Episode 337 - On this week's show I reveal the insights from my favourite 80-20 Investor research articles. I also discuss whether it is more profitable to invest in furnished holiday lets rather than buy-to-lets. Finally, I discuss whether you should look to borrow more money when you remortgage.
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Abridged transcript - Episode 337
Damien Fahy 04:59
So, I release a couple of pieces of research every month on 80 20 investor, along with fund shortlists, weekly newsletters, monthly newsletters etc and anyone is welcome to sign up for a free trial should they want to.
I thought it would be interesting to list some pieces of research that I have carried out for 80 20 members; articles that I am particularly proud of and I’m going to let Andy pick out 5 of them to feature in a bit more detail. Some of those research articles are listed below.
- The annual Chinese equity rally
- The perfect ISA portfolio
- Funds - buy cheap buy twice
- Should you ever invest in gold?
- How to make your portfolio immune to stock market volatility.
- What's the most profitable day of the year to start investing?
- What's the highest charge you should pay for an investment fund?
- Do active funds outperform passive in sideways or falling markets?
- How often should you rebalance your portfolio?
- Should you follow star fund managers?
- Are funds for performance fees worth it?
- How often should you check the value of your portfolio?
- How often should you change your funds in a portfolio?
- Does a new all-time high make a market crash more likely?
- What are the best all-weather portfolios?
Andy Leeks 09:13
Okay, the winter fund portfolio. What's that one?
Damien Fahy 09:21
We did a piece on this in podcast episode 297 regarding the phenomenon of UK stocks outperforming over the winter period versus the summer. So if you look at the winter period between November to the end of April, UK stocks tend to do better during that period than they do during those summer months. The research looked at what would happen if you simply bought equities during those winter periods and then went into cash during the summer.
Now go back and listen to Episode 297 where I go into more detail about what happens if you use trackers, etc. The overall gist of it is that you can capture pretty much all of the upside in equity markets, if you use a winter portfolio strategy, staying invested during the November to April period and then back into cash during the summer.
On podcast 297 where I mentioned that this phenomenon existed, I said that the year before, in 2019, the winter portfolio strategy did badly and it's because of the pandemic came along and wrecked everything. Do you remember in the February of 2020, markets tailed off and collapsed in March, so it didn't matter what you bought, you were going to lose money in equity markets. Then, in November 2020. I said, that it should be a good year for the winter portfolio because we've just had a vaccine. It's interesting because I was proved right.
One of the other things the research has shown if you want to use a strategy, you are better picking an active fund in the UK mid cap universe. So pick a UK smaller companies fund - an actively managed one - because it's one of those instances which goes back and links nicely to another piece of research about the fact that when it comes to active managers versus passive strategies, active managers tend to outperform passive trackers.
Andy Leeks 13:55
Ok next, what's the highest charge you should pay for a fund?
Damien Fahy 14:05
So I'm talking about the AMC of a fund, the annual management charge and I did a piece of research where I looked at the performance over a period of 5 years, specifically looking at the cost of passive and actively managed funds.
I then plotted the performance and the cost of that fund over a period of time, producing a scatter chart. When I drew the line of best fit, the conclusion was that if you simply buy funds because they're cheap, it won't maximise your investment returns and so cutting costs doesn't guarantee improved returns. Sign up to 80 20 investor to read that piece of research in full.
Andy Leeks 17:07
Moving on, then, let's go for sectors where active funds beat passives
Damien Fahy 17:11
Okay, I did a bit on podcast episode 229 that talked about this. I looked at different sectors including UK smaller companies, global funds etc and looked at how actively run funds - those with fund managers - tend to be a bit more expensive compared to the cheaper alternatives of passive investments - things like ETFs - that just track indices.
So I'm going to run through the sectors now:
- Asian Pacific (excluding Japan) - active funds within that sector underperformed on a relative basis compared to passive investments by a total of about 1.28%.
- Chinese equities - passives were massively outperformed by the active funds. They made more than 20% more because they were active funds compared to passive European equities.
- Europe (excluding UK) - unit trusts within that sector (active funds) tend to outperform by about 13% to 14%, over 20 year period
- Global funds - Now this is the area where active management seems to fall down, they tend to lag about 10% to 11% over a 20 year period
- Global emerging markets - again, it was down around about 11% when you compare active versus passive. So stick to passives you're investing in global versus global emerging markets is the general trend.
- Japanese equities - actives marginally underperformed
- North American equities - This is quite a famous example, actually, that North American equities fund managers have struggled to beat the S&P 500 and over a 20 year period, it was almost 12% less that they've made. So that's significant.
