Performance Update for Colm Fagan's ARF

[Colm Fagan]

In response to popular demand, e.g.,

Good to see you back Colm... I appreciate your insights on investing.

As we approach the end of the trading year how did your investments survive volatile period we all have experienced

here, for @Bluefin and others, is an update on the performance of my ARF.
The ARF's overall return in 2023 was 18.5%, in contrast with the negative 8.0% in 2022. In the 13 years since I started it (and a related AMRF) in December 2010 the performance has been heartening. For every €100,000 invested at the start, I withdrew €102,091 (an average of around 6% a year on prevailing value) and earned a return of €188,046. The net result is that the value at 31 December 2023 for every €100,000 invested in December 2010 was €185,955. The lowest yearly return in the period was minus 15.3% (in 2018) and the highest was 45.3% (in 2019).
The good long-term return can be attributed to three factors: (i) investing entirely in equities, (ii) keeping cash to a minimum and (iii) keeping costs low. That's exactly my prescription for the smoothed equity approach to AE.
My stock selection wasn't great, to put it mildly. I would have done far better by investing in a passive world equity fund.
In the entire 13 years, I recall making just one bond investment, and that was for a special reason, which I'll recount at some stage. Otherwise, I steered clear of this asset class for the simple reason that the expected return on bonds (in the mathematical sense) is around 4% a year less than from equities. The same is true for cash. I wouldn't fancy paying an extra management charge of 4% a year on a portion of my portfolio, which is what I would effectively be doing, by my reckoning, if I invested in bonds or cash on deposit. No, thanks.
There were no purchases or sales during the year: the holdings at year end were exactly the same as at the start. Zero trading helped keep costs down. I had to take an income of 6% in the year. That came entirely from dividends on existing holdings and by running down the cash portion of the fund from 2.6% at the start to 0.6% at the end.
The passive investment approach wasn't by choice. I just didn't have time to research possible purchases (or sales) because of my preoccupation with trying to convince government to commission an independent evaluation of my proposal for a smoothed equity approach to AE, a campaign that everyone on AAM must be aware of by now. Also, as I get older, I will inevitably make fewer purchases and sales. I envisage very few purchases for the rest of my days. It will be nearly all sales as I run down the portfolio.
The best performer in 2023 by far was Novo Nordisk, which I wrote about in 2019 (see here). As an aside, its spectacular performance since I bought it has nothing to do with my stated reasons for buying it in the first place! In other words, I was just lucky.
I bought my entire current holding in the company in 2020. At end September 2020, just after the purchases, Novo Nordisk accounted for 7.4% of my ARF portfolio. Even by my standards, that was a large investment in a single asset. By 31 December 2023, its share of my ARF portfolio had increased to over 20%, purely as a result of capital appreciation. The price had increased from the average DKr205 when I bought in 2020 (DKr410 before a 2 for 1 share split), to DKr698 at 31 December 2023, at which time it represented over 20% of my ARF. I also got dividends in the period. Novo Nordisk alone contributed not far short of 8% of the total return of 18.5% in 2023.
The second best performer in 2023 was Apple, accounting for almost 7% of the 18.5% return.
The worst performer in 2023 was my single biggest ARF investment: Phoenix Group Holdings. It contributed almost a negative 1% to the total return.
The second worst contributor to the total return was fees! It has proven very difficult to persuade ARF providers to cut their fees, despite the fact that all I'm asking of them is a bit of bookkeeping. I've finally taken steps to reduce the fees charged to my account.
With the benefit of hindsight, I invested far too much in the UK (probably because I think I'm familiar with that market from reading the FT). I would have done far better if I had steered clear of the UK entirely.
In total, my ARF only has holdings in 11 shares. If I had many more, I simply wouldn't be able to keep track of them.

 

[JimmyB99]

What's the take-away for other users?

Say someone at retirement with a fund of a few hundred thousand who needs to manage this fund sensibly to supplement the state pension - are you saying that they should put their fund entirely into equities? If not, what asset allocation are you advocating/believe appropriate in such a scenario?

 

[GSheehy]

(iii) keeping costs low.

The second worst contributor to the total return was fees!

What are the costs/fees pa?

 

[Colm Fagan]

Say someone at retirement with a fund of a few hundred thousand who needs to manage this fund sensibly to supplement the state pension - are you saying that they should put their fund entirely into equities? If not, what asset allocation are you advocating/believe appropriate in such a scenario?

