Performance Update for Colm Fagan's ARF

Status
Not open for further replies.
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!

Are you referring to Joseph O'Dea's question Colm in this piece: https://www.youtube.com/watch?v=2Lzyi1i4Nmg?
 
@Colm Fagan

Can you post a link to the video in question? That would be helpful.
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.
 
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.
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.
 
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?

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
 
@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.
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.
 
Last edited:
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.
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.
 
But everybody is doing that. Everyone is not throwing darts at a board.
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.
 
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.
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.
 
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.
 
Last edited:
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.
 
Last edited:
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.?
 
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.
 
Status
Not open for further replies.
Back
Top