We are bringing out a new edition of "Big Picture Investing", our guide to asset allocation and Exchange Traded funds.
A lot has happened since we produced the first edition in 2008. Markets have dived and then rallied. The remorseless movement of activity, energy and raw financial and industrial power to Asia has continued. Interest in Exchange Traded Funds has grown strongly in the UK, and continued apace in the USA.
More and more investors have become disillusioned with active managers who promise so much but have often delivered so little. In this cost conscious world where everything that costs a business or a charity money is under review, Trustees and investment committees are asking if there is a better and cheaper way to do things. More investors are coming to appreciate that their current portfolios reflect the old world of US and European dominance, not the new world of Asian led growth.
Our ETF guide illustrates that many of the funds are growing in size following the increase in demand. Many are doing well at offsetting quite modest costs so the overall tracking error is small. We would like to see more downward pressure on the costs of ETFs in the more exotic markets, and expect that will materialise from more competition. They still remain much cheaper than their actively managed counterparts.
The percentage declines and rises in main markets in the last two years have shown just how dominant market changes are in determining returns. Any fund which held substantial investments in US and UK shares through 2009 and 2010 is likely to have had a disappointing time. Any fund which used cash and bonds in 2008 to avoid the worst of the downturn should have done well. Holding Asian equities throughout was better than holding the developed economy shares, but better still was to avoid the credit crunch collapse.
The extraordinary and difficult events of the last two years have confirmed our view that an investor needs to concentrate on the big picture. You cannot avoid an asset allocation. There is no perfect or long term right answer to asset allocation. You need to work away at judgements and assessing risks. You can avoid the higher costs of active management for shares. The last two years have shown how volatile and difficult markets can be, making it very difficult to find a successful active share manager.
Our book of ETFs and asset allocation offers another way of investing. It should cut your costs of investing. With good judgement it can also raise your returns. Our suggested models for Pension fund investment can sometimes raise the potential return and lower the risk of the typical fund. That must be worth a look.