Equity Investing Framework.

Its a little old and UK based but it doesn't matter because the concepts are ageless and universal. This is a great video to to make accessible and hopefully understandable the research and observations that underlie the framework for low cost, low turnover, highly diversified equity investing.

 

Great video with great interviews with titans of the industry including Eugene Fama, Ken French, Jack Bogle, Larry Swedroe.

 

As an actively managed fund's FUM increases past a certain point, the probability of outperforming an index becomes less likely. Firstly, with the increase in algorithmic trading, inefficiencies and arbitrage are reduced, which are opportunities for an active manager. Without such inefficiencies the number of opportunities is reduced. Secondly, agility and timing is important for active management, so as you move from a remote controlled car to the QE2, manoeuvrability is drastically decreased. Very difficult to invest 50 million in the market without moving the price.

I think a person has a better chance at outperformance actively managing their own portfolio with a limited number of outperforming shares aka barbell strategy, rather than paying high fees for a manager with a big FUM.

With that being said, it is index huggers cap weighted for me.

 

@dunno IVV (S&P 500 ETF) charges 0.04% and gives you access to the best and the most profitable companies in the world. Considering it's highly diversified if you are happy to live with country specific risk I cannot think of better bang for your buck type of investment for Australian investors.

Sure VGS at 0.18% and VAS at 0.10% are very good and up there but paying above 0.50% for any investment to me seems like ideal candidate setup for underperforming broad diversified low cost index over the long term (10-15 years)

Cheers,
Oracle.

 

S&P 500 has done well in the past decade or so, but slid sideways the previous decade, out performed by International equities, Australian equities, Emerging Markets, Small Cap Value etc.

Anyone with nerves of steel that could stomach an internationally diversified small cap value portfolio and the associated tracking error, the results were crazy good.

Backtest Portfolio Asset Allocation

 

Yes quite a line up. You can add to the list of heavy hitters in the video, David Booth and Chalie Ellis also maybe less known but had a large influence for me, Bruce Greenwald. I'm sure there is more, I don't recall. The video is more a communication of ideas by thought leaders rather than a marketing job for a product provider - which is somewhat rare in the finance industry.

 

I've taken a small dabble on VISM for that kind of exposure. Also a punt on an Australian small companies managed fund for similar reasons.

I've matched that with a bit of VLC for the big part of ASX town, and a chunk of VGS for the overseas general action.

And two months ago, for some reason that seemed good at the time, a parcel of WBC, which is being very naughty by bumbling along at a loss ever since. Quite like me really.

 

I also hold VISM as a pairing with VGS to get total market exposure. Small cap value factor investing are more funds like Dimensional and Avantis (Eg AVUV/AVDV etc)

 

Hi @oracle

Yes IVV would have to be the ultimate low cost locally domiciled diversification for an Australian investor.

Whether VGS's extra cost for extra diversification is worth it or not is defensible either way.

No international diversification advocates have a less defensible position in my view. Their case largely rests on it worked O.K in the past. But diversification is about coping with an unknown future.

Using a Concentration Coefficient to look at the different funds on like terms – ie how many equal weight positions they represent.

• 1Million dollars in VAS costs $1000pa and represents 38 stocks over 6.26 sectors in 1 country.
• 1 Million dollars split 50/50 VAS/IVV costs $700pa and represents 101 stocks over 8.09 sectors in 2 countries.
• 1 Million dollars split 50/50 VAS/VGS costs $1400pa and represents 124 stocks over 8.18 sectors in 2.83 countries.

Personally, I’m willing to pay for the extra diversification and actually go beyond VGS by building out with other funds the area’s where VGS still lacks the diversification I want.

But minimising known expenses and forsaking a little unknown diversification outcome is as powerful an argument as paying up a little to diversify even more broadly against an unknown future. It’s an argument that can only be resolved on a personal level.

 

Between 1980 and 2000 S&P 500 returned CAGR of 16.13% - Link

A decade of lower returns was bound to happen sooner or later after 20 years of stellar returns.

Cheers,
Oracle.

 

Always learning from dunno. Is there a tool to easily calculate the concentration coefficient of various portfolios?

As a matter of interest I ran the country calculation manually against VT which is total world include emerging markets
100% VT (inc 2% Australia) = 2.88 countries
50/50 VT/VAS = 2.88 countries
75/25 VT/VAS = 3.77 countries - this appears to be the max

 

No tool I know of, just ye old faithfull spreadsheet.

Equal weight will obviously always show up more diversified than MCW, but that misses the information provided by MCW, so you need to not get too hung up on just maximising diversification but nether the less it often provides useful for comparisons, assessing combinations and certain other things, just like you have with the 75/25 ratio where it answer what combination of MCW and home bias gives the highest country diversification.

 

Just before blowing the spreadsheet away I took a quick look at max diversification for VGS/VAS which comes in around 30% for VAS when considering individual stock, country and sector diversification.

• 70%VGS / 30% VAS. cost $1,560pa per Mil. 192 stocks, 8.44 Sector, 3.11 Country.

• 70% IVV / 30% VAS, cost $580pa per Mil. 112 stocks, 8.09 Sectors, 1.76 Country.

How much are you willing to pay for diversification is the question?

Costs are a certain saving, future benefit or otherwise of diversification are unknown because the future is unknown.

The natural volatility harvesting effect of ongoing additions during accumulation (if you are in that position) could probably also come into the judgement.

 

Love your work Dunno. So I boil your analysis down to this: For 71% more stock diversification, 4% more sector diversification, and 77% more country diversification, it will cost 0.1%p/a on your portfolio.

 

A company like Johnson and Johnson is part of S&P500 and therefore IVV. That is highly correlated with a lot of global activity. This argument holds for many SP500 shares.

The implication is that the SP500 is diversified enough to cover the world equity portfolio

 

Unless you start to think about country-specific risk, no? (risk specific to the regulations of the country in which the company is domiciled)