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US Fund

Discussion in 'Managed Funds & Index Funds' started by Alan, 15th Aug, 2005.

  1. Alan

    Alan Well-Known Member

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    Hi Steve.

    Firstly.......congratulations.......I'm sure yourself and the others will make this Site an extremely valuable educational resource and it'll be great to be able to balance property discussion with shares etc. :)

    Now......a shares question....... :p

    I think you recently said at the Cocktail Party that the proposed NavraInvest US Fund will invest in the DOW 30?

    I must admit I'm not that familiar with the details of the Index except that it is made up of 30 VERY large US companies that are selected by the Wall Street Journal and that they change very rarely.

    From the monthly reports of the Australian Navra Funds it is clear these Funds move in and out of a number of different companies, don't like Insurance Companies, the companies must have very strict fundamentals etc.

    Therefore, how does selecting the DJI 30 US companies fit with your selection criteria for the Australian Funds? Indeed, is it even publically known what criteria the Wall Street Journal uses for selecting the companies in the Index for you to be able to allign your selection criteria with the Dow Jones Industrial Index?

    Thanks.


    :)
     
  2. Steve Navra

    Steve Navra Well-Known Member

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    Hi Al,

    I will give a detailed response to this question sometime tomorrow night.
    (Just flown into Brisbane from Cairns tonight . . . must crash soon ZZZZZZZZZ)

    Regards,
    Steve
     
  3. Steve Navra

    Steve Navra Well-Known Member

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    The Dow Jones contains 30 of the largest and most influential companies in the States. It is hands down the most recognized index in the world, and the one that is frequently referred to as "The Market

    Created By:
    Charles Dow on May 26, 1896. Currently maintained by Dow Jones & Company.
    Number of Companies:
    It began with 12. Today there are 30.
    Types of Companies:
    Various. The DJIA covers all major areas of the U.S. economy, except the transportation and utility sectors.
    Selection Criteria:
    Selection is at the discretion of The Wall Street Journal editors. Reviewed as needed.
    How it's Calculated:
    The original DJIA was simply an average of stock prices. Today it uses a price-weighted system. For example, Citigroup's stock is worth approximately 3% of the DJIA.

    Advantages: The DJIA has stood the test of time. It contains 30 of the most familiar blue chip companies in the U.S. and is not considered to be volatile or risky.

    Hi Alan,

    So to answer your questions:

    The common knowledge criteria for selection of the Dow 30 stocks are very similar to the selection criteria I use for the NI Australian Blue chip funds.

    It was based on my experience in the US market that I came up with the selection criteria for the Australian funds.

    So in the first instance please refer to: http://www.navrainvest.com.au/index.asp?content=share_selection

    Differences:
    Ultimately our universe is the S&P ASX 200 out of which we through our filtering process select the 20 to 30 stocks traded at any one time.

    With the USA funds we intend to trade all 30 stocks:
    The point is that NavTraDE will in almost all instances over time beat a buy and hold strategy of an individual share. However we can't trade the entire 200 stocks, simply because so few meet all the criteria.
    Thus we select out very carefully to arrive at our preferred portfolio.

    The American market by contrast is enormous so using the same criteria one can encapsulate a large portfolio of stocks that fit the bill. The final filter of these many 'acceptable' stocks is market cap / weighting.

    We will thus be able to trade the entire 30 Dow stocks relying on the greater volatility (greater than ASX) of that market and NavTraDE's ability to outperform the buy and hold of each of the stocks individually.

    A most exciting prospect . . . I can't wait :)

    Come by sometime and I will show you some live feeds and results!

    Regards,

    Steve
     
  4. Alan

    Alan Well-Known Member

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    Sleep. :confused: Since when did you start doing this? :D

    *******************************************

    Thanks for the explanation Steve.

    With the stocks in the Australian Funds, even when narrowed down to a select few, it would appear you still move in and out of these. I guess this may be due to changes in the opinion of management, the level of dividend payments, debt levels, diversification across sectors etc etc.

    Surely the fundamentals of the companies in the Dow 30 would similarly offer a variation beyond such a strict selection criteria and yet they seem to stay in the Index for years and years without any change?

    Why do you think there is a difference between the US 'universe of shares' and the Australian 'universe of shares' in this regard?


    Back testing stocks in the Dow 30 must give you a much more consistent and reliable feedback than the Australian Market due to the consistency of share makeup. In the Australian case, I guess you could backtest 30 shares fairly easily but then they may not consistently be in your portfolio and the back testing may be a little more ambiguous.

