Good reads from around the Web.

There’s little doubt that most potential investments look expensive at the moment, with the possible exception of marked-down Brazilian football shirts…

Take UK government bonds. As recently as 2008, you could taper down your risk exposure by buying gilts and locking-in a 5% return.

At the same time, interest rates on cash for the savviest private investors were over 6%.

Today you won’t get even 3% on gilts. As for interest on cash, it has dwindled to approximately the same level as interest in signing the Brazilian strikers Fred, Hulk, and Oscar.

i.e. Near-zero.

This low return from safer assets mirrors the wider picture, where ultra-easy policy from Central Banks has pulled down yields across the asset classes, and hence bid up prices everywhere.

The New York Times has a catchy name for it, or rather two: Is it the Everything Boom, it asks, or the Everything Bubble?

Either way it’s not a place for stingy buyers to go shopping:

“We’re in a world where there are very few unambiguously cheap assets,” said Russ Koesterich, chief investment strategist at BlackRock, one of the world’s biggest asset managers, who spends his days scouring the earth for potential opportunities for investors to get a better return relative to the risks they are taking on.

“If you ask me to give you the one big bargain out there, I’m not sure there is one.”

I think the article is a bit selective with its definition of “everywhere you look” (Manhattan real estate and US bonds have been surging for years, and the Indonesian stock market is one of the few major emerging markets that looks truly frothy) but I agree with the gist.

There really isn’t much that’s obviously cheap about. Emerging markets looked better value for a while, but I have to boast say my pointing to this in December last year proved to be decent timing, given how they’ve caught a bid in 2014.

Even the gold miners I flagged up last July are ahead, with the likes of Randgold Resources some 25% higher.

Today it’s not easy to find comparable bargains. I could point to a few things that might be cheap, but they hardly seem like slamdunk opportunities.

For instance UK housebuilders have fallen hard on fears the property market has overheated – but investors could easily be proven right to have marked them down, depending on how interest rates move from here.

Anyway, buying too many shares in say Barratt Developments is hardly the stuff of prudent asset allocation.

What if they’re right?

Still, what seems like an expensive time to buy assets might yet turn out okay.

For one thing, not all markets are as expensive as the US, which tends to dominate the media. The UK market looks fine to me, and emerging markets as a whole are not yet dear in my view.

More important than my guesswork however is that stock markets are not completely stupid. It may well be that investors are right to be paying up to buy assets, even if they look a bit pricey.

One of the easiest traps to fall into as a new stock picker is to think that a share on a P/E rating ¹ of 6 is certainly a better buy than one on a P/E ratio of 18. Often it will be, but if the company on the higher rating grows earnings at 20% and the cheap stock sees profits fall, you will probably have done better to buy the more expensive looking option.

Similarly, it’s possible the global economy is finally going to shake off the long global slowdown and burst into strength for a few years. If it does, then today’s expensive valuations will be moderated by fast-growing earnings, and could turn out to have been a good investment after all.

Time will tell on that.

In the meantime, if you really must snag a bargain, maybe you could look at US golf courses! It’s a buyer’s market, apparently.

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1. The price to earnings ratio, often used as a measure of expensiveness.[↩]

Ha, ha. So you want to compare a few funds? Prepare for pain my friend, prepare for pain. You’d think there’d be some great app out there that would enable you to match up the key data in the blink of a pixel. But no…

While the flash boys play Tron bikes in cyber space, you and I limp along the information B-roads on our tuk-tuks. Even the best tool – Morningstar’s Fund Compare – is as clunky as a 1980s mobile phone, and only enables you to compare Open Ended Investment Companies (OEICs) and Unit Trusts.

To compare Exchanged Traded Funds (ETFs) as well as funds, try Funds Library’s Data Comparison ¹ and fold in extra data from Morningstar.

I’ll explain how to do so as we go.

Comparison able

Once you’ve condensed the universe of possible funds into a solar system of probables, feed your choices into Fund Compare or Data Comparison and face-off the following:

Expenses as measured by Total Expense Ratio (TER) or Ongoing Charge Figures (OCF) – Lower is better.

Number of holdings – Higher is better. More securities equals more diversity and less chance that you’re taking unrewarded risk.

Average market cap – If you want exposure to small caps then obviously a fund that holds smaller sized companies is better.

Search for your tracker on Morningstar. Click through to its profile and you’ll find average market cap on its Portfolio page.

