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What caught my eye this week.

They say all publicity is good publicity, but perhaps we’ll make an exception for Neil Woodford. The troubles of the former star fund manager dominated the personal finance news this week like no story I can remember since the run on Northern Rock.

And it’s essentially been a run on Woodford’s near-£4bn equity income fund that’s caused this Sturm und Drang.

For those with better things to do than monitor the latest bungling of the UK financial services industry, a quick recap.

Neil Woodford was a market-beating fund manager for many years at the giant house Invesco. He prospered across several bull and bear markets, and for what it’s worth I think he proved he had skill – or edge, as the pros call it – in as much as we can be sure such a thing even exists.

Anyway it’s a truth universally known that a man in possession of a large fortune, a super public profile, and a proven ability to beat the market generally wants to do it bigger and better. Five years ago Woodford set up his own fund shop in a blaze of publicity and raked in billions. Even the BBC described him as “The man who can’t stop making money.” By early 2017 his equity income fund alone was managing more than £10bn.

Yet scarcely two years later and Woodford’s reputation is in tatters. What happened?

Well, for one thing his returns have been lousy – enough to see his fair-weather fans pull money from his main fund so that by the end of May it was down to £4bn.

But that isn’t the real problem. What did for Woodford was that for reasons that would make little sense to students of financial history – but would be readily understood by, say, the writers of age-old Greek myths – this erstwhile bagger of big blue chips decided to stuff his income fund with a stash of illiquid and unquoted companies.

At first this odd departure wasn’t an issue. But as his mainstream income picks floundered and investors began to withdraw their money, Woodford had to sell assets to meet redemptions. The liquid holdings went easiest, which left a growing rump of harder-to-sell and “what’s it even doing in a Woodford income fund anyway?” fodder piling up on the books. It got to the point where the fund was in danger of upsetting the regulator.

Shenanigans ensued to try to manage down these problematic holdings. Nothing illegal, I stress, but also nothing much to do with the everyday business of running a vanilla income fund.

A few commentators began to warn of a looming crisis, and then one big investor asked for its £250m back.

Eek!

At this point, Woodford – sensibly enough, given where he’d gotten to, but you wouldn’t want to get there – decided to gate the fund, preventing investors from withdrawing their money. Woodford said he needed breathing space to reposition the portfolio without resorting to a fire sale.

The suspension was initially for 28 days, but it can be rolled over if deemed necessary.

Would you believe it?

The result of all this has been shock, anger, fear, gyrating share prices, grave dancing, and the usual dollop of nonsense.

The market had already sniffed out Woodford’s woes, and had been selling down the shares it thinks he’s going to have to unload. This got worse in the days following the suspension. Meanwhile the share price of Hargreaves Lansdown has plunged over the ramifications of the platform championing Woodford’s funds in its Wealth 50 recommendation list. Woodford’s Patient Capital venture-focused investment trust has seen its share price slammed, too, presumably on concerns the value of its holdings will be hit by any liquidation of shared holdings in Woodford’s main fund. (Ironic, given that an investment trust is exactly the right vehicle for long-term investment in illiquid assets.)

Meanwhile press and pundits – or at least those without egg on their face, or the chutzpah to talk through it – have endless perspectives on the urgent takeaways from Woodford’s downfall.

Merry Somerset-Webb in the FT [search result] offers one of best recaps, highlighting the apparent hubris behind some of Woodford’s decisions. However she concludes by bemoaning his personal money-making over the past few years. That seems to me a bit of a populist take – few complained about Woodford’s pay when he was in the ascendant and clients were shoveling £15m a day into his fund. (In a similar vein there are stories about Hargreaves Lansdown bigwigs making a mint selling shares in the platform in the weeks before the Woodford hit the fan.)

Some see Woodfall’s downfall as proof – amply backed up by all experience and evidence – that active fund management is doomed to mean reversion. The Evidence-based Investor offers a pretty temperate perspective to that affect.

