Performance Update for Colm Fagan's ARF

[Gordon Gekko]

Of course not, you've paid your entry ticket into Augusta in either case.

Yes, you’ve paid your green fee to play.

Or alternatively, you could pay a slightly higher green fee for Jordan Speith to play on your behalf, notwithstanding the fact that most pro golfers struggle to make a living and struggle around Augusta.

(For the non-golf fans, Jordan Speith has one of the best longer-term track records around Augusta, home of the Masters)

 

[Colm Fagan]

Stewards' Enquiry - that extent of a winning margin suggests the possibility of doping!
And indeed my performance was enhanced by the substantial PRSA injection at the start.
In terms of the ARF course in isolation my figures are: Withdrew 81% (only 4% p.a. mind). Now has 169%
I can confirm that as a result of the SE the places have been reversed.

Thank you @Duke of Marmalade for initiating the Stewards' Enquiry - and for the result, which pleases me no end.
So the revised result, as at 31 December 2023, for 100 invested on 31 December 2010, is:
Colm: Withdrew 102. Now has 186.
Duke: Withdrew 81 Now has 169
So it seems that I won by a distance, rather than the reverse, as we had thought initially. The bad news though is that I have to backtrack on my earlier explanation for underperforming! I'm no stranger to backtracking.
I reckon that my lucky decision to invest so much in Novo Nordisk, which performed spectacularly since I bought it, must have played some part.
In the longer term, the decision to chart a steady course, with minimal switching, combined with the other essentials (investing close to 100% in equities - always - to minimise the 4% handicap, and keeping costs down) played a major part.
The problem with active management is that managers must be "active".
As I mentioned at the start, I kept exactly the same shares in my portfolio all through 2023. Can you imagine if an active manager did the same? Their clients (or more likely their bosses) would berate them: "I pay you to be active, so do something, anything, to show that you ARE active."
Every time you switch shares, you incur a cost. It may be small, but it's a cost. At any time, market values are a fair measure of the relative value of different shares, which makes it difficult to justify moving from share A to share B, given that there are lots of people out there, much smarter than you or me, moving in the opposite direction. That's the definition of a market. Why are they moving in the opposite direction to you? Are they mugs? That's the sort of thinking that causes me to stay the course with the shares I have rather than chop and change.

 

[Colm Fagan]

Time for an update on the performance of my ARF for the first six months of 2024.

As regular readers know, my investment strategy is simple: invest close to 100% in shares and keep transaction costs to a minimum. It's the same as the strategy I advocated for my ill-fated auto-enrolment proposal.

I achieved both goals in the six months to end June. For every €100,000 of fund value at end 2023, there was just €623 cash; the other €99,377 was in shares. Sales in the six months were €2,003 (to cover pension withdrawals of €2,968); there were no purchases. Unfortunately, there is no escaping ARF manager’s fees, which are excessive in Ireland, but I negotiated a reduction from the start of 2024. Total fees for the half-year, including sales commission, were €246 (all figures are per €100,000 of fund value at the start of the year). Cash in the fund increased to €1,955 at 30 June on the back of dividend receipts. The fund’s value increased to €110,243 and the return for the half-year was 13.4%.

The six-month return was good but short-term returns should neither excite nor worry the long-term investor. (They do, though, despite our best efforts!) What matters is the long-term. I have been tracking the return on the ARF since I “retired” at end 2010. A number of milestones were reached in the first half of 2024. Total pension withdrawals in the thirteen and a half years to 30 June 2024 exceeded the amount invested at the start and the fund’s value increased to more than double the initial investment. The average return for the entire period was 11.2%.

I don’t claim any investment expertise, but I like to hold individual shares rather than units in unit-linked funds. It gives me a greater sense of security to see the fund invested in real businesses. I also save on investment managers’ fees: the average fund manager doesn’t add value and I don’t have the expertise to identify the few exceptions. I take the simple (simplistic?) view that the market is good at pricing shares relative to one another, since at any time there’s an equal weight of investors wanting to buy a share at a given price as there are people wanting to sell at that price, so the performance of a portfolio assembled at random won’t diverge much from the market average in the long-term.

