Performance Update for Colm Fagan's ARF

JimmyB99 said:
When you send the clip, I'll elaborate more. But, in the meantime, let's be very clear. The reason I mentioned the AE presentation is that it was an example of where the comments were made publicly by a senior actuary who is expert in the investment of pension funds. JO'D's comments about sequence of risk were in the context of your espousal of the merits of an all equity approach for the individual retiree as part of his preamble to his broader commentary on your AE proposals. I honestly am amazed that you don't seem to know/remember exactly what I'm talking about. If I had worked so hard and long on a project and received such unbridled criticism, I'm pretty sure I'd remember what was said!
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Are you referring to Joseph O'Dea's question Colm in this piece: https://www.youtube.com/watch?v=2Lzyi1i4Nmg?
 
JimmyB99 said:
@Colm Fagan

Can you post a link to the video in question? That would be helpful.
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As I said earlier, I don't have it. I presume it's on the SAI website, so you should be able to get it there yourself or someone else can post the link. (Thanks, @Itchy. I just saw your note after I'd posted).
You mentioned the initials JO'D. I presume you're referring to Joseph O'Dea, who spoke at the discussion of my paper at the SAI.
I tried to paraphrase what I recalled of his contribution in my entry for the competition run by the Institute and Faculty of Actuaries:
Typically, the reduction in expected returns post-retirement is most marked for the less well-off, who can least afford the volatile luxury of equity investment. As a pension consultant once remarked to the author:
“It’s fine for an affluent retired old professional like you to put your trust in equities, but less affluent pensioners cannot afford that luxury: they must take less risk and invest a significant portion of their funds in bonds.”
I am agreeing that less affluent retirees would normally be denied the benefits of equity investment, or have them substantially diluted. The essence of my AE proposal is that it removes that constraint. It allows 'ordinary' workers to enjoy the higher returns from equities all through their retirement AND all during their working years.
@Duke of Marmalade , who I think is a good-natured old soul despite his equine appearance, PM'ed me to say that he thinks we are talking at cross purposes, that I'm discussing individual ARF's and AE without making clear the distinction. My apologies if that's the case.
I recognise of course that there is a sequence of return risk for an individual ARF investor. I also say that it's sometimes overplayed. That's not to deny its existence. I also say that it almost disappears entirely for AE where the scheme is almost certain to have positive cash flows for the next 30 years or more, and that the buffer account will be there when cash flows eventually turn negative, to ensure it's not an issue then either. However, we are now moving very definitely from discussing one individual's ARF to discussing AE.
 
Apology accepted!

Colm Fagan said:
I recognise of course that there is a sequence of return risk for an individual ARF investor. I also say that it's sometimes overplayed. That's not to deny its existence.
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I agree with all this and am pleased to have this acknowledged. Fancy meeting up in Starbucks??!!:D

@Itchy - thanks!
 
Duke of Marmalade said:
We are really talking very second order effects here. Consider the two alternatives:
A. Fund of 100 earns dividend of 3 at start of year. 3 is reinvested at start of year. Fund falls 20%. 4 is taken as income at end.
Fund at end = 103 * 0.8 - 4 = 78.4.
B. Fund of 100 earns dividend of 3 at start of year. 3 is withdrawn at start of year. Fund falls 20%. 1 is taken as income at end.
Fund at end = 100 * 0.8 - 1 = 79.

B is a saving of 0.6 over A i.e. the 20% fall in the dividend, i.e. you have got c. 3% relief for your "pain", wouldn't be a big seller of headache tablets. If it all happened evenly through the year the effect would be broadly half of that again. Of course, the reverse is also the case; A is better than B in a rising market and so A should be better than B in the round. Hardly worth elaborate work arounds.
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Thanks for working it out. Nice to see it small enough not to matter. I usually get as far I my thinking as remembering that I'll have the 25% tax free cash in cash to help hedge against equity returns in an ARF.
 
JimmyB99 said:
What's the take-away for other users?

Say someone at retirement with a fund of a few hundred thousand who needs to manage this fund sensibly to supplement the state pension - are you saying that they should put their fund entirely into equities? If not, what asset allocation are you advocating/believe appropriate in such a scenario?
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In the context of individual ARFs (i.e. let's park AE for awhile!).......

1. Active management doesn't pay!
2. Asset allocation (AA) is key
3. In striking the right AA balance, one's overall income and assets are very significant in determining extent of scope for riskier assets.
4. Don't be too aggressive or too conservative
5. Take long term view
6. Sleep well
 
Colm Fagan said:
@Duke of Marmalade.
The comparative figures, per 100 invested at the start are:
Colm: Withdrew 102. Now has 186.
Duke: Withdrew 127. Now has 218.
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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.
 
Nice summary there, Jas. Include keeping charges to a minimum and you're probably approaching a full house! The first point about active management is so true. In fairness, I think that penny has dropped with most informed folk at this stage.
 
My actively managed pension fund has done 171.74% over the last 10 years net of fees.

The passive equivalent has done 176.60% over the same period excluding fees.

So active management ‘won’ in this case.
 
There is a conundrum here. The whole market can't be passive. The market exists because of active managers/investors. They are driving the bus. The passive investors are jumping on for the free ride though they do have to pay for the upkeep of the bus. The active investors are paying the drivers on top of the upkeep so it is hard to see how they could systematically be getting a better deal than the passivengers.
 
I struggle with this debate. I accept that in aggregate, passive wins, but is that because there are terrible active managers who contaminate the data? And the selection of passive options is in itself and active decision. Plus the tax treatment of passive options is very messy, sometimes they’re not accessible at all, and there is a cost to holding passive options.
 
Active managers increase the value of funds, on aggregate.

But it's skewed towards a small number of super performers, and a large number of average or poor performers.

So the chance that you select the overperformer over the underperformer is less than 50%.

Therefore a passive strategy wins for the average investor.
 
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Corola said:
Active managers increase the value of funds, on aggregate.

But it's skewed towards a small number of super performers, and a large number of average or poor performers.

So the chance that you select the overperformer is less than 50%.

Therefore a passive strategy wins for the average investor.
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Why is the chance that you select the overperformer less than 50%? Nobody’s throwing darts at a board. Take someone like Eagle Star/Zurich. A super firm with a track record of outperformance.
 
Corola said:
But everybody is doing that. Everyone is not throwing darts at a board.
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I don’t understand your point. There are tens of thousands of active managers, probably more. Plenty are eejits and chancers. Therefore they skew the data.

The vast majority of golfers in the world don’t beat par. And par’s a good score around Augusta National. So should you accept par or pick Jordan Speith or John Rahm to play for you around Augusta?
 
Both of whom are charging you for the privilege and could bogey on every hole.

If the expected prize money isn't commensurate to their fee you would be better off accepting par.
 
Corola said:
Both of whom are charging you for the privilege and could bogey on every hole.

If the expected prize money isn't commensurate to their fee you would be better off accepting par.
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Passive options aren’t free. Particularly in pensions and ARFs, which are the the subject of this thread. I pay 0.50% for active management and I’m very happy with that versus something similar for a passive ETF which would still cost me something similar (e.g. 0.10-0.15% for the ETF and, say, 0.4% best case for the pension structure.
 
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