Fundamentals – To increase exposure to the value factor, compare your trackers on the key ratios:

• Price/earnings
• Price/book
• Price/sales
• Price/cash flow

As a rule of thumb, the lower the number, the greater the trackers’ exposure to value.

Each fundamental measure amounts to a different method of identifying value. Investments will vary in their exposure to each fundamental and this accounts for short-term performance differences. But those transient advantages have levelled out over time, so don’t sweat it.

If the fundamentals don’t reveal a clear winner then plump for price/book as your tie-breaker, because it’s the most widely used factor.

To find fundamental data: search for the tracker on Morningstar. Click through to its profile and you’ll find the fundamentals listed on the Portfolio page.

Turnover – Lower is usually better. A low-trading fund racks up fewer dealing expenses.

You can compare turnovers using the Funds Library Data Comparison tool.

Bid-offer spread – Another cost of trading that affects Unit Trust funds and ETFs. Sometimes the spread can be so large that you may be better off with a higher OCF product.

A tracker’s buy/sell prices will be available on its website. Calculating the bid-offer spread is straightforward.

Tracking error – Lower is better as it means the fund’s costs are consuming less of the market’s return.

It’s tricky to make accurate tracking error comparisons across products, but we’ve previously explored two ways to measure tracking error, using Hargreaves Lansdown’s and Bloomberg’s charting tools.

Performance – Sure, higher is better but asset classes rise and fall like empires. Today’s sick man could well be tomorrow’s dominant power.

Look for the annualised return in the Total Returns section of a product’s Morningstar profile and pay no heed to less than five years worth of data.

Sharpe ratio – Higher is better. The Sharpe ratio is a risk-adjusted measure of investing performance. It enables you to compare whether the risk taken is worth the return. A ratio of 1 is good, 2 is very good and 3 is excellent.

The factsheets of life

It’s rare that one tracker trounces another in any comparison. These are the ultimate me-too products, after all.

I normally err on the balance of advantages, but if you only want to bother with one data point then pick the OCF every time.

Index tracking has become an increasingly competitive space, with little opportunity for product providers to open up yawning advantages.

So while it’s sensible to understand the important features of trackers and how to read a factsheet, picking the ultimate product is nowhere near as important as sticking to a passive investing strategy and choosing the right asset allocation.

Take it steady,

The Accumulator

1. You’ll need to register, but it’s free.[↩]

Good reads from around the Web.

Most of us know passive investing in index funds is the best way forward for the vast majority (even if some of us continue to pick stocks for kicks, or just out of sheer pigheadedness…)

Passive investing is the least effort and the lowest cost way to invest, and yet it’s also the most likely to deliver nearest to the market’s long-term returns.

However there’s a snag, which is that there are not hundreds of inspiring passive investing books out there filled with witty one-liners.

Active investors can turn to Warren Buffett quipping about being like an over-sexed guy in a harem in a bear market, or Peter Lunch warning that you should invest in companies that any idiot can run, because “sooner or later, any idiot will run it”.

Passive investors? They have Vanguard literature boasting of a 0.01% cut in annual charges.

Oh, and Smarter Investing by Tim Hale, which I’ve almost come to blows over with my co-blogger.

While I agree his Best Book Ever is the number one route map for UK passive investors, I’ve never managed to read more than three pages without dozing off.

Get a quote

I’m biased, but I’ll add that my co-blogger, The Accumulator, is slowly amassing a nice collection of witticism about index investing. Perhaps one day they’ll be collated by a fan overburdened with time for future generations to enjoy.

Until then we can turn to the American Enterprise Institute. It sounds like a spoof corporation from a 1970s dystopian movie, but the Institute gets a thumbs-up for bringing this quote to my attention:

“Building a portfolio around index funds isn’t really settling for the average. It’s just refusing to believe in magic.” – Bethany McLean of Fortune

I also liked this one:

“I own last year’s top performing funds. Unfortunately, I bought them this year.”– Anonymous

There’s even one from the aforementioned stockpicking legend, Peter Lynch:

Thereʹs something to be said for the dart‐board method of investing: buy the whole dart board.” – Peter Lynch, Fidelity Magellan

However the list is not comprehensive, and it does boast a few bore-fests. For example they missed a trick by not including this quote from the master:

“By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals.” – Warren Buffett

Perhaps we should do our own roundup of insights about index funds someday, with a focus on the snappy. Having such quotes to hand is not just for fun – distilled wisdom can be a useful touchstone in a tight spot.

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