I have tracked returns on shares that have been in my ARF for the three-an-a-half years from 31 December 2020 to 30 June 2024. There have been startling differences in performance. The winner by a country mile was Novo Nordisk, the Danish pharma company, whose share price at end June 2024 (allowing for a 2 for 1 split) was almost five times what it was at end 2020. I first wrote about it back in 2019 in my blog here. Thankfully, I held on to all the shares I had at the start of the period and so have benefited from the full rise in the share price. The problem now is that Novo Nordisk accounts for a very high percentage of my fund.

The second-best performer came as a surprise when I did the sums, but it made sense on further reflection. Town Centre Securities is a UK regional property company. It has been in my ARF for at least ten years. Its share price was on the floor in 2020 but it has since staged a remarkable recovery. By 30 June 2024, its value was almost four times its value at end 2020. It also paid a dividend for the entire period.

The worst performer was Disney Company: its value (in Euros) at end June 2024 was less than two-thirds its end 2020 value. To add insult to injury, it didn’t pay a dividend. (Correction: there was a small dividend in January 2024, after a four-year hiatus)

My biggest single investment, Phoenix Group Holdings, also performed indifferently: its market value fell by more than 20% in the period, but there was the consolation of excellent dividends. The dividend has increased consistently, yet the dividend yield at 30 June was over 10%.

Looking forward, with advancing age comes a greater degree of caution, so I may shift the balance of the portfolio towards more defensive stocks. That could mean selling some of my Novo Nordisk holding. Overall, though, the strategy of staying invested in equities and keeping transaction costs to a minimum will remain unchanged.

 

[GSheehy]

In the interest of absolute clarity, as fees/charges/costs feature a lot in your posts on ARFs, the 13.4% and 11.2% quoted above are net of all fees (+vat or AMCs), custodian fees, stamp duty, stockbroking fees, currency exchange, over the specified periods? That the only other 'cost' not inculded in the figures were your own time and effort in self-managing the fund.?

 

[Colm Fagan]

A PS to my update above for the six months to end June: the figures imply that dividends in the half-year were €2,543 (per €100,000 at the start). This equates to a dividend yield of over 2.5% for the half-year, over 5% for the year. That surprised me because, while I have some high-dividend payers in the portfolio, there are some with very low dividend yields. I'll check the figure. BTW, the calculation was 1955+2968+246-623-2003.
In answer to @GSheehy, yes, the returns quoted (13.4% and 11.2%) are net of all fees (but before PAYE and USC of course - no PRSI at my age!). I didn't spend any time or effort in managing the fund. I just left what I had alone. The only transaction was a sale, and I decided to sell the biggest holding. Maybe I'll spend more time managing the fund now that my efforts to persuade government to adopt the same strategy for the national AE pension scheme (pre- and post-retirement) have come to nought.

 

[Deauville]

A PS to my update above for the six months to end June: the figures imply that dividends in the half-year were €2,543 (per €100,000 at the start). This equates to a dividend yield of over 2.5% for the half-year, over 5% for the year. That surprised me because, while I have some high-dividend payers in the portfolio, there are some with very low dividend yields. I'll check the figure. BTW, the calculation was 1955+2968+246-623-2003.
In answer to @GSheehy, yes, the returns quoted (13.4% and 11.2%) are net of all fees (but before PAYE and USC of course - no PRSI at my age!). I didn't spend any time or effort in managing the fund. I just left what I had alone. The only transaction was a sale, and I decided to sell the biggest holding. Maybe I'll spend more time managing the fund now that my efforts to persuade government to adopt the same strategy for the national AE pension scheme (pre- and post-retirement) have come to nought.

Colm,
Thanks for sharing your methods and results.
It’s beneficial to have such information even if it isn’t my preferred route.

 

[Colm Fagan]

This equates to a dividend yield of over 2.5% for the half-year, over 5% for the year. That surprised me because, while I have some high-dividend payers in the portfolio, there are some with very low dividend yields. I'll check the figure.