A few believe Woodford’s creep into unquoted holdings is a canary in the goldmine of a wider problem. They warn that pension funds have been similarly encouraged into unsuitable alternative holdings by historically low interest rates – and that they’re just a financial crisis away from being found out. Even the Bank of England governor Mark Carney dropped hints last week.

And then there are the spokespeople and journalists bemoaning how Woodford has tarnished the reputation of all those fund managers who are delivering for their clients. If the financial services industry has done anything wrong, they suggest, it’s in putting the wrong person on a pedestal!

Perhaps the apogee of this is the commentator who blames not Woodford but the FCA for – um – Woodford’s problems, and says the takeaway from the drama should be to “put trusts on buy lists”.

No no no.

We all know what the answer is

Look, I like investment trusts as much as the next inveterate active investor. And it’s abundantly clear that Woodford shouldn’t have had illiquid holdings in an open-ended fund.

But so what? Anyone who believes that the answer to this week’s soul searching is for platforms to tout trusts on the same buy lists that cherry-pick open-ended fund managers hasn’t been paying attention for – oh – the past 20 years.

What all these writers should be saying is: “Forget about active managers! The average investor should simply put their money into a diversified portfolio of cheap index funds. The evidence has shown us again and again that most active fund managers fail to beat the market. Go and read the Monevator website, or that book by Lars Kroijer. Then get a new hobby.”

They don’t for a variety of reasons. As we’ve discovered over the past ten years of blogging about passive investing for a revolving door of readers, the main ones are there’s not much money in it, and there’s not even much of a long-term audience.

Listen, if I was my passively-pure co-blogger, I’d no doubt be penning a screed against Woodford and the very idea of active investing. But The Accumulator never writes Weekend Reading, and his punishment is I get to ride my own hobby horses.

And personally, I understand the pull of active investing. I like stock picking. I read books about great managers. I get it.

But that’s exactly why I recruited my co-blogger to fill the blog full of articles about the boring index funds that people actually need.

The way some have covered the Woodford drama, you’d think index funds didn’t exist. To paraphrase:

  • “Investors will wonder where they can turn if they can’t even trust a star like Woodford!”
  • “Woodford reminds us that we need to watch our investments like a hawk and ditch losing managers!”
  • “You need to know who the investing heroes are of today – not yesterday!”
  • “There’s no advice for people who just want a comfortable retirement”.

To which I say:

  • Turn to index funds
  • No you don’t
  • Ignore fund managers because they overwhelmingly fail to beat the market
  • Yes there is – read this blog.

Can’t see the trees for the Woodford

There will always be people – like me – for whom investing is a hobby. We enjoy picking stocks, and following the ups and downs of the market.

But we’re the investing equivalent of my brother. He’s a mechanic who likes to get hold of scrap cars to do up over several years in his garage.

Did you drive to work today in a car you built from the bolts up? Do you feel the need to? Are our daily newspapers full of tips about how to refit a dashboard or re-tune an engine?

Of course not. And none of the equivalent fund investing guff in the media or on the platforms is there for the benefit of the average saver, either.

It seems doubtful that Woodford will regain his standing. We’ve seen him scapegoated this week, but we might note that his fund at the centre of all this hasn’t lost much money. It hasn’t wiped out fortunes – it’s just lagged a benchmark and delivered a flat performance. By the pyrotechnic standards of financial scandals, that’s hardly the greatest crime.

The real lesson from Woodford’s woes is you’re better off just tracking the benchmark with an index fund. This is all most people need to hear.

Once the storm passes, however, I’m sure there will be a new Woodford to be feted – Nick Train or Terry Smith perhaps, or as I pointed out last week James Anderson.

Pundits who don’t know (or worse, ignore) that active investing is a zero-sum game will go back to writing illogical nonsense – claiming that the bull market is drawing to a close, and so it’s “time for active management to shine”.

We’ll also hear more from active fund managers about how index funds and passive investing threaten market stability – even as we all gradually forget about the £4bn income fund run by the most famous active manager in Britain that locked-up the money of its investors.

This is ridiculous – investing for the masses is a solved problem.

It’s 2019, and someone saving for their retirement needs a star fund manager about as much as they need a horse.