- UK all companies - Active managers outperformed by nearly 4% over a 20 year period.
- UK smaller companies - This is where the magic happens, over a 20 year period, these actively managed funds outperformed the small-cap index by 100%. So that's basically making twice the money. So, the UK smaller companies funds are where the active managers really outperform and so that links quite nicely to the winter portfolio piece. So when you get all these different bits of research, you actually start to find over time that it confirms something you thought or discovered or another piece of research.
Andy Leeks 20:04
Great. So number four then. Is it worth rebalancing your portfolio and how often should you do?
Damien Fahy 20:13
Okay, for this one, I looked at the data for a whole bunch of asset classes over 27 years and I built a portfolio, assuming that people had invested an equal amount in each of the 17 different asset classes.
Then I looked at the impact of rebalancing the portfolio over that extended period of time. I looked at rebalancing every year, every quarter, every month and also what would happen if you didn't rebalance at all.
The portfolio that performed the best was the one we didn't rebalance. The number two was when you rebalanced annually when you rebalance quarterly was third and when you rebalance monthly was last.
What happens if you're riding a version of momentum. Lets imagine UK smaller companies exposure started off at 3% or 4% of your portfolio to start with, as that started to race away, by the time you got to the end of that 27 year period, you'll probably find that UK smaller companies was making up more than 10% of your portfolio because the ones that underperformed had shrunk in value, but that one started to dominate. That's what happens, if you don’t rebalance, or rebalance less often, your risk level increases.
I actually went ahead and worked out the numbers. If you didn't do ant rebalancing, then by the end of the 27 year period, 26% of it would have been invested in China and only 1% of it would have been invested in strategic bonds, where they all started out at around about 5.86% invested in each sector.
The point is that rebalancing annually is good enough and actually can boost your investment returns.
Andy Leeks 24:30
Ok, so final one. What is the most profitable day of the year to invest?
Damien Fahy 24:38
Again, the full research gives you more than what I'm telling you on this podcast and you can gain access to the research by taking out a free trial of 80 20 investor. This piece of research was to see if there's any pattern that occurs if you invest on a given day. I looked at the average rise in the footsie 100 over a five year period and I looked at that from the inception of the FTSE 100 - which was 1983 - all the way up to 2015 when I actually did this piece of research.
I found that the most profitable day if you're going to invest for five years, on average, would be the 3rd of January. The next day was the 10th of January, then the 24th of January, then the 17th of January. Then in fifth place was the 14th of February. So the point is that there was a nice skew there. You do a piece of research like this and you start to notice patterns.
So if you took that one step further, and actually thought, well, let's not focus just on days, what about months. July - oddly enough - was the best, with January in 2nd and the 3rd best month was December. 4th was February and 5th was March. Now again, this just reaffirms the point about the winter portfolio holding some truth. So, strong patterns in the early part of the year are when statistically you're likely to make more money.
Andy Leeks 27:19
Okay, so moving on then and there has been a lot of talk about people turning their buy-to-let property into a holiday let. So why is that?
Damien Fahy 27:33
So there was some research that was carried out by the government and it showed that more than 11,000 homeowners in England have flipped their properties to become furnished holiday lets since the pandemic.
Check out the article below for more information or listen to the podcast to find out more.
Andy Leeks 35:44
Okay, so the final piece of the podcast and we are going to talk about whether you should borrow more money when you remortgage?
Damien Fahy 35:53
The one thing you've got to bear in mind obviously is your circumstances. So how have your earnings fared and your own financial circumstances in terms of other debt since you took out the mortgage or last remortgaged as that will be considered by the lender when they do an affordability check.
Assuming that those things are in good stead and you've got enough income coming in and you can meet those requirements of affordability, then there is no reason why you couldn't borrow more money. Go back and listen to episode 330 where we talk about green mortgages our podcasts on green mortgages, as you may be able to get a cheaper rate.
Look at all types of borrowing because if you are only trying to borrow a small amount of money, you may be able to do it over a shorter term, with something like an unsecured loan with a much lower rate. You could even consider a 0% purchase credit card, especially if you only want to borrow a small amount because, over the long term, you will pay less interest.
Of course, on the flips side, there are a number of scenarios when you probably shouldn’t consider borrowing more, for example, if you're in a fixed deal and it has a high redemption penalty, as you’ll likely have to pay a hefty early redemption charge. Additionally, if you have a high loan to value, you might not even be able to borrow more. So make sure you speak to a mortgage broker because they can look at the numbers and can tell you what's out there and they could even give you advice in the lead up to your remortgage on how to get your finances in order, which can increase your chances of actually getting the deal you're after.