I don't advise. I just tell what I did, the logic behind it, and the outcome. People can make of that what they will. There's no rocket science.
I do advise for AE, though. Contributions are being invested over a very long number of years and are withdrawn over a very long period also. That, and the stipulation that members join and leave at smoothed values, minimise - almost to the point of eliminating completely - the random element of being lucky or unlucky on the way in or the way out (which could apply for an individual investor). Having said that, I was unlucky at the start: my fund suffered a negative return in the first year. Advisers, who warn of "sequence of returns" risk, would have warned me against investing everything in equities at the start for that reason.

 

[Colm Fagan]

What are the costs/fees pa?

It proved almost impossible to find an ARF provider to do the basic jobs I was looking for - simple bookkeeping, keeping track of dividends, payroll services, etc. - for anything less than 0.5% plus VAT, which is over 0.6%. It almost felt as if there was a cartel. In the end, I managed to get a lower fee, effective from the start of this year, but still far too expensive for the work required, in my opinion.
I should add that there are other, more hidden ways, for ARF administrators to make money. For example, a significant proportion of my holdings are in sterling and it was necessary to convert sterling dividends to Euros in order to take a (taxable) income from the fund. They took a cut every time I converted sterling (or dollars) to Euros. That cost isn't included in the fees. However, I do include commission on purchases/ sales as a cost but, as I said, there were none in 2023. They may also get a margin on interest credited (or not credited) to the account versus what they earn, but as I stated, I have minimal liquidity in the fund so that's not an issue for me.
PS: I've just looked at my analysis, and saw that the cost last year was close to 0.8%, not 0.6%. I'm trying to find why. I think it's because I changed providers at year end and my old provider charged me in December for the final quarter, when they would normally have charged me in January. Therefore, in effect I had to pay more than one year's fee in 2023.

 

[GSheehy]

I should add that there are other, more hidden ways, for ARF administrators to make money. For example, a significant proportion of my holdings are in sterling and it was necessary to convert sterling dividends to Euros in order to take a (taxable) income from the fund. They took a cut every time I converted sterling (or dollars) to Euros. That cost isn't included in the fees. However, I do include commission on purchases/ sales as a cost but, as I said, there were none in 2023.

What do the additional (average) costs per annum normally cost as a percentage of fund value?

 

[JimmyB99]

Ok Colm

I get it that your fund may be sufficiently large to take the all equity risk. I think it's important that people with more modest portfolios are provided with fair warning that sequence of returns risk is real and could hurt them big time. My fear about your post is that the plus side (very attractive returns) is not proportionately balanced with the downside risk (sequence of returns).

Frankly, the comment does zero to allay my fears.

Advisers, who warn of "sequence of returns" risk, would have warned me against investing everything in equities at the start for that reason.

 

[Colm Fagan]

Hi @GSheehy . As you probably know, I'm not an adviser, so I don't know what average costs are in the market. I can only tell what I've been charged, and I've done that above. To the best of my knowledge, ARF investors are subject to a variety of charges. There may be initial and/or trail commission from the insurance company to the adviser. The insurance company's management charge is on top of that. There will probably also be further charges by the asset managers who invest the money received from the insurance company. Then we have the margins on sales and purchases, currency exchanges, etc. I'm sure others are more au fait with those charges than I am.

 

[Colm Fagan]

I think it's important that people with more modest portfolios are provided with fair warning that sequence of returns risk is real and could hurt them big time.

I repeat that I'm not advising anyone to do as I did, so your advice has at least as much validity as mine.
I really do believe, though, that the 'sequence of return' risk is overplayed by advisers. Take for example what happened in 2018, when my ARF's value fell 15.3%. I haven't looked at the numbers for that year, but dividends probably covered about 4% of the income I took from the fund, leaving another 2% to find by way of asset sales. I might also have had some liquidity, which I could have run down. The bottom line is that I probably had to sell around 1.5% to 2% of my portfolio at depressed prices. Not the end of the world.

 

[GSheehy]

Hi @Colm Fagan , I was asking what the additional costs (currency exchange, portfolio transactions etc) normally cost you, on top of the 0.5% + VAT that the ARF provider charges pa.?

Your ARF is self-administered and you make the investment decisions yourself? So it's the equivalent of an execution only ARF? You don't want/need advice?

 

[Colm Fagan]

Hi @GSheehy . I think I've made that clear. There were no portfolio transactions in 2023, so the cost under that heading was zero, zilch, diddly squat. The currency exchange costs were small. I'm no expert on currency rates, so I wouldn't have more than the vaguest idea what margin the provider took on conversions from sterling to euros. Wouldn't have been much anyway. They didn't screw me.
Yes, it is execution only. I don't want/ need advice. I won't say I make 'decisions'. I just leave it lie. As I said, I'm sorry I didn't just put my money in a passive low-cost world equity fund. I don't believe advice adds much value. If people knew which way the market was going to move, they wouldn't be contributing to AAM, they'd be swanning around after making killings on the market.