[continue reading…]

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BlackRock MyMap fund-of-funds

BlackRock MyMap fund-of-funds post image

I don’t know about you but I like it when things are made easy for me. Hand me a magic wand with the promise that all my problems are over, and I’ll give it an experimental wave.

And hey presto! BlackRock – the fund giant behind the popular iShares ETFs – has come along with an investing magic wand in the shape of its new MyMap range of funds – here to solve your asset allocation worries.

Each MyMap fund is an off-the-shelf solution known as a fund-of-funds. Essentially it’s a hamper full of index trackers that amount to a ready-made portfolio.

With a fund-of-funds there’s no more fretting about how much emerging markets is too much, or whether to be big in Japan. Such diversification decisions are taken care of by the portfolio manager/fairy.

There are already lots of other fund-of-funds on the market. The gold standard up until now for passive purists has been the Vanguard LifeStrategy range.

And with MyMap on the scene… it looks like Vanguard LifeStrategy is still the gold standard, for our passive purposes at least.

Look into my eyes

As passive investors, we want products that are:

  • Low-cost
  • Simple
  • Transparent
  • Aligned with sound financial theory (for example, we will achieve market returns through long-term asset allocation decisions rather than market timing).

MyMap scores well on the low-cost front, but on the latter three points it distracts with a lot of wand waving.

Here’s a summary of what MyMap is touting:

MyMap fund's asset allocation, cost and volatility targets shown as a table

Source: Blackrock

Now those Ongoing Charge Figures (OCF) (rightmost column) are low. MyMap’s 0.17% annual fee compares very well with the 0.22% you pay with a Vanguard LifeStrategy fund. To put that into real money, MyMap would set you back £170 per year on a £100,000 portfolio versus £220 for LifeStrategy.

The table also shows us the asset allocations on offer across the MyMap range where, as always, the critical investing decision is how your money is split between equities and bonds.

We can see the MyMap 3 fund ranks as low-ish risk with only 34% in equities. The range then steps up through the gears to the high-octane MyMap 6, which has 82% in equities.

Ala Peanut Butter Sandwiches

From here on things get cloudy, not to mention smoke and mirror-y.

The MyMap portfolio is actively managed. It’s built from iShares index funds and ETFs, but the Key Investor Information Documents (KIIDs) say:

The Fund is actively managed without reference to a benchmark meaning that the investment manager has absolute discretion to choose the Fund’s investments and is not constrained by any target, comparator or performance benchmark.

You can choose your allocation today but the manager is free to move it all over the map tomorrow. So how concrete are the asset allocations we saw in the table?

BlackRock notes:

Expected asset allocations as of Day 1. For illustrative purposes only and subject to change – there is no guarantee that the above asset allocations will be met. Allocations may change over time.

And this is the nub of our concern.

The reason why billions has flowed from active funds to passive funds in recent decades is because the word is out: asset allocation is what determines most of your results, and active managers – as a group – don’t add value by timing the market.

This means that as a passive investor persuaded by the evidence, I want a reliable asset allocation that is maintained by clear rules.

BlackRock is playing yesterday’s game: We’ve got a secret sauce that can zhuzh up your results!

The volatility targets in the table look flighty, too. From BlackRock again:

There is no guarantee that the Fund will perform as expected and remain within the stated volatility tolerances. The fact the Fund remains within the stated volatility tolerances does not guarantee positive performance.

The volatility management process may reduce the effect of falls in market prices but may equally moderate the effect of rises in market prices.

When markets are volatile, managing volatility within tolerances will [r]equire the asset allocation of the Fund to be changed more frequently than normal. The cost of the transactions required to effect these changes will be met by the Fund and may affect returns.

In other words, the tight ranges listed in the table are marketing. And should the volatility targets corset the manager, your costs could increase because higher investment turnover will incur more trading fees.

One of the advantages of passive investing is that turnover is low relative to active management. A proper cost comparison includes fund trading costs as well as the OCF.