I checked my calculations and made some interesting discoveries.
My ARF can be divided into two very distinct groups: "high dividend" and "low dividend" shares. The former have dividend yields of over 7% and the latter dividend yields below 3%. There's nothing in between: it's a "barbell" portfolio. It happened by accident, not by design.
At 30 June 2024, "high dividend" shares accounted for 38.5% of the portfolio by value, "low dividend" shares for 59.7% by value. However, 91.6% of the dividends were paid by "high dividend" shares and just 8.4% by "low dividend" shares. Dividends in the half year for "high dividend" shares were 5.4% of market value at 30 June, dividends for "low dividend" shares were just 0.3% of market value at 30 June.
An even more surprising statistic is that the value of the "low dividend" shares increased by 22.2% while the value of the "high dividend" shares fell by 2.2% in the half-year (a strange coincidence of "2"s!!). The pattern is reasonably consistent across the portfolio, with a small number of exceptions in both directions, of course.
I'm still trying to get my head around it all. I wonder if there was a fashion in the half-year for "low dividend" shares to do well and "high dividend" ones to do less well. I don't know enough about investments to make a call. If it is a fashion, will high dividend shares come back in favour at some future date?

 

[Deauville]

I checked my calculations and made some interesting discoveries.
My ARF can be divided into two very distinct groups: "high dividend" and "low dividend" shares. The former have dividend yields of over 7% and the latter dividend yields below 3%. There's nothing in between: it's a "barbell" portfolio. It happened by accident, not by design.
At 30 June 2024, "high dividend" shares accounted for 38.5% of the portfolio by value, "low dividend" shares for 59.7% by value. However, 91.6% of the dividends were paid by "high dividend" shares and just 8.4% by "low dividend" shares. Dividends in the half year for "high dividend" shares were 5.4% of market value at 30 June, dividends for "low dividend" shares were just 0.3% of market value at 30 June.
An even more surprising statistic is that the value of the "low dividend" shares increased by 22.2% while the value of the "high dividend" shares fell by 2.2% in the half-year (a strange coincidence of "2"s!!). The pattern is reasonably consistent across the portfolio, with a small number of exceptions in both directions, of course.
I'm still trying to get my head around it all. I wonder if there was a fashion in the half-year for "low dividend" shares to do well and "high dividend" ones to do less well. I don't know enough about investments to make a call. If it is a fashion, will high dividend shares come back in favour at some future date?

Colm, that’s very interesting.
I don’t know if this is related in any way.

I’ve been doing homework on building an ARF portfolio for later this year.
I currently plan to include a Dividend Growth fund.

Part of the reason being that I read a publication a few years ago suggesting partially using high dividend equities to partially replace bonds in a multi asset portfolio.
The aim being to reduce correlation and volatility while retain as much growth as possible.

Looking at fund performance in the 3 year period including where we had equities and bonds fall together 2022 ?
Dividend Growth performed better than the Indexed Global Equity. Comparison on Zurich funds.

I wonder if this difference in performance within the same asset class would be relevant to your results ?

Again, thanks for sharing.

 

[cremeegg]

On the other hand, I don't think I would have risked putting all my money in equities if I didn't know the companies I was investing in and didn't have confidence that they would deliver reasonable returns in the long-term.

Surely stock picking is riskier than a global equity fund.

Investing in companies you know may or may not lead to better returns, but I would think it is certain to be riskier.

 

[Sarenco]

Surely stock picking is riskier than a global equity fund.

To be fair @Colm Fagan does acknowledge in his opening post that he would have done far better if he had simply invested in a passive global equity fund.

And investing in a concentrated portfolio of equities is certainly far riskier than investing in a broadly based portfolio.

So, at least during this limited time period. the additional risk wasn’t compensated with additional return.