 

[JimmyB99]

@Colm Fagan

Your continued (used advisedly) lack of real acknowledgement of the sequence of return risk for the normal retiree is bizarre. I just want the normal retiree to be forewarned and not got dazzled, unwittingly, in the all equity headlights. That's the risk I see with your OP.

I am not alone here. I watched your presentation on Zoom to the Society of Actuaries re AE. In the subsequent Q&A, the inappropriateness of your down-playing of sequence of returns risk for the individual regular retiree was clearly made to you. Do you remember this specific criticism? It was pretty much as robust a critique as I've seen in polite company!

 

[Colm Fagan]

Hi @JimmyB99 I honestly don't understand your use of the word "bizarre". I thought I made my position clear in response to your earlier comment. Do you disagree with my conclusion that, in the example cited of my experience in 2018, I may have had to sell around 2% of my portfolio at reduced prices? Would you also agree that that's not the end of the world?
Of course an all-equity portfolio has risks for the individual investor, but those risks are almost completely eliminated for AE, where returns are smoothed in the manner proposed and where members contribute and withdraw over many years. Therefore, I can't understand your reference to "as robust a critique as I've seen in polite company". Could you expand, please?

 

[JimmyB99]

Very happy to do so. Can you send me the link to the zoom so that I can quote what was said precisely please?

 

[JimmyB99]

In the meantime, this is what I said

@Colm Fagan

......In the subsequent Q&A, the inappropriateness of your down-playing of sequence of returns risk for the individual regular retiree was clearly made to you.

gets.....

Hi @JimmyB99 .....Of course an all-equity portfolio has risks for the individual investor, but those risks are almost completely eliminated for AE, where returns are smoothed in the manner proposed and where members contribute and withdraw over many years.

i.e. I was talking about sequence of risk at an individual level and I get a response which about the workings of AE?? Really??

When you send the clip, I'll elaborate more. But, in the meantime, let's be very clear. The reason I mentioned the AE presentation is that it was an example of where the comments were made publicly by a senior actuary who is expert in the investment of pension funds. JO'D's comments about sequence of risk were in the context of your espousal of the merits of an all equity approach for the individual retiree as part of his preamble to his broader commentary on your AE proposals. I honestly am amazed that you don't seem to know/remember exactly what I'm talking about. If I had worked so hard and long on a project and received such unbridled criticism, I'm pretty sure I'd remember what was said!

Hi @JimmyB99 I honestly don't understand your use of the word "bizarre". I thought I made my position clear in response to your earlier comment. Do you disagree with my conclusion that, in the example cited of my experience in 2018, I may have had to sell around 2% of my portfolio at reduced prices? Would you also agree that that's not the end of the world?

I think this again is an(other?) attempt to mislead/divert. All I shall say for now is that I am talking - as really should be clear to you - about the regular retiree. You need to understand that the regular retiree doesn't do self-administered ARFs hence the dividends' cushion argument is redundant. But you probably know that.

 

[Duke of Marmalade]

My stock selection wasn't great, to put it mildly. I would have done far better by investing in a passive world equity fund.

Very interesting update Colm.
It is quite striking the comparison between myself and yourself. Just as a point of clarity, unfortunately despite my aristocratic background I have no inherited wealth, my ancestors must have had my passion for the gee-gees.
I retired (a tad early) in 2007. I have a DB pension which is sufficient for my modest appetites. I also did a few nixers in retirement which enabled me to take out a small PRSA which I converted to an ARF in 2010 just at the same time as your own ARF, so I have some experience of DC. Before describing that experience I should also point out that I have a modest nest egg (from tax free lump sum etc.). Until recently that was entirely in deposits and state savings. But now it is entirely in (very low coupon) bonds and deposits. So despite the aforementioned passion, I have a pathological fear of what I think is meant by "sequence of return risk".
So has my DC experience vindicated that fear? Further to your above quote, it is entirely invested, both in its PRSA phase and its ARF phase, in a global equity fund with 0.75% p.a. charges (not sure whether it is passive or not). For every 100 invested I have received 127 in income (4% not the 6%) and I have 218 remaining. That is a return over the period of 9.8% p.a. before tax. Tax is broadly neutral but the PRSI on pensions before 65 reduces the net return to 8.3% p.a. Clearly I was somewhat fortuitous in retiring just before the GFC and surely these sort of returns are not to be expected in future - so maybe both our experiences should carry the caveat that "past performance is not a reliable guide to future performance".
There was an opinion piece in today's IT about the different influences of emotion and reason in political thought - the writer making the point that reason is not necessarily superior to emotion. So "sequence of return risk", whatever it means, does have a big emotional impact for some and indeed a possible real impact as it would be wrong to believe that "everything will work out in the end so don't worry yout little head about a mere 18% fall in your ARF".
Lifestyling has not gained such traction without reason and it is hard to tell people, especially those targeting modest pensions, not to worry about the ups and downs of the stockmarket.
That's why your smoothing proposal could be such a game changer and an answer to the social impact, of climate change proportions, that the move from DB to DC is heralding.