And for my next trick…

BlackRock has been here before with its Consensus funds. This too is a range of fund-of-funds, constructed from index trackers with an active management overlay.

MyMap reboots the Consensus concept with a slicker marketing campaign, a cheaper price tag, and a different coloured wig.

The most intriguing thing about MyMap is the allocation to alternatives, listed as precious metals and real estate in the KIID. The 2% allocation to alternatives cited in the table above would be near pointless, but the small print says the manager can invest up to 15% in alternatives.

I like the idea of extra diversification. However the uncertainty baked in to the arrangement makes me think it’d be simpler to just add a REIT tracker and/or a precious metals ETC to an existing portfolio rather than having to keep checking in on what the MyMap managers are up to.

All hat no rabbit

You may be sensing that I don’t see MyMap as a massive breakthrough for passive investors. True, but even if I was as excited as a koala discovering eucalyptus ice-cream, I’d counsel caution. That’s because BlackRock hasn’t yet published data on the fund holdings.

There’s nothing suspicious about that – the funds only launched on 28 May 2019. But it does mean we don’t yet know anything about the split between global vs domestic securities, say, or how the fixed income side will be diversified across government, corporate, index-linked, and junk bonds.

Once BlackRock shows its hand, we’ll be left with a conundrum. Because these funds do appear to be cheap.

The main argument against active management is it’s not worth the cost. But where does that leave us if MyMaps’ active management is cheaper than a pure passive alternative?

MyMap is marginally cheaper than Vanguard LifeStrategy at the OCF level. Only time will tell whether it can maintain that advantage once transaction costs are tallied and the total cost of ownership is known.

Yet even with that said, control remains a key factor. Is a slim saving worth it when active management decisions could be leading you towards an inappropriate asset allocation?

Personally I think that’s a poor trade-off.

A fund-of-funds is meant to make life simpler and more convenient. For my money, MyMaps introduces unnecessary complexity.

Take it steady,

The Accumulator

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Weekend reading logo

What caught my eye this week.

Over in the world of active investing, there’s a changing of the guard taking place. Or at least there is if you believe one of the leading guardsman.

More on him in a moment. Let’s focus first on the man in the red corner, cruising for a bruising – yesterday’s hero Neil Woodford.

Woodford made his punters richer for decades. But after a rotten run he’s now less popular than a Tory in a European Election.

According to ThisIsMoney:

Nervous savers pulled cash out of Neil Woodford’s flagship fund as it lost £560 million of its value in just four weeks.

Money in the once-feted Equity Income Fund dropped from £4.33 billion in April to £3.77 billion this week, research firm Morningstar said.

The fund looked after £10.2 billion of investors’ cash at its peak in 2017, nearly three times the current amount.

Woodford is a value investor, and those sort of stocks have been on the ropes for a decade.

A decade!

Is value dead? Even the passive factor-based investors have fretting, although some leading lights have suggested value’s long hibernation is all the more reason to own it.

As one, Wes Gray of Alpha Architect, put it earlier this month:

Don’t get rid of your value because it hasn’t been working, but arguably get more of it – if your goal is to try and beat the S&P 500 over the next 20 years.

Which brings us to the blue corner – where man of the moment James Anderson of the Scottish Mortgage Trust is having none of it.

Heavyweight champion of the world

Anderson is the Woodford of right now. Not in the way he invests, but rather in the way private investors name check him and his fund when you say passive investing is the best way to go for most.

In other words his fund has been winning for many years.

Scottish Mortgage’s Trust’s underlying investments are up about 500% over the past decade. The shares have done even better, registering a 600% gain as a discount has turned to a premium. That’s a staggeringly good run, even after remembering the US tech-heavy Nasdaq index has itself soared more than 300% over the same 10 years.

Now, I could take this quick post in various different directions here. For instance, I could do a bit of a beneath-us sniggering at individuals who don’t understand the hard part in active fund investing is to find the funds that will do well in the next 10 years – as opposed to shining a light on one of the best and best-known performers of the past.

Or maybe to offer a gentle reminder that zero sum games such as active investing can and often do have huge winners – and equally losers – and hence Scottish Mortgage hasn’t somehow broken the case for going passive.