 

[Colm Fagan]

Lots to chew over, @Deauville, @cremeegg and @Sarenco! Thanks for your comments.
Firstly, I agree (mostly) with @Sarenco, but I'm not certain that I was right originally in thinking that I would have done better with a passive find. @Duke of Marmalade gave me cause for pause. I suspect now that the spectacular performance of Novo Nordisk may have rescued me from mediocrity, but to some extent that proves @Sarenco 's point!
If one accepts that the market is always right (which has to be the rational starting point), then a random selection of stocks will beat a passive fund - on average. I agree that it's riskier, but the balance of riskiness should be on the upside since you avoid charges completely (and switching costs, which are there with passive funds as well as active ones). The element of riskiness should reduce over time, so that the longer the holding period, the less the divergence from the market (I haven't proved this to be true mathematically, but it feels right).
But that's not really why I've invest in individual shares rather than in funds. Strange to say, I don't know if I'd have the courage to invest everything in faceless equity-linked funds; I would probably take refuge in bonds for a portion of my portfolio, despite knowing that I was surrendering the ERP for that portion of the portfolio: I would be afraid all the prices would fall through the floor. I'm far more prepared to invest everything in a range of real companies in different industries/ countries where I have a good idea of the businesses that they're in, I can see the impossibility of them all getting into difficulties at the same time, and I'm confident that they'll deliver reasonable long-term returns, definitely more than bonds. Investing in real companies allows me to claim the Equity Risk Premium for my entire portfolio.
Hi @Deauville. You're bringing me into the honours class and I'm not sure I can keep up with you, but your logic seems sound. I see my high-dividend holdings as quasi-bonds - with the big advantage over bonds of much higher yields. High-dividend shares also tend to have better defensive qualities than low-dividend ones. That should reduce long-term volatility of the portfolio. I confess though that I'm not qualified to discuss the finer points of your argument.

 

[Fortune]

If one accepts that the market is always right (which has to be the rational starting point), then a random selection of stocks will beat a passive fund - on average. .

Does the same gold true for stocks selected not at random? I seem to recall reading that you investigated the companies before buying shares in then.

As for dividend shares, the theory states that the value of a share should fall by the amount of the dividend as soon as it's paid.

 

[Colm Fagan]

I seem to recall reading that you investigated the companies before buying shares in then.

You are right, of course. There's no way that I'd buy a share at random. I always do some research, although for some of my purchases, the research was done many years ago. I was trying to make a theoretical point with my reference to randomness.

As for dividend shares, the theory states that the value of a share should fall by the amount of the dividend as soon as it's paid.

Right again. Total return, dividends and capital gain, is what matters. For the gross (pension fund) investor, it doesn't matter whether the return comes from capital growth or dividends.

 

[SPC100]

If one accepts that the market is always right (which has to be the rational starting point), then a random selection of stocks will beat a passive fund - on average. I agree that it's riskier, but the balance of riskiness should be on the upside since you avoid charges completely (and switching costs, which are there with passive funds as well as active ones).

I think you are wrong here?

The future prospect for each share is different. If you accept that A very small percent of shares drive most of the market returns. With your small random set, on average, you are more likely to miss at least one of the greats, which will drive underperformance.

 

[Gordon Gekko]

If one accepts that the market is always right (which has to be the rational starting point), then a random selection of stocks will beat a passive fund - on average. I agree that it's riskier, but the balance of riskiness should be on the upside since you avoid charges completely (and switching costs, which are there with passive funds as well as active ones). The element of riskiness should reduce over time, so that the longer the holding period, the less the divergence from the market (I haven't proved this to be true mathematically, but it feels right).

Regardless of how it feels, I’m really struggling to see how any of the above is right.

I checked a family member’s ARF just there which is in an equity fund. 326% for the same period gross of fees, which are 0.6% pa in total (0.5% headline). Seems like a lot more than 11.2% pa over 13 years.

 

[Colm Fagan]

I think you are wrong here?

The future prospect for each share is different. If you accept that A very small percent of shares drive most of the market returns. With your small random set, on average, you are more likely to miss at least one of the greats, which will drive underperformance.

Sounds convincing, but most funds have piddling amounts in a massive number of shares, which dilutes the impact of blockbusters. In my case, I've had Novo Nordisk and Apple in my portfolio for the three and half years from end 2020 to June 2024. They both account for double digit percentages of the fund. Novo Nordisk's share price is 467% of what it was at the start of the period (allowing for the share split) while Apple's is 181% of its value at the start of the period. I recognise that Novo Nordisk was a fluke - I was lucky - but I'm not complaining!

