2Xideas Global Fund - better than VT/VWRL?

A friend of mine works at this 2xIdeas company that creates funds aiming at delivering 100% return in 5-7 years. They basically follow the global MSCI ACWI Index (large and mid caps) and use a Warren Buffet style approach to identify the 400 best companies from the 4000 mid to large Cap companies. Then they select 100 stocks for the fund that should help outperform the index. Every quarter they review the fundamentals and tweak the allocations a bit. So far the (short) track record since looks good.

They transparently communicate why they do what and they are long only. They are fully aware of the fact that Tesla investors made a killing in 2020 and yet they believe in the long-term returns of solid companies. To me it sounds like the boring VTI/VWRL portfolio but better.

Why hang in there with companies who are past their prime when you can weed out the ones that don’t have what it takes and focus on the good ones in a way that offers the same risk profile as if you had invested in VTI/VWRL? 1% TER sound expensive to us but I kinda like the approach. They have outperformed the MSCI ACWI index by almost 9% for the last 6 years.

On the downside I think it is a bad time to get involved now. I feel the peak is approaching. And 1% TER is high. If these guys are confident in what they are doing, they would charge only 0.5% and take their margin whenever they do their over-performance magic. What do you think about it? Snake oil or real deal? 2Xideas Library Fund

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This statement goes against the efficient market hypothesis. Investors want the highest risk-adjusted return for their capital. So an apparently “unsexy” company has a price that should reflect it. If these guys are not doing anything magical, but follow a few well known and publicly available indicators, then this should be priced in.

Their approach of starting with a full index and “weeding out” the worst companies actually sounds similar to Fundsmith, where they opt for a positive selection based on the indicators.

If you’re afraid of a coming crash, it’s the badly managed rotten eggs that will crash the most, so actually it would be a good time to invest in a fund that tries to weed them out.

That being said, I still don’t get it how such funds manage to beat the market. Why is it so easy? Or do they take more risk than the market average?

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EMH is an academic fairly tale.

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There are two ways to beat the total return of the broad market:

  1. Take on a specific market segment that comes with higher risk and Volatility (e.g. Small Caps; Shares with high Leverage): This will theoretically work, but it comes at the expense if higher Risk/Volatility so its a bit useless. Besides: these investments generally come with higher expense ratios, which offsets any benefits we would otherwise have.
  2. Play with the risk distribution curve (like hedge Fonds); meaning that we get higher, and more consistent, returns but at the expense of long-tail risks that only materialize once in a blue moon… but upon materializing have a devastating effect on the Portfolio. Net-net and over a long enough sample of years so that we as well include some long-tail risk; the overall risk adjusted return will be the same than the broad market; with the only exception that this tail management comes with additional „friction“ and higher expense. So you lose out as well.

This fund does a combination of both, but to my understanding mainly leans on the second strategy. Conclusion: this might work out well for years, until a long tail Event kicks in and destrois all previous gains. There is both theory as well as sufficient observation on these topics.

Really - its not worth the thought. The only way of optimizing your return that works both in Theory and Practice is diversification agains low/non-correlated asset classes. But to be fair; efficiebt markets keep reducing such benefits over time and there are less and less such low-correlated asset classes out there.

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Not really, it is just that a lot of people have a poor understanding of it.

If it was that easy to weed out rotten eggs, they would already be trading at nearly Zero CHF. This is what we need short-sellers for (as they can work around a situation in which a share artificially remains too valuable as its investors simply refuse to place a price/sell).

Markets are fairly efficient, there is a psychologic component to them but I doubt anyone could over the long run successfully trade on such.

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Interesting point, and I think I agree. Elon Musk, however, shares a different opinion and he said short selling is a vice disguised as a virtue. He also said short selling originated in the times when you knew your shares are coming on a different horse which is a few days away. So in order not to wait, you sold something you didn’t (yet) have on you. But today’s short selling can be used to bully a company into the ground (as was being done to TSLA in the past). Again, I think I don’t agree with him.

I’d say it’s common sense. We want the highest returns. There are millions of people analyzing stock market indicators, smart people writing algorithms that exploit market inefficiencies. You’d think the market would be efficient at least to a degree. Or that the inefficiencies are not consistent and easy to spot.

Yeah that’s very well put. That’s what comes to my mind when I see a chart, where fund X return looks like an amplified version of S&P 500. You can pocket higher returns for years until something totally unexpected happens.

Agreed. Everyone that follows the „there must be better returns“ trap… read into the Short VIX Products. Famius case where things worked out amazing; until Long ytail killed all investments…

Wouldn’t it be better to just identify the best company and skip the other 399? Diversification only makes sense if you can’t find the stock that will have the best performance, but as they think they can, why bother with more than one stock?