But the trouble is I can’t snicker too loudly… because I’m also a bit of an Anderson fanboy.

No, I don’t currently own shares in his trust. But I do like to read his reports. Say what you like about active investors, they write far more interesting guff than passive funds can muster. (Of course they do, it’s part of the marketing!)

Anderson is particularly readable. He’s got a whole theory about how most listed companies are set to be disrupted into irrelevance by the technological revolution that’s barely gotten started. It’s thought-provoking, and I recommend an occasional peruse however you invest if you’re at all interested in technology and change.

The question though is whether Anderson has really identified a breach in the value-growth continuum – whether it “is different this time” – or if instead he’s just the latest incarnation of a growth investor grown fat and full of hubris before a bust.

Boxing clever

The latest Scottish Mortgage annual report [PDF] tackles the question head on:

It has been an investment commonplace for long decades that growth investing is a chimera. Value investing, especially as articulated by Warren Buffett, has risen to the status of the one true faith. Yet over the last decade growth indices have substantially outperformed their value counterparts.

Moreover this trend has principally been driven by the shares of a cohort of major internet platforms that have defied all predictions of doom based on the strains of growth from an already large base or assumptions of a short competitive advantage period.

What’s going on? According to Anderson, modern technology platforms – from Google to Uber to Microsoft – can now scale efficiently to an almost indestructible size, while venerable companies are being outmoded out of existence.

Value will therefore not come back from the dead because this time many value-style companies are going to be finished off once and for all.

And if that’s true, then Neil Woodford won’t be coming back either.

But if it’s not – if things aren’t really different this time any more than all the last times – then Anderson and Scottish Mortgage Trust may well be terrible places to put capital for the next decade, as finally we see a reversion to the mean, a swan dive for growth, and a value resurgence. (This could happen due to high share price valuations coming down, incidentally, even as the growth companies themselves prosper.)

Of course with a global tracker fund, you own both the growth Goliaths of today and the potential down-and-out value Davids of tomorrow.

Chalk another win for passive investing, and then settle down to watch the fight.

[continue reading…]

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Life expectancy for couples: why it’s surprisingly long and what you should do about it post image

The life expectancy of a couple is much longer than any pair of individuals – more than a decade longer. If you’re taking responsibility for a retirement plan for two, you need to know what the odds are that both or one of you may make it to a ripe old age. Long life can drain your portfolio like Facebook drains the battery of an aging smartphone.

We’ve already looked at how to find good life expectancy data for individuals. But we need to go one step further to see how two hearts make one financial strategy.

(This counts for romance on Monevator.)

Survival probability

When you’re joined at the financial hip, it’s a big mistake to look at life expectancies separately. This table from a retirement research paper by Dr Paul Cox of the Birmingham Business School shows why. For a heterosexual couple:

Probability of a UK couple surviving to age 95

Source: Helping consumers and providers manage defined contribution (DC) wealth in retirement, 2015. Dr Paul Cox.

The 50% chance that one of our two lovebirds still needs money by age 95 is much higher than the 33% probability for females, or the mere 25% for the males circling the drain.

And that’s for a UK couple born in 1950 who’ve reached age 65. For a matching set of Gen Xers, born in 1970, Cox calculates that the chances of one of them still being in business at:

  • Age 95 = 60% probability
  • Age 100 = 36% probability

Cox thinks the probability of one member of a couple surviving to age 95 and 100 is increasing by 3% every five years.

So individual life expectancies fly about as well as a paper aeroplane. Gambling your future security on a 50-50 bet of making age 95 won’t look smart if there are still bills to pay, your portfolio has waned, and you haven’t had the decency to fall off the log yet.

We need to settle upon a pragmatic degree of failure. For example:

“We’ll plan for a 50-year retirement because we accept a 10% chance that one of us will stagger on beyond that point, and a 90% chance that neither of us will.”

Then we need to personalise those odds with a projection of our shared life expectancy.

