposed limit and want to minimise additional capital investment into this asset class).

    I'm thinking a DCT-like strategy could work well when you aren't actively growing your portfolio with new capital - take some profits (not too much) when prices go up, and buy additional units when prices go down. The idea is to profit from the "swing" in prices from low to high above and beyond the performance of your underlying units. I wouldn't advocate selling a significant portion of your holdings at any one time using this method - I think using a relatively small percentage of your holdings for DCT trading could work well.

    But I'm not convinced that strategy is best when actively growing the portfolio across multiple funds using new capital and gearing up.

    That's why I'm starting to investigate what I call "momentum" buying ... allocating money to funds that currently show good positive momentum with the goal of riding the wave up - and accessing the additional equity that creates to gear up further. The main part of the strategy I haven't worked out yet is: when (and indeed "if") to sell. That requires some more thought.

    All of this is, of course, just thinking out loud - with the goal of stimulating some discussion. I am by no means advocating any of this as a sound investing strategy without a lot more thought and planning as to how to manage the process.

    Thoughts ?
     
  5. Nigel Ward

    Nigel Ward Team InvestEd

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    I suppose capital gains tax is another consideration.

    Cheers
     
  6. Leandro

    Leandro Well-Known Member

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    It would seem that the only way would be to base everything on historical performance and predictions. Not a safe and sturdy method for most of the NavraInvest unitholders i would assume. And not being able to control when your transaction will actually be performed would place a further unknown into the equation.
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Quite right Leandro ... but I'm not addressing these questions to "most of the NavraInvest unitholders" :D

    Indeed according to this poll, currently more than 50% of respondents have money in funds other than Navra (or indeed no managed funds at all).
     
  8. perky

    perky Well-Known Member

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    I did this in May on Navra Wholesale - I was around 1% off the peak when I got out - then another 2% off the bottom when I got back in. I would have got in quicker if I has driven in to the city and taken the cheque from BT to hand deliver to Navra (the market rose 2% in those 2 days) - thats something to remember for next time.
    ANYWAY.....the market dived around 9 or 10% , and Navra only went down by 4% ish.
    So I didnt save that much by doing it.
    I also invested money into the Platinum Asia fund thinking it would continue to track upwards - then watched it dip over 11% in the next few months.
    It has only now got back (almost) to its level of late April (after taking into account its July distribution, and my subsequent re-investing of that ditribution).
    So I would exercise caution in this approach.
    Having said that, I am getting very close to doing the same again. The US and Oz markets have gone very well this month - and I can see the writing on the wall for another late October correction.
    Time will tell.
     
  9. Tropo

    Tropo Well-Known Member

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    Sim,
    It seems to me that you would like to control money parked in funds in the same way as traders control money they are trading hands on.....

    It does not matter if you trade hands on or fund is trading for you, because in both cases you need to develop a system, which tells you when to buy/sell, how much add/sell ect....

    PS - I am just curious - what happened that you suddenly changed your view on the long term Buy and Hold strategy :eek: :eek: :eek: :eek: :eek:

    :cool:
     
  10. Nigel Ward

    Nigel Ward Team InvestEd

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    I think he's bored :D :p not like he's got enough to do already.... :rolleyes:

    Or perhaps it's an IT thing, they like to fiddle with things to upgrade the features...

    N.
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I still do fundamentally have a buy-and-hold strategy ... but when I had developed my analysis spreadsheet to the point where I was able to start charting the performance of the funds I was interested in - the visual representation really opened my eyes as to what was really happening.

    I've since replaced most of that spreadsheet with a computer program I've developed to do the same thing - but with much greater control. The spreadsheet had become horribly complicated and didn't allow easy analysis of potential new funds. My new program also updates the data automatically from the web.

    As I've mentioned in other threads, I'm currently adding to my portfolio on an almost weekly basis - both through external capital (from consolidation of other investments plus refinancing of my real estate portfolio) and through "gearing up" as my portfolio increases in value.

    So my strategy hasn't really been "buy-and-hold" ... it's been "buy-buy-buy-hold-buy-buy-buy-hold" :D

    Originally I was simply putting money into the fund that was furtherest away from the target value I'd assigned to each fund. That's fine for funds that are under-capitalised ... but some of the funds were low because the performance had been negative. Sure, buying additional units lowered my average buy price, but it didn't really help my overall performance if they didn't then start heading up again soon afterwards.