Why is a artificially high stock price a problem for us that needs to be solved by short sellers? I heard this argument a lot but I don’t understand it. If I think a stock is overvalued I just don’t buy it.

I totally get why people are short selling stocks, but do we as participants in the market or a society need it?
For me the main purpose of the stock market is to provide a exit strategy for investors and that companies can acquire new capital. As a side effect I can invest in businesses and that’s great, but a lot of the other stuff that evolved around this is imho just because of greed and hurts the economy more than it helps.

I think there aren’t incentives to figure out the mispricings otherwise. E.g. if you think something is a fraud or will fail, you can’t put your money where your mouth is, and it might encourage bubbles.

I guess 1 company might be all or nothing, and 100 companies might offer a risk profile that is more representative of the whole group of 4000 companies

Apparently the risk measure is pretty much like the whole index.

When I think about any group there is always a normal distribution of different traits. Company success is not like a random game of dice. It’s more like poker, where good players have a better chance of winning. Could even be like dart, where physics rule. Having a good product, a good business model, sizeable differentiation from competitors, loyal employees - it all contributes to success. Not a random game. It makes absolute sense to me to find a pattern in a group and split it in a preferred and non-preferred part. And revisiting the decision every quarter would help me to fix any issues my previous choice may have caused.

It might open a whole other lot of can of worms to talk about ESG. Well performing companies would not make the cut of the 2Xideas fund, if they are controversial, vice-oriented or contribute to global warming. Yet they are part of VTI/VWRL…

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I don‘t know, 10 Million or so of Professionals do this day in and day out. They deserve their salary for their above average intellect, education and commitment of life energy. Whenever they spot a case; the price of the share goes up to match their consensus. Because as long as the share is below its value, they will keep investing more in that share, whilst reducing their broad market investment. So long story short; after a fairly fast amount of time, THE MARKET will price the known facts in and the share is at a fair price again.

Active Stock selection is based on the claim that you were consistently smarter than the cumulative wisdom of these 10+ Million of smart heads together. You may be lucky one in a while. This is not Lotto where you are 99.999% of the time not fortunate; this is Red/Black in Casino where you are always to 50% right (share price to cheap or to expensive). You can be „right“ in casino even a few times in a row… but that is luck.

Thinking you could systematically and beyond random luck beat the cumulative wisdom of 10+ Million of super smart people is in my view… not that smart.

The situation may be different if you traden on psychologic aspects; there could be strategies that use market anomalies that are due to comon mis-perception. But they are on one hand hard to spot and they still imply that you pretend to be smarter than the 1+ Million of psychologists that among the 10+ Million of traders apply their PHD knowledge in human behavior into making money for their Psy Trading Market Strategies.

Its time to wake up from the Stock picking dream. Clearly, with a diversified Stock picking Portfolio, you may get Market Returns with completely different shares; you dont need VT… but Stock Picking won‘t allow you to systematically beat total markets and given higher transaction cost and lower diversification…

There are valid reasons for Stock Picking but you better know why you do it and the reason better not be a search for higher than (risk adjusted) market returns.

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Even if I don‘t homd the over-valued Stock; its an issue for myself. Once the bubbke bursts, it will spill over to my other shares. People that lost their money in Wirecard probably had to sell other shares to recover dome liquidity. Clearly not a big impact but on a large scale, there csn ve trickle down effects even to most solud investments.

Besides: every franc invested in a bad Corp is a franc less invested in a Good Corp and it reduces overal economic efficiency; which will indirectly as well impact the return pf my good investments.

Besides 2: even if you don‘t like it, you do own the share as well… be it through your pension fund, AhV, National Banc or any other Index Fund that indirectly matters to you.

So: fundamentally short selling is good. I agree though that something was wrong and to be fixed if I see the massive Short Volunes we had e.g. on Gamestop. The other question is where Market Manipulation starts; but as long as we have very strict market regulations I don‘t mind.

If you agree that an average Joe does not know any better about the price of any stock, then you would agree that buying any stock at its market price is as good an investment as the other, right? And weighting by market cap allocation is logical, it spares you rebalancing and it’s the most popular way. So why are you not convinced by VT/VWRL? I think you posted your concerns already, but without explanation.

Fundsmith has already sort of done that for you with the exception that they simply and only invest in the stocks they have selected and no indexes :stuck_out_tongue: For large caps check the Fundsmith Equity Fund (FACTSHEET) and for small and mid-cap check Smithson Equity Fund (FUND FACTSHEET).

