Performance Update for Colm Fagan's ARF

[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!!

 

[Colm Fagan]

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

It's a straightforward compound interest calculation: 3.26^(1/13.5)=1.09148. (I've to disable the portrait orientation lock on my iPhone to get the power calculation, but you can also do it quickly on a spreadsheet.)

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.

The money for my ARF didn't appear out of thin air on 31 December 2010. It came from a self-administered pension plan, which I started in 1996 and was also invested (almost) entirely in equities - and went through the floor in the GFC, but also experienced the subsequent recovery. I do agree that QE has done wonders for equity returns since then, but I would have happily settled for 3% a year less on average over the period since 2010. That would still have left me with an average return of over 8% a year. BTW, I did experience the "sequence of return" risk: the fund had a negative return in the first year (2011). So what? Of course, it would have been lovely to have kept some of my money in cash at the start of 2011 and then invested it in equities at the end of the year, but I would most likely have kept it in cash (or bonds) for the entire period and would therefore have experienced a lower return overall.
I agree that someone with limited other reserves (or unencumbered equity in their home) would not be well advised to do as I did. One of the main aims of my AE proposal was to give that freedom to pensioners of more modest means. Unfortunately, Minister Humphreys scuppered that ambition.

 

[Duke of Marmalade]

@Gordon Gekko @Colm Fagan Guys, I think you are a tad at cross purposes.
GG is talking about 326% growth, CF is talking about 326% all in
CF is talking about the Mean when he says random selection preserves the average; GG is talking about the Median when he says the blockbusters push the random average down

BTW my global equity ARF is up 12% YTD after 0.9% p.a. AMC

 

[Colm Fagan]

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!

You're right. It's actually 11 but a few of them are small, so there would be only around 7 with a reasonable amount in them. And you're right too that money makeover people would tell me to diversify. I tell myself that, but I haven't had the time to research shares that I would like to add to the portfolio (I may get some time now that my AE idea is dead). Still, I wouldn't be looking to have more than 20 or so reasonable-sized holdings of shares I was comfortable to hold long-term (at whatever the asking price was at the start).

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).

My argument was based on simple logic - but it may be faulty.
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.
The managers of passive funds charge fees. They also vary weightings of different stocks over time, as companies are taken over, go bust, have rights issues, etc. Such changes cost money, not a lot, I'm sure, but a cost nevertheless. A random selection of stocks saves the costs of the manager and of switching.

 

[Colm Fagan]

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.

I never went down the past performance/ comparison route. Others chose to go down that road.
The main point I want to make is that opting for a 100% equity portfolio has served me well. I believe it would serve ordinary workers (active and retired) equally well if the government's AE scheme were structured in the way I proposed.

 

[Sarenco]

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.

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. So, with that in mind…

It is generally accepted that a handful of stocks account for the bulk of market returns.

Most stocks – in Ireland and beyond – are flops

Just five stocks – CRH, Ryanair, Kerry Group, Flutter, and Kingspan – account for all wealth created on Dublin exchange over 30 years to 2020

www.irishtimes.com

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.

The managers of passive funds charge fees. They also vary weightings of different stocks over time, as companies are taken over, go bust, have rights issues, etc. Such changes cost money, not a lot, I'm sure, but a cost nevertheless. A random selection of stocks saves the costs of the manager and of switching.

Costs matter, no doubt about it. However, these days passive managers can typically track an index to within around 0.1%.

That’s largely down to stock lending income and the ability to move stocks around to mitigate withholding taxes.