I checked a family member’s ARF just there which is in an equity fund. 326% for the same period gross of fees, which are 0.6% pa in total (0.5% headline). Seems like a lot more than 11.2% pa over 13 years.

Firstly, 326% over 13.5 years is 9.1% a year (8.5% after fees), which is quite a bit less than 11.2% a year.
I honestly don't know how well my ARF has done relative to the equity market. The main point, which I've made on many occasions, is that I've gained by having it all in equities for the entire period. That is unusual for ARF's that are the pensioner's main source of income (some have all-equity ARF's on top of their "core" DB pensions). However, my exchange with @Duke of Marmalade earlier in this thread makes me think that my ARF performed better than the average all-equity portfolio.

 

[Gordon Gekko]

Sounds convincing, but most funds have piddling amounts in a massive number of shares, which dilutes the impact of blockbusters. In my case, I've had Novo Nordisk and Apple in my portfolio for the three and half years from end 2020 to June 2024. They both account for double digit percentages of the fund. Novo Nordisk's share price is 467% of what it was at the start of the period (allowing for the share split) while Apple's is 181% of its value at the start of the period. I recognise that Novo Nordisk was a fluke - I was lucky - but I'm not complaining!

Firstly, 326% over 13.5 years is 9.1% a year (8.5% after fees), which is quite a bit less than 11.2% a year.
I honestly don't know how well my ARF has done relative to the equity market. The main point, which I've made on many occasions, is that I've gained by having it all in equities for the entire period. That is unusual for ARF's that are the pensioner's main source of income (some have all-equity ARF's on top of their "core" DB pensions). However, my exchange with @Duke of Marmalade earlier in this thread makes me think that my ARF performed better than the average all-equity portfolio.

Is it not 11.33%? I agree that one would expect 326% to translate into a higher number.

Whilst I agree that people with other assets should think of their overall asset profile and consider having an all-equity ARF, you’ve been exceptionally lucky that your investment period started after the Global Financial Crisis. If you’d retired right before the dot.com bubble burst of the GFC kicked in, the picture would be different because of sequence of returns risk etc.

 

[GSheehy]

If you're going to go down the past performance / comparison route then it's important to compare like-with-like as accurately as possible.

The YTD figure for the @Gordon Gekko 's family relative on the fund they're invested in (previously dislosed) is 18.92% net of the AMC disclosed and all other costs. The period I'm quoting is 29/12/2023 to 28/06/2024 as those are the dates that the fund prices are available from.

The annualised return for the same fund is 11.3% (net of all charges). The period I'm quoting is 01/01/2011 to 28/06/2024.

But, there are > 400 holdings in the relatives fund. A more concenrated fund on the same platform (with circa 50 holdings) did 11.18%.

Incidentally, the Actively Managed 100% Global Equity Fund and the Global Index Tracker on the same platform over the period 10/03/2011 (the date that the Index Tracker fund was included on the platform) to 28/02/2024 are identical @ 11.44% pa (net of all charges ie the 0.5% AMC and all OOCs and PTCs)


Gerard

www.prsa.ie

 

[SPC100]

but most funds have piddling amounts in a massive number of shares, which dilutes the impact of blockbusters

True, but In a passive market fund all the blockbusters are guaranteed to be included over time.

 

[SPC100]

You may not want to reveal how many shares are in your ARF and the percentage weighting? From reading your posts over the years, using my bad memory and my model of your fund, I'd estimate about 7 shares with about fifty percent of value concentrated in two shares.

If you did a money makeover post people would say diversify!

I think the long term expectation of that shape of holding (randomly constructed) is to underperform a passive fund (that tracked the market these are selected from).

In your previous post you seemed to be claiming the opposite?

If one accepts that the market is always right (which has to be the rational starting point), then a random selection of stocks will beat a passive fund - on average

Obviously there will be a lot of variance for individual sets, with some under and some over performing. And in my framing you seem to have chosen a good set! Congratulations on your luck or as some would argue skill!!