Thank you both. Indeed, Fundsmith uses similar wording as 2Xideas: No Nonsense, No Shorting, No Market Timing, No Trading, Just a small number of high quality, resilient, global growth companies that are good value and which we intend to hold for a long time, and in which we invest our own money. Even the costs are +/- the same: TER 1.05%

We all believe in Indexing and Efficient Markets. Hence, we believe in a few things:

  • Capital Markets DO compensate Market Risks (Risk Free Rate plus Beta times Market Return)
  • Capital Marked DO NOT compensate Risk that can be diversified away.
    => The risk of an individual company going bust is a Non-Compensated Risk; Given that one could take on a bunch of different shares and by doing so diversifying the risk of a single share away.

This raises a question: Does the Market compensate for Jurisdictional Risk of holding shares that are domiciled in the US?

US domiciled shares have the following attributes:

  • They to a certain extent serve consumers in the US: Non US Domiciled Shares may do the same (by establishing an US subsidary)
  • They can fairly fast build up additional US Footprint / Scale: The mobility of Non-US Corps is however not restricted as well; nothing prevents foreign investment into the States
  • Their Dividends are subject to US Dividend Taxation: US Subsidaries get equal or even better Taxation Treatment; Double Taxation Treaties generally foresee Zero Withholding Tax on Distributions from a subsidary to a Parent Company
  • Their Profit is Taxed under US Tax Laws: Same aplies for those Profits that result under an US Subsidary; and re Profits from outside the US, US Corporate Tax is anyways no materially better than Non-US ones (clearly; a few countries are seriously worse)
  • They have access to the largest Capital Market: could be achieved by international stocks as well, be it by using dusl listingbir an ADR approach.
  • They report in USD and their Treasury is hence likely geared towards (naturally) hedging away their Non-USD FX Exposure: Surprise, surprise; there is quite a few international Corps that as well report in USD

So the question is: Is there any Source of Return that only exists for US based corporations? The above indicates that this was not the case. The conclusion is that US domicile translates to non-compensated risk as you can diversify it away.

Its important to acknowledge that under the assumption of efficient markets; the domicile of a corporate is a non-compensated risk.

This implies that if we replicate World Shares from their characteristics (Sector, Size, Corporate Age & Agility, Reporting Currency, Startyness, TaxationAttractivity, …) you can achieve World Market Returns with pretty much Zero US Shares.

Clearly, its not an easy task and I would definitely not go to Zero… but at the same time; I as well don‘t get why i should be taking 55% of US Domicile Risk; Not receive any Risk Compensation for it and just leave it like this - If I can get the same returns with a bit more efforts but less non-compensated risk?

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I guess the answer would be convenience. Also I think trans-national companies are often domiciled in USA, because it’s the largest stock market that grants them access to capital etc etc. They do a lot of business outside of USA, but the headquarters is in USA.

But would you agree that holding VT is not far from optimal? OK, a bit much USA, but it’s not like the risk is so bad. After all, these corporations could flee USA and change domicile. I don’t know how often it happens that a stock switches from NYSE to LSE, but for an ETF holder there wouldn’t be much difference, or?

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VT is an efficient way of investing into shares. But VT as well implies 55% of non-compensated US Domicile Risk. As long as nothing happens, you are good. But you never know if we somewhen face e.g. Capital Export Taxations or so, that prevent a move of headquarters outside of the US.

Risk is always the same - no impact and you don‘t worry about it; until its to late. And by that time… it will be to late.

So why not got for another efficient Portfolio; but this time see that you only have e.g. 25% of US domiciled shares? You can get the same efficiency and returns than VT but with less US domicile concentration risk.

Remember: VT is not the only optimally efficient stocks Portfolio, its just the most convenient one. You could get an efficient Portfolio with a few hundred shares only; and they given non-compensated risk can have different domiciled. Sampling is not easy but can be done.

Back to the ETF World, itcrequires some thought on how to diversify from the states whilst preserving the same sector splits and Portfolio efficiency; but it can be done even with a Portfolio of Index funds.

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It may be more difficult than it sounds.

This example comes to mind:
“In 2016, Allergan’s planned $152 billion merger with Pfizer fell apart after the Obama administration changed the tax rules to [make it more difficult for American companies] to lower their taxes by using mergers to shift their headquarters overseas. Since then, Allergan, an Irish company whose business is primarily in the United States, has been exploring either a sale or a split.”

This was blocked soon after another high-profile company moved outside USA or did something similar successfully (I don’t remember which one).

I guess there was fear that this would catch on & so the “concept” was “stopped”.

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