    With the Australian Funds it would appear you try and diversify across as many sectors as possible. Do you see this as any weakness of the Dow 30 that it doesn't include Utilities or Transport or is this of little importance?


    Out of curiosity, have you ever done a backtest using the ASX20 as the share portfolio over an extended period of say at least 5 years and then compared this performance to the actual shares you have held in the portfolio over the same period? It would be interesting to see what sort of differences were apparent.


    Thanks Steve. It's good to have you back so we can ask these types of questions direct. The bad news for you is your absence has given me time to think of lots more questions! :D :D



    :)
     
  5. Alan

    Alan Well-Known Member

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    .......and another couple of questions relating to the US Fund Steve. Sorry. :eek:

    It sounds like the volatility of the US Market could/should be beneficial to the NavraInvest trading style and result in potentially higher trading profit percentages than received from the Australian Fund.

    Q1. Any idea what sort of % difference is expected on the trading component of the Fund Return compared to Australia?

    Q2. Wouldn't some of the increased trading profit potential of the US Fund be offset by lower interest rates held in Cash(if kept in US) and the much lower dividends received by many of these large US companies? Any idea what sort of % offset will be caused by these couple of 'negatives'?



    :)
     
  6. Steve Navra

    Steve Navra Well-Known Member

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    The universe of shares in the Americam market is enormous compared to Australia. Also the market capitalisation (of the American companies) is many fold higher.

    Our universe of shares in the Australian market is the S&P 200 and then filtered down to approximately 30 companies. (There are ONLY about 30 companies that actually fit our very strict criteria!)

    America is different . . . you could use the filtering criteria and still end up with in excess of 300 companies that fit the bill. (GROAN . . . and imagine the research and manhours this would take :eek: )

    The 30 Dow Stocks have been selected out of the strongest of the companies listed oon the American market . . . so by trading these 30 you are on pretty safe ground. One might well trade the Dow 30 indefinitely, but note that the 30 stocks do change each year. Each year the 30 are re-assessed and some drop out to be replaced by new companies.

    I intend to make the 30 stocks the universe and trade most of them.




    Yes back testing the Dow 30 is less ambiguous . . . but back testing, although it does give one a good sense of confidence is . . . its HISTORY!
    I regard the fact that the NavTraDE system is a process and is logical to be more valid than back testing . . . the advantage with the American market remains the much greater volatility.





    The sector diversification aspect in the Australian market is a necessary risk management excercise. It is necessary, because of the limited number of adequate (Fit all the criteria) stocks available. One does not have such limitations in the American market, therefore the sector diversification is FAR less important. (The diversification or AVERAGING across sectors is limiting on the returns! (Lower risk = lower returns . . . generally.)





    Yes certainly have done this excercise . . . the gains we made were limited to the trade advantage we accrued by buying low and selling high. The limitation is the lower volatility of the top 20.





    The bad news is GOOD news . . . glass half full ;)

    Keep asking questions . . . we all learn from this.

    Regards,
    Steve
     
  7. Alan

    Alan Well-Known Member

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    Thanks Steve. That explains a few things. :)

    Any thoughts on the above?

    I guess I'm wondering how much the lower or nil (?) dividends will offset the expected trading advantage(due to increased volatility) of the US market. I think you've previoulsy said on the Forum that about 3% of the total return can be expected from dividend input from the Australian Fund.



    :)
     
  8. Alan

    Alan Well-Known Member

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    Hmmm......I was thinking about this a little more and perhaps this may be the case?

    If we assume return from Australian Fund is made up of 10% trading profit and 3% dividends then we have a 'return' of about 13% per annum.

    Volatilty in the US seems higher but lower dividend yield. Assuming a trading return of 15%(?)and a dividend yield of about 1%, then we could have an annual return of about 16%?

    My 'rubbery' guesses only, but if this is close to the mark, an additional 3% return above and beyond 13% still equates to an almost 25% better return.

    Will be interesting to see........


    :)
     
  9. johnnyb

    johnnyb Well-Known Member

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    Steve,

    I understand from reading the prospectus that if the current offer is not fully subscribed (or subscribed enough) then you may decide not to create the US funds. Assuming this isn't the case what is your timeframe for setting up the funds to the point where we can invest?

    Thanks.

    John.
     
  10. Glebe

    Glebe Well-Known Member

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    With different tax implications.
     
  11. Alan

    Alan Well-Known Member

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    Oh........and I guess Franking would be another factor in the balance....




    :)
     
  12. Simon

    Simon Well-Known Member

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    Bump

    I am wondering when it is starting too?

    Cheers,