Are company profit warnings a buy or a sell signal?


#1

Originally published at: http://whichinvestmenttrust.com/are-company-profit-warnings-a-buy-or-a-sell-signal/
Autumn is traditionally the season for profit warnings but this year is bringing a more bountiful crop than usual. According to Ernst & Young there was a 40% increase to 79 in the third quarter. And there have been more since. Some of these have surprised the market while others have merely confirmed suspicions that…


#2

I agree with not trying to play the market too much and remaining invested. I tend to do that anyway but I do like to spend some time choosing what I think are the right fund mangers.

I know that there is merit in buying a passive fund like @robert_davies manages but I think there’s more than one way to skin a cat and you can do as well or better by selecting good fund managers.

I think of City of London as being a bit like a tracker fund only with a manager to watch over it. It has low fees, quite a safe investment strategy and something like 45 years of rising dividends.

Robert’s fund looks good too but I get piece of mind from my fund picks (though I may look at your tracker fund too).


#3

Setting the Record Straight on Asset Allocation

Evidence shows that the groundbreaking research on the importance of asset allocation has been > poorly understood and widely misquoted.

In 1997 William Jahnke published a critique of the BHB study, in which he argued: “The fundamental problem with BHB’s analysis is its focus on explaining return volatility [their italic, my bold] rather than portfolio returns. …

…The hoax Jahnke referred to was the financial industry’s exploitation and misrepresentation of the BHB study. He saw its embrace of the BHB study as an abdication of their active management responsibilities. But, as Hood [Randolph Hood, one of the ‘Brinson colleagues’ and co-authors of the research referred to in the WhIT article] later pointed out, “Nothing in the original paper suggests that active asset management is not an important activity. It was not the point of our paper, and our goal was not to demonstrate otherwise.”


#4

I’ve read the same point made this article many times over, but never quite believed it because I have seen my own investments do well, when I’ve paid little attention to asset class.

The is first time I’ve heard of the critique William Jahnke published. I found the following if anyone wants to learn more about this: https://blogs.cfainstitute.org/investor/2012/02/16/setting-the-record-straight-on-asset-allocation/

Thanks @arkwelder, you should be our teacher (Damn it, you are our teacher!) :smile:


#5

Thanks for that @khalidkhan and @arkwelder :slight_smile:


#6

I receive guff from all the ISA plan managers warning me about investment success all being down to getting the asset mix right, not to mention those BlackRock iShares folks. Like you @khalidkhan I never believed them because my investments bring home the bacon.

I’m pleased as punch to have found these posts and read this research. Well done to @khalidkhan and @arkwelder !


#7

Hmm. Such a wide ranging topic, Asset Allocation. I find, like most things, there are different “rules” for different investors. For example; fund managers may well have to spread their investments in a fund across all possible sectors within their remit. All they can do is be a little over or under weight. Sole investors don’t have to if they wish to be more active. Have we all been holding commodities in its demise just to keep the mix?!
A diversified portfolio does certainly reduce volatility but there is the chance of a good rise being undone by another sector’s fall. Let’s see how these new breeds of multi-asset funds do, not very well I suspect. Where do we go from here?!


#8

Of course there are critics of the Brinson paper. There is a whole industry that depends for its survival on trying to prove that.

However, Brinson’s paper also says
"Active management cost the average plan 1.10 percent per year, although its effects on individual plans varied greatly, adding as much as 3.69 percent per year. "

On average, active managers subtract value.


#9

I haven’t actually read this paper. Was it based on the US market by any chance. Certainly previous studies with similar conclusions have been done, but I don’t think the consensus travels very well.


#10

100% of passive managers subtract value due to their costs.

On average, active managers have managed to be less effective at subtracting value over the past 5, 3 and 1 years than the passive strategy employed by the VT Smart Dividend UK Fund which has managed to deliver fourth quartile performance over those periods, and also over the last six months. The source for this information is the fund manager’s own factsheet for November.

“Nothing in the original paper suggests that active asset management is not an important activity. It was not the point of our paper, and our goal was not to demonstrate otherwise.”

That statement was made by one of the authors of the Brinson paper. If you read Jahnke’s comments, his criticism of the Brinson paper is that they are not seeking to explain portfolio returns, yet the WhIT article contains the statement “However, Brinson and his colleagues in Chicago demonstrated decades years ago that 90% of your returns come from the asset class”.

Are you able to quote the section from the paper that allows you to form that conclusion? Because the nearest that I can find is the following, but which does not support your statement:

The results are striking. Naturally, the total plan performance explains 100 per cent of itself (Quadrant IV). But the investment policy return in Quadrant I (normal weights and market index returns) explained on average fully 93.6 per cent of the total variation in actual plan return; in particular plans it explained no less than 75.5 per cent and up to 98.6 per cent of total return variation. Returns due to policy and timing added modestly to the explained variance (95.3 per cent), as did policy and security selection (97.8 per cent). Tables 6 and 7 clearly show that total return to a plan is dominated by investment policy decisions.

That does not say that 90% of returns can be explained by asset allocation (not class, as stated in the WhIT article), but that 90% of the variance in returns can be explained. Two different things, and which does support the comment that the Brinson paper is misunderstood and misquoted - and there is no criticism of the paper.at all is saying that.

For anyone who is interested (@james_pigott) the original Brinson paper fronm which the above quote was taken: Determinants of Portfolio Performance


#11

Thanks for the links. I believe in Active management and yes, they have been misquoted/understood. As for the other link; Smart = Stinker!