 

[Fortune]

You need to understand that the regular retiree doesn't do self-administered ARFs hence the dividends' cushion argument is redundant.

I'm likely to end up as a regular retiree and I've idly wondered about this. Ending up in a normal life company ARF, even if I'm in a passive tracker fund, all dividends just contribute towards an increased unit price (and likely quickly reinvested within the fund) meaning that any withdrawals are funded by selling units and incur sequence of returns risk. To avoid that, I could go for the same strategy, but with a distributing ETF on a self directed structure. This would seem like a more expensive route. Is the expected increased cost to receive dividends in the ARF is a cost effective method of reducing sequence of returns risk? Or is the best method to just have a tracker plus cash strategy in the ARF, with the cash element being used for withdrawals?

 

[Duke of Marmalade]

I'm likely to end up as a regular retiree and I've idly wondered about this. Ending up in a normal life company ARF, even if I'm in a passive tracker fund, all dividends just contribute towards an increased unit price (and likely quickly reinvested within the fund) meaning that any withdrawals are funded by selling units and incur sequence of returns risk. To avoid that, I could go for the same strategy, but with a distributing ETF on a self directed structure. This would seem like a more expensive route. Is the expected increased cost to receive dividends in the ARF is a cost effective method of reducing sequence of returns risk? Or is the best method to just have a tracker plus cash strategy in the ARF, with the cash element being used for withdrawals?

We are really talking very second order effects here. Consider the two alternatives:
A. Fund of 100 earns dividend of 3 at start of year. 3 is reinvested at start of year. Fund falls 20%. 4 is taken as income at end.
Fund at end = 103 * 0.8 - 4 = 78.4.
B. Fund of 100 earns dividend of 3 at start of year. 3 is withdrawn at start of year. Fund falls 20%. 1 is taken as income at end.
Fund at end = 100 * 0.8 - 1 = 79.

B is a saving of 0.6 over A i.e. the 20% fall in the dividend, i.e. you have got c. 3% relief for your "pain", wouldn't be a big seller of headache tablets. If it all happened evenly through the year the effect would be broadly half of that again. Of course, the reverse is also the case; A is better than B in a rising market and so A should be better than B in the round. Hardly worth elaborate work arounds.

 

[Colm Fagan]

@Duke of Marmalade. Your experience confirms my (unproven up to now) belief that I would have done far better if I had adopted a more 'conventional' pure equity strategy of investing in a world equity fund (which I presume is what you chose).
The comparative figures, per 100 invested at the start are:
Colm: Withdrew 102. Now has 186.
Duke: Withdrew 127. Now has 218.
Sticking with the parlance of your ancestors, Duke, you beat me by a distance.
On the other hand, I don't think I would have risked putting all my money in equities if I didn't know the companies I was investing in and didn't have confidence that they would deliver reasonable returns in the long-term. I think you're saying that, if you were in my shoes and didn't have the backing of a nice DB pension, you wouldn't have invested entirely in equities either. Not sure I can take much consolation from that, though.
I'll reply to @JimmyB99 and @Fortune later; however, I see that the Duke has addressed the dividend point, which was also raised by @JimmyB99 who claimed that I was trying to mislead/ divert by raising it. Needless to say, I had no such intention. In any event, there's no need to be so confrontational about it, nor about the other points you raised.

 

[Duke of Marmalade]

Your experience confirms my (unproven up to now) belief that I would have done far better if I had adopted a more 'conventional' pure equity strategy of investing in a world equity fund (which I presume is what you chose).
The comparative figures, per 100 invested at the start are:
Colm: Withdrew 102. Now has 186.
Duke: Withdrew 127. Now has 218.

Yes it was a Global Equity Fund. Also I got about 3 years extra in the PRSA phase which I think were quite favourable.

In any event, there's no need to be so confrontational about it, nor about the other points you raised.

It is a problem with this online format of discussion. Differences which would be easily smoothed over and resolved over a coffee tend to get misunderstood and tetchy online. I will be addressing @JimmyB99's points myself though it seems I would have to contact the SAI to get my hands on your podcast.