    I realised that this strategy wasn't getting me closer to my goals very quickly - although over the long term, I'm sure they would do well - I was being held back by poorly performing funds.

    When I started analysing the charts, it was pretty obvious that some indicators showed a positive momentum that more often than not indicated a steady increase in value. If I was to direct my additional investments towards those funds, then I figured I could ride them up and use that momentum to boost my returns.

    The flip side of that is that some funds were obviously struggling at times - again as shown by the indicators on the charts ... and so depending on the nature of that "struggle" - I figured I would either hold (ie not increase my investment), or if really bad, sell down part (but not all) of my holdings in that fund and reallocate the capital elsewhere. Once that fund starts to show positive momentum again, I'd start buying in to catch that wave.

    Once I reach my target allocation for each of the funds, it will change to more of a "hold-and-buy-more-when-cheap-and-take-profits-when-expensive" strategy ... which is still fundamentally a buy-and-hold strategy ... but aiming to add a bit more value along the way. This will also allow me to reduce my risk by paying down debt and aiming for a lower LVR.
     
  12. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, yes, and umm ... yes.

    Guilty on all charges :p

    I needed a break from building InvestEd v3.0 ... it was starting to get me down. A lot of hard work still required there.
     
  13. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    By the way - in case anyone is curious - my current indicators would have seen me stop adding additional investments to Navra AUS at the end of April, and then holding all the way through the last 5 and a half months and then starting to make additional investments as of yesterday (got the first buy signal since April from Wednesday's unit price).

    I did get a "query" signal in early August - which means I would have had a close look at the chart and the underlying market to see if I thought it was worth reducing my exposure to that fund. This is not the same as a "sell" signal - the fund didn't drop anywhere near enough to even consider that. The query signal only lasted 2 days, so by the time I got around to analysing it - I would have been back into "hold" territory, so would have been unlikely to have acted.

    I'm still refining these indicators of course.
     
  14. Nigel Ward

    Nigel Ward Team InvestEd

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    Wow sounds impressive!

    Do give details. How, with what, can it chart, show us some screenshots (excuse drool on the keyboard) :D
     
  15. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It is web based, and does charting, but isn't ready for public consumption yet.
     
  16. MJK

    MJK Well-Known Member

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    Buy sell spreads with Funds would limit trade opportunities and the slowness of order excecutions.
    I do believe you do need to maximise your dollar by buying funds when unit prices are lower and if you want to sell waiting for the best time, but trading as a strategy in itself I dont think would work.

    MJK:D
     
  17. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I agree that trying to trade a fund like you would shares is not going to work very well.

    I'll leave that to the fund managers and share traders .

    My "trades" (don't like calling them that) are once per week maximum for buys, while sells would be much less frequent - I'd be surprised to sell more than once in a couple of months ... and then only if there was a fund that met all the sell criteria.

    I'm also talking about relatively volatile funds with pretty large swings in value and pretty high value transactions ... all of which make the buy-sell spread rather insignificant.
     
  18. Glebe

    Glebe Well-Known Member

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    Sim,

    It's an interesting concept, but I'm not sure about why you would target Managed Funds and not LIC's and listed index trackers like streetracks. The speed of execution, the ease of extracting daily prices etc, the savings in entry/exit/management fees...

    Also would you agree that this strategy wouldn't suit most retail funds (those that have 4% entry fees). Although I guess if you're in the know you can bypass these high entry fees...
     
  19. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I prefer managed funds because of the geographic and sector diversity that is on offer - you simply don't get as much choice through LICs.

    I'm not choosing funds to trade - I'm looking maximise the returns I have from the funds I've already chosen to hold long term.

    Yup, I'm only dealing with wholesale funds which generally don't have entry fees - but there's no excuse for paying entry fees anyway - plenty of options out there for avoiding those fees.
     
  20. Tropo

    Tropo Well-Known Member

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    "....... - the visual representation really opened my eyes as to what was really happening"

    AT LAST !!!!!!!! :D :D :D :D


    By the way - in case anyone is curious - my current indicators would have seen me stop adding additional investments to Navra AUS at the end of April, and then holding all the way through the last 5 and a half months and then starting to make additional investments as of yesterday (got the first buy signal since April from Wednesday's unit price).

    Bravo !! :D :D :D :D
    :cool: :cool: