Performance Update for Colm Fagan's ARF

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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.
11.2% compounded over 13 years (11.92^13) is 397%
 
I have to confess that the way actuaries think (or at least the way they express themselves) often leaves me scratching my head in puzzlement.
Me too ;)
So, logically it follows that the more concentrated an equity portfolio, the higher the probability that an investor will miss out on the small number of “super performers” and will lag the broader market.

Now, you might argue that there is an equal chance that a concentrated portfolio will avoid the turkeys. However, that’s not the case - there are far fewer stars than turkeys.
Actuaries love wild examples so let us assume that the market consisted of 10 stocks, costing 1 each. One stock returns 9 another returns 1 and the rest return 0.
As a Duke I go for the market, investing 0.1 in every stock, My return is 1, i.e. my money back.
Imagine 10 Colms, who each just pick one of the stocks and invest their whole 1 in that stock.
One lucky Colm finished with 9, another with 1 and the rest bombed out but between them they got 10, their money back same as me.
But for sure, as Colm says, riskier.
And referring to the earlier nerdish point, the Colms got a Mean average of 1 but a Median average 0.
 
11.2% compounded over 13 years (11.92^13) is 397%
I don't want this to become a self-help lesson in compound interest, but you're right (forgetting about the bit in brackets, which should be 1.112^13).
For what it's worth, I calculated the average 11.2% a year for 13.5 years by looking at each year's cash flows, assuming they were paid out half-way through the year, and seeing what constant annualised rate of return would give the same fund as I actually have after 13.5 years, remembering of course that the interest earned in half a year is a bit less than half a full year's rate, e.g., 11.2% in half a year is 5.45%, not 5.6% (showing that I meet @Duke of Marmalade's description of a nerdish actuary!) To prove my nerdiness, the calculation changes for the last half-year! BTW, Duke, your nerdish answer to @Sarenco's question might qualify you for honorary actuaryship, to add to your Dukedom!
 
By definition, a passive fund mimics the entire market. A random selection of stocks should deliver the same return on average, but with a high chance of under- or over-performing.
This point has been touched on (refuted) by other people, I do believe it's worth discussing further however.

The vast majority of returns in the market come from a very small percentage of stocks (4-5%).
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122 (Underperformance of Concentrated Stock Positions)

The market pricing things fairly is also a big assumption - though that is debated at the highest levels. It's enough to track a stock like GME to dissuade one of that opinion.

The most recent example: Nvidia alone accounts for more than a third of the S&P 500’s gains this year! That's one stock out of 500, driving 30%+ of gains.
 
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.

Not a long enough period to be certain....but what your experiencing in terms of returns is what I would expect to see over the medium and long term of such a barbell portfolio of 'high dividend' and 'low dividend' stocks........much of the stock markets bond beating returns (over the long run)....comes from the power of retained earnings and their re-investment into incremental income producing opportunities with high returns on on that retained equity......it's this self-compounding mechanism which makes stocks a marvel when compared to bonds over the long pull.

The classic self-compounding stock is one with an optically high PE, low dividend.....but with high ROIC opportunities on retained profits.....and a long runway ahead of it of being able to deploy retained profits into incrementally high RoE opportunities - a classic 'compounder'.

Some stocks (high dividend/low PE ones) are almost like bond proxies....I suspect some of your holdings down 2.2% are a bit like..they likely send 80%+ of their annual profits out the door and retain very little...in some respects these companies are holding up their hands and saying hey we throw off alot of cash but we've no where to invest it sensibly so we are sending it to you as dividends so that you might do something better with it than we could. The subtext to that is that we dont plan to grow particlaury fast. The market prices them then with low growth...pays a low PE and as such then the dividend yield is also high.

Low dividend/high PE stocks......broadly......are the opposite....they are saying hey we've got lots of places to put retained profits at return rates you're unlikely to find elsewhere if you let us hold on to it......think of the returns on retained earnings that Novo Nordisk is getting on an investment of a new plant to produce GLP1's or ROIC on R&D to develop the next generation of GLP1's......I dont want them sending me dividends......I want them keeping the cash and building new factories...such that they are a much bigger business in years to come in terms of profits. The market anticipates their much larger future position and so will be pay a higher P/E today....on the expectation that E will be much larger in the future.

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?

Yep fashion is good word for it.......some markets environments its all about 'jam tomorrow' (growth, EPS 5-10yrs out) and some market environments say like 2022 or 2000 or 2008 it quickly turns into a 'jam today' market.

Your high dividend stocks will outperform in jam today markets...and will underperform in jam tomorrow markets.

Right now we are in a market where stories about the future matter a lot....its most definitely a jam tomorrow market.

This is the push and pull of markets in the short run.......where sentiment matters a lot....and can whipsaw returns.

Over the very long pull...when you zoom out...stock returns are almost perfectly correlated and related to free cash flow per share growth or contraction.
 
Which is a lot more than was contended by other posters…
I don't know if I qualify as one of the "other posters". If so, I'll make the obvious point that I have been taking a regular (normally monthly) income from my ARF for the entire period since I started it thirteen and a half years ago. If I had left the full amount invested for the full period, it would clearly be worth a lot more.
 
I don't know if I qualify as one of the "other posters". If so, I'll make the obvious point that I have been taking a regular (normally monthly) income from my ARF for the entire period since I started it thirteen and a half years ago. If I had left the full amount invested for the full period, it would clearly be worth a lot more.
Are your performance numbers ignoring the withdrawals?
 
The story of my ARF for the first 50 weeks of 2024 was much the same as previous years: keep turnover and costs as low as possible. The only transactions in the first 50 weeks were two small sales, amounting to €2,010 in total for every €100,000 at the start of the year. The other €97,990 was left untouched. This changed dramatically in weeks 51 and 52.

Cash of €623 at the start of 2024, plus sales receipts of €2,010 in the first 50 weeks and dividends of €4,666 were sufficient to cover pension withdrawals of €6,403 and expenses of €522 (all per €100,000 at the start). I was particularly pleased with the low costs, which included not only the ARF provider’s fee and the costs of share purchases and sales, including the activity in weeks 51 and 52 (of which more below), but they also included a once-off fee to my pension advisor for sourcing a better-value ARF provider at the start of the year and for overseeing the handover.

With the benefit of hindsight though, it is clear that sticking to the “buy and hold” strategy for the first 50 weeks was a big mistake. I hope that my activities in weeks 51 and 52 will show that I learned my lesson.

When reporting on AAM about performance in the first half of 2024 (see #43 above), I wrote that Novo Nordisk was the star performer: its value then was almost five times what it was at end 2020, at which time it represented under 7% of my fund. By mid-2024, without any further purchases, it accounted for over a quarter of the fund.

I closed my July 2024 update as follows:
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.
Sadly, I didn’t follow my own advice! I held on to all my Novo Nordisk shares. The price fell sharply in the second half of 2024, falling by over 20% in a single day in December. By 31 December, the price was down almost 40% since 30 June. Not a happy experience, but I’m not complaining. Novo Nordisk owes me nothing: I’ve done well out of it. I’m not selling, not for the time being anyway, but I did learn to watch out for shares that had overperformed, which brings me to what happened in weeks 51 and 52.

On 18 December last, in the course of doing research for another AAM discussion (in the thread "Should retirees be 100% invested in equities") I looked at some metrics for Apple, one of my biggest holdings. At the time, it accounted for almost a quarter of my ARF. Here’s how I documented my conclusions:
One of the "growth" shares is on a P/E multiple of over 40. I bought shares in the same company in 2015 at a P/E multiple of under 20. I don't think its prospects are much better now than they were in 2015, so I'm thinking of selling some or all of my shares in that company. I only did this analysis now, when drafting this post. It's very - VERY - superficial, but it seems to support the impression that came through a few times during the current exchange, that the current hype about AI etc. has many similarities to the dot-com bubble that ended with a bang in 2000.
The “growth share” in question was of course Apple. Here is what I wrote about it back in 2015, when I had a “Diary of a Private Investor” column with the Sunday Times. The contrast between 2015 and 2024 shocked me and caused me immediately to offload more than three quarters of my Apple holding at an average of $252.82 a share. I used some of the proceeds to buy Nvidia at $137.20 a share but left more than 50% in cash, so the cash portion of the fund at year-end was much higher than usual: 11.7% of fund, compared with just 0.6% at end 2023.

Total fund value at year end was €103,834 for every €100,000 at the start, so the return for the year (net of expenses) was €10,237, which equates to 10.6%. I don't have figures to hand, but I'd say it was quite a bit below the market average, which can probably be explained largely by my Novo Nordisk experience.

In the 14 years since starting the ARF at end 2010, I withdrew €114,000 for every €100,000 invested at the start (average withdrawal around 6% a year), and the value of the fund at end 2024 was over €193,000, which equates to an average return (net of costs) over the entire period of 10.8% a year.
 
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Well done, very interesting, concise and honest update, as always Colm.

so the cash portion of the fund at year-end was much higher than usual: 11.7% of fund, compared with just 0.6% at end 2023.

This is particular caught my attention. Would I be correct in assuming that 11.7% is very high for your fund relative to the past 14 years and not just end 2023? I would be interested in learning whether you think this is a temporary situation as you rebalance your portfolio or if you are intending to maintain or increase this in the short term.
 
@Colm Fagan In the past I have compared my own 'umble Global Equity Fund ARF with your DIY ARF. For the record you beat me handsomely over the last dozen or so years, but at 12.2% for 2024 I get a rare win. But I bet I beat you fairly consistently on your Sharpe ratio. (apologies to @Gordon Gekko for the intellectual self gratification).
 
Hi @llgon Thanks. It takes me a long time to be concise!
You're right about the cash proportion being much higher than normal. Usually it's close to 1%. That's partly because I sold the Apple shares very close to year-end. I'm now looking for an alternative home for the money. Ideally, I would prefer to replace "growth" with "growth" but the reason I sold Apple was because I thought they were overvalued, so presumably I'd consider other "growth" shares similarly overvalued. I had a quick look at Nvidia and, while they're at a very high multiple, they're growing revenues and profits like Topsy (unlike Apple). Of course, growth will flatten but it just feels that there's a better chance of it growing into its valuation. I don't have much confidence that it will, though, which is why I'm holding back from investing more.
Hi @Duke of Marmalade. I knew that I'd lag the market this year because of NN. I'm surprised that I'm not further behind a global equity fund. That's one of the problems faced by active managers. The nature of the beast is that they're certain to underperform in some years, but they get castigated when they do. Ergo, most of them end up as closet trackers.
 
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Global Index Equity tracker would be circa 24% from 01/01 to 17/12. Cautiously Managed would be circa 11%.
Jayz, I better check my figures. Colm was surprised they were so low and you have corrected my misinformation.
Just checked. It is not quite a Global Equity Fund though it does have global exposure. Actual 2024 growth would seem to be 14.63%.
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@Colm Fagan In the past I have compared my own 'umble Global Equity Fund ARF with your DIY ARF. For the record you beat me handsomely over the last dozen or so years, but at 12.2% for 2024 I get a rare win. But I bet I beat you fairly consistently on your Sharpe ratio. (apologies to @Gordon Gekko for the intellectual self gratification).
Hi Duke. Are you sure about that? I was initially inclined to agree, because I thought the variance in the Sharpe Ratio was relative to the market, and my variance from market returns would be high, but I see that it's actual returns (v risk-free) and actual volatility. I suspect that on that measure my Sharpe Ratio could well be higher than yours (i.e., better).
For comparison purposes, here are my yearly returns from 2011. I could get more granular figures, for later years anyway, if needed:
-2.9% (2011 - the dreaded sequence of return risk bites in year 1!) +24.2% +22.4% +16.4% +13.3% -5.8% (2016) +27.5% -15.3% +45.3% +1.8% +16.1% (2021) -8.0% +18.5% +10.6%
I bow to your greater expertise at cranking the numbers to calculate respective Sharpe Ratios (while accepting the limited nature of the data).
 
Hi Duke. Are you sure about that? I was initially inclined to agree, because I thought the variance in the Sharpe Ratio was relative to the market, and my variance from market returns would be high, but I see that it's actual returns (v risk-free) and actual volatility. I suspect that on that measure my Sharpe Ratio could well be higher than yours (i.e., better).
For comparison purposes, here are my yearly returns from 2011. I could get more granular figures, for later years anyway, if needed:
-2.9% (2011 - the dreaded sequence of return risk bites in year 1!) +24.2% +22.4% +16.4% +13.3% -5.8% (2016) +27.5% -15.3% +45.3% +1.8% +16.1% (2021) -8.0% +18.5% +10.6%
I bow to your greater expertise at cranking the numbers to calculate respective Sharpe Ratios (while accepting the limited nature of the data).
Okay, that's a volatility of 16%, in line with typical equity indexes. I stand ejected :(
 
They’re useful contributions, but you’re wasting your time for a suboptimal outcome. I agree with AJAM, you should move to a fund/ETF/managed portfolio.
 
You should both of you, bite the bullet, and actually move to a global equity index.

But thank you both for the information.
Can't quite remember why I chose a High Dividend fund. I suppose it is down to my three rules for choosing investments: Tax, Tax and you guessed it. High Dividend shares should stand at a small discount because in general they are subject to higher taxation and so that should be a free lunch in an ARF. Seems to have cost me about 10% in 2024 :oops:
 
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