Hello!Given the amount of recent traffic on this board about long term investing strategies and the virtues of buy-and-hold vs momentum investing in funds, and the fact that another year has passed (!), I thought it was about time to conduct another Foolish IT Challenge update.Those who have been around a while will probably know what I'm talking about. For those who haven't, the original posts and updates are here:http://boards.fool.co.uk/Message.asp?mid=7164750http://boards.fool.co.uk/Message.asp?mid=7154355http://boards.fool.co.uk/Message.asp?mid=7724077http://boards.fool.co.uk/Message.asp?mid=8235051http://boards.fool.co.uk/Message.asp?mid=9230773The executive summary is that I proposed that a portfolio of ITs/UTs selected for their long term growth prospects would outperform a similar portfolio invested on a tinkering (a.k.a. momentum) basis. So SteveClarke and myself "invested" a fictional portfolio of GBP20,000. This was started in May 2002 so the 4th anniversary is coming up! I think Steve lost interest in his trading portfolio, however, it's still interesting to see how the long-term buy and hold portfolio of mine has fared.So, here are the figures!Investment Date Bought Paid(£) Number Price then(p) Price now(p) Current value(£) Gain (£) (%)British Empire Secs (BTEM) 22/05/02 4002.35 2000 200.12p 493.50p 9870.00 +5868 (+147%)Witan Pacific IT (WPC) 22/05/02 4010.39 3600 111.40p 174.85p 6294.60 +2284 (+57%)RIT Capital Partners (RCP) 22/05/02 5955.07 1350 441.12p 1018.0p 13743.00 +7788 (+131%)Invesco Perp Inc Acc Units (PPINCA) 18/06/02 5964.03 650 916.16p 1499.67p 9747.85 +3783 (+63%) Cash Previous240.00New DividendsBTEM 44.00WPC 47.88RIT 41.85Total = 133.73Total cash373.73 __________VALUE OF PORTFOLIO ON 05/05/06 £40,029.18 Gain +20,029.18 (+100.15%)FTSE100 Index (closing prices)05/05/06 6062.822/05/02 5151.9Change in Value +910.9 (+17.68%)Value today of £20,000 invested in FTSE 100 on 22/05/02: £23,536Well, it seems that this portfolio has comprehensively whooped the FTSE 100 (and by implication, trackers much loved by the fool), as it has pretty much all thoughout its life. Not only is the overall portfolio way up on the FTSE, all the UT/ITs are as well.I'll first make some comments on the overall strategy of the portfolio, which mirrors in part my actual long-term UT/IT holding.The geographic weighting of the portfolio breaks down something like this:UK 40%Japan 18%Far east 14% (concentrated in the more developed economies)Europe 13%US 10%Emerging 5%The UK acounts for quite a large chunk of the portfolio. This is with good reason - there are real risks associated with investing abroad, notably financial and political. I'm reasonably conservative in my approach and my aim is really to keep risk down. Far from being an investment backwater, the UK still offers excellent investment returns from a relatively stable economy. Also, (if, like me, you believe there are fund managers who actually add value - I count Neil Woodford in charge of the Invesco Perpetual Income fund as one of these) as a UK investor with access to the UK investment fund universe, you've got far more talent to pick from, there being way more UK funds to chose from than overseas funds.Similarly, the rest of the portfolio is concentrated in the major developed world economies with a strong emphasis on Japan (which did when the portfolio was constructed, and still does offer a compelling long term attraction, IMHO) and very little direct investment in emerging economies (of course, there are companies held in the portfolio which invest in emerging economies indirectly). Again, this is risk minisation - it stikes me that we're approaching somewhat of a bubble situation in emerging markets. Have a look at the share price of something like Templeton Emerging Markets IT over the past decade or more to see what I mean: certain periods have produced stellar returns but there are frequent large troughs, driven mostly by external political and financial events. While things look reasonably rosy at the minute, IMHO there is also a large risk of a fall. Not that I could change things anyway (I wouldn't!), this being a buy and hold portfolio :-)(As an aside, there have been recent comments on this board along the lines of "GDP growth in emerging economies is much higher than developed economies, ergo one shoudl expect much higher investment returns". Actually, this isn't the case - GDP growth doesn't necessarily correlate with corporate profits, and the link between corporate profits and investment returns is a complex one anyway. I read a research paper about this a few years back, can't find it anymore, but they looked at investment returns and GDP growth and found little