Enter the Longevity Illustrator

The Longevity Illustrator constructs survival probabilities for couples using US Social Security data. That’s good enough for our purposes – we’re looking for a plausible time horizon not a palm reading.

Enter your age, gender, and health deets, then watch your possible futures unfold in a few graphs.

Here’s the key table for an everyday couple – retirement planning obsessive, The Accumulator, and reluctant financial case study, Mrs Accumulator:

Survival probability / time horizon table for a couple using Longevity IllustratorOur acceptable failure rate is 10%. The bottom row shows a 10% chance that one of us will last 50 years beyond our retirement date. I accept that Mrs Accumulator is the bookies’ favourite.

There’s a 10% probability that both of us could last 42 years. I need to target a portfolio size and sustainable withdrawal rate (SWR) that can provide a dual income for at least that long.

It does sting a little to see there’s only a 50:50 chance we’ll both be around for 30 years. We’d better make the most of the time we have.

Dr Cox’s work helps us put some UK context around that table:

Between ages 80 – 84 two thirds (65%) of all men and one-third (30%) of women are part of a couple. At age 85+ one-half (48%) of all men and 1 in 8 (13%) women are part of a couple.

The large drop in the proportion of women living in a couple is because the proportion of widowers rises.

This life expectancy post explains how to find UK mortality data suitable for your year of birth if you want to go the extra mile. You can calculate your own survival probabilities with the formula I’ll share in a bonus appendix below.

You should reduce your SWR if you need to live off your portfolio much over 30 years. There’s good evidence you should increase your equity risk if you want your wealth to last 40 to 60 years.

What does failure look like?

It’s important not to overdo fears of eating dog food in retirement. Failure rarely looks like bankruptcy. In practice the chance of living long enough to run out of money is smaller than it seems because it depends on two events:

The probability that your portfolio fails.

And

The probability that someone is left alive to rue the day.

For example:

There’s a 10% chance that one of you survives 50 years.

There’s a 10% chance your portfolio runs dry given your chosen SWR.

The probability that both events occur together is 0.1 x 0.1 x 100 = 1%.

That’s a 99% success rate. That’ll do me.

Besides, even a 1% fail case doesn’t necessarily mean you run out of money. It means you’ll need to lower your spending along the way to prevent your portfolio ebbing away.

That will probably happen naturally when your portfolio only has to support one of you – assuming your next move isn’t to shack up with some asset-less Condo Casanova. (I recommend prohibiting that in your relationship agreement.)

Still, one person can rarely live half as cheaply as two, as the Pensions Policy Institute warns:

The proportion of pensioners living alone has increased as a result of divorce becoming more prevalent at older ages and increased longevity leading to widows and widowers living for longer.

Living alone tends to decrease income due to the loss of a partner’s pension and reduce living standards as a single person requires more than half of the income of a couple to maintain the same living standards.

Hmm, divorce, yes, that’ll screw things up, so be nice.

Watch out, too, if the new State Pension is a fundamental part of your retirement calculations. Most people will inherit the square root of naff all from that quarter when their partner dies.

Finally, if your data points to long life then put an annuity on your ‘to do list’ for your early seventies.

Annuities are currently the best financial tool we have for buying lifetime income cheaply, aside from the State Pension. There are pitfalls to avoid, they are much misunderstood, and you need to live well into your 80s to come out ‘ahead’, but annuities are a great way to live long and prosper.

Take it steady,
The Accumulator

Bonus appendix: Survival probability calculation for a couple 

Take the probability that you will be alive in 50 years, for example:

Jill = 25% chance
Jack = 10% chance

The probability that both of you will be alive in 50 years:

0.25 x 0.1 x 100 = 2.5%

To work out the probability that either of you will be alive in 50 years:

The chance that Jill will be alive but Jack will not: 0.25 x 0.9 x 100 = 22.5%

The chance that Jack will be alive but Jill will not: 0.10 x 0.75 x 100 = 7.5%

The chance that at least one of our pair will be alive in 50 years:

2.5% + 22.5% + 7.5% = 32.5%

Check out more investing maths fun with Monevator!

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