Value Investing: New fund launch, The UKVI 20 (part 1)
I will shortly be launching a new model fund which will be called the UKVI 20. This fund will be separate from my personal investments, although the two will be very similar to start with and I expect them to eventually have exactly the same constituent parts but with slightly different weightings.
I'll put up the facts and figures for the UKVI 20 onto the web site in due course and I'll keep posting my private investment performance for several more years until the new fund has some reasonable amount of history behind it.
What are the fund's rules?
The fund consists of UK listed equities and has the goal of outperforming the FTSE 100 over periods longer than 5 years. The target number of holdings is 20 to provide adequate diversification without excessively watering down the 'best ideas' approach. Each holding will be allocated approximately 5% of the fund on purchase. Each holding must have a better 5 year estimated total return than the FTSE 100. This estimate is based on past growth, returns on equity, dividend payouts, share price levels and other factors affecting the holding's future total return. Each month the holding with the lowest 5 year estimated returns will be sold and replaced with a new holding that has a 5 year estimated future return higher than the one it's replacing. The monthly buy and sell decisions will be posted to the blog, as well as re-valuations of the fund as a whole and constituent companies when annual reports come out.
Why the monthly trades?
This process of selling the least attractive holdings and replacing them with more attractive ones is my way of continually weighing the portfolio as a whole towards companies with higher expected returns than the benchmark. So each month, rather than the quarterly review of the FTSE 100, instead of kicking out the smallest company by market cap I will kick out the company with the lowest estimated future returns and replace it with the company that has the highest estimated future returns that isn't currently in the fund.
This approach should over time ensure that the fund is always holding companies that have better current earnings and dividend yields than the average, and that also have better long term growth prospects than average. That combination should help the fund to show the various FTSE UK indices a clean pear of heels in the long term.
One buy and one sell decision each month is also a good pace for the general stock picker I think. More often than that and they risk getting too close to the market and less often, perhaps once a year, means they may risk getting bored and switching to a different method, over and over again. Constant switching from one idea to another has a proven track record of under-performance and should be avoided at all costs.
When does it start?
The UKVI 20 will have a start date of 1st January 2011 and an opening balance of £20,000, which I think is a minimum amount for running this sort of fund due to trading commissions and tax. It already has several new holdings; in fact all of my private purchases since buying BP in March have been added to the UKVI 20. The buy dates and prices are the same as for my private investments and that will be the case going forwards.
Why are you doing this?
The reason for this split is that my private investments have had a fair amount of style creep over the years whereas the UKVI 20 will be starting with a clean sheet and strictly defined criteria based on my current approach to finding attractively valued companies. Another reason for the split is that I want to develop a systematic approach to investing that can be easily followed by anybody that wants to, assuming it is suitable for their own situation. That of course has to be decided between them and their financial advisor.
Why should I care?
The UKVI 20 may be able to help investors in their stock picking efforts. Readers who see that I have added Vodafone (LON:VOD) to the fund, for example, may decide to take my thoughts and opinions to their financial advisor to discuss its suitability with them. The ideas on diversification and using a systematic approach to trading may give someone the disciplined framework from which to manage their own investments, again with their financial advisor to hand. If that sounds like you then I hope it proves useful. If that doesn't sound like you then I hope you find it interesting nonetheless.
If you have any suggestions on how you'd like to see this idea develop, please message me or email ukvalueinvestor@gmail.com.
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3 comments
4 thoughts, I hope they are helpful.
I would avoid a system that is built on regular trading. The stockmarket is always irregular and applying a rigid rule is unlikely to add value.
I use Company REFS and have noted how forward forecasts of profitability can suddenly change from month to month when they should be the same, then return to the norm a short time later. Assume the data is not 100% accurate, but is subject to a margin of error.
Frequent trading is not good for profits, you should be mindful of commission, stamp duty and spread. These costs go straight to your bottom line as a loss.
I use Sharecentre's Trader scheme, where I pay about £100 a year, then all my commissions are fixed at £7.50 or less.
MadDutch
Hi MadDutch, thanks for the comments.
I agree, too much trading is a real drain on returns. However I feel that with 20 holdings and one trade a month, the portfolio will on average be completely turned over once every 20 months. Put another way, 12 of the 20 holdings are replaced on average each year giving a portfolio turnover rate of 60%, which is fairly normal for investment funds.
I think that perhaps a lower rate would improve performance, but the UKVI has been set up partly for educational purposes. With one trade a month readers can see a regular flow of analysis which may help them get to grips with the difficult task of being a successful stock picker.
Fixed trading costs are the reason I mention a sensible minimum investment of £20,000, or £1,000 per holding since that keeps costs down to 2% or so per transaction. If an investor has less than £20,000 they may do better having fewer holdings, although of course this may mean more volatility, or just invest in an index / bonds portfolio until they have enough to venture into individual companies.
But your main point is totally right. Trading costs are something that many investors don't even consider.
If you use Sharecentre's Frequent Trader scheme, the commission cost of 12 deals value £1000 each is;
- £80 per annum fee, plus
- £7.50 per trade x 12 = £90.
- Total £170, plus VAT = £204.
The larger your trades and the more you do, makes a considerable saving. For example my last Sharecentre deal was a £9000 sale, the commission cost me £7.50 plus VAT. About a tenth of 1%.
Furthermore, the Frequent Trader scheme applies to all my portfolios with my customer reference number, I have 6 portfolios on £7.50 per trade; an enormous saving.
I would not make the 1 trade a month rule a rigid rule. Example; in a Euro Sovereign debt crisis or an oil price collapse, I would want to sell more than one share.
MD