correlation. This is basically analogous to a company chasing turnover at the expense of margins - of course a company which can maintain is margins in the face of rising turnover is going to be very profitable, but not all companies will achieve that. GDP is effectively a measure of turnover, not profit.)That said, all three of the ITs have a mandate that allows them to invest where they see fit. WPC is restricted to the far east, including japan, RCP has a global mandate and tends to invest quite a bit in the US, BTEM is similar but has historically had a larger european weighting. IMHO, this is a great feature for the long-term buy and hold investor because changes in asset allocation are taken care of and no rebalancing needs to be done. Coupled with a core UK holding in an income fund, the portfolio basically manages itself. If it's not obvious, I'm a very big fan of the interational general IT sector, it's a way better core investment choice than a tracker for roughly the same level of management/trading expenses (TERs on these trusts are typically in the range 0.2-0.8%). You get a well diversified portfolio, including investments in different asset classes. A particularly striking feature of some of these trusts (notably RCP and Personal Assets) is that they have a lot of wealth tied up in them by some quite serious investors, and the trust represents their best effort in asset allocation for long term growth at low levels of risk - wealth preservation is key in these funds. Frankly, this is what most investors aspire to and is probably the lowest risk way into non-cash investments. They're just not sexy and don't get much publicity, but that doesn't negate their value in any way. (Or the cynical take: you don't tend to trade them frequently and they don't pay commision, so they don't earn the financial service industry much money!)Two further comments on the portfolio strategy. First the yield is very low (0.3%). This is in part caused by holding accumulation units of the UT and the ITs all pay low dividends too. This is good, less tax, less money sloshing around that requires action (particularly if you're short on time).Second, there are virtually commodities stocks held by the various trusts. There is some oil&gas, mostly in the form of the majors in the ITs, but overall levels are very low. This is a good thing and makes me happy :-) I'm strongly of the opinon that there is a major bubble in this area and I'm very glad my managers have avoided it too. (That's why I selected the funds I did, they're managed in a long-term contrarian way, which suits me down to the bone). Despite that, their investment returns have been excellent; I'd be very concerned if my wealth hung on the basis of some fresh out of university analyst's copper pricing model :-)So, moving on to some specific fund comments. I posted some comments on some global ITs a while ago, which included RCP and BTEM and are still valid, so here's the link:http://boards.fool.co.uk/Message.asp?mid=9917603Witan Pacific=============Excellent 1 year performance on this, on the back of strong gains in Japan and the far east. The new management structure appears to be working, the discount has narrowed and investment returns have beaten the benchmark index marginally. It's still an excellent one-shot exposure to the far east, including japan.Invesco Perpetual Income========================Another good year, outperforming both the FTSE and the average UK income fund. It's basically quite heavily invested in utilities and tobacco - I don't particularly care where it invests, Neil Woodford has proved adept at making great macro calls over many years and the long term performance of this fund is excellent.A quick conclusion: I still genuinely believe that a long-term buy and hold strategy is one of the best ways of investing for most people (myself included!). I don't have much time (in both senses of the word!) for momentum strategies nor do I think they're particularly effective in the long run. It's a shame Steve's portfolio has lapsed, cos I'd be really interested to see how it fared. The reality is that I have roughly half my portfolio tied up in trusts like these, and the other half I trade along very value/contrarian lines both in trusts (buying into undervalued markets/sectors) or individual UK shares.OK, sorry if I've rambled a little and the writing's a little polemical in places (there's been lots of recent posts on this board that I've had views on but I've not had the time to comment on, so I thought I'd merge some of my thoughts here!), but I hope this helps someone.Regards,CourantPS I hold RCP, WPC and Invesco Perpetual Income
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