Rake-free investing strategy?

[kimchi]

I, like other UK investors, can invest $14000 (in GBP) per year tax free. This means I can trade no-load mutual funds free of charges and tax.

I currently use my own trend-following system which tracks the prices of around 30 funds spanning most geographical and financial sectors. In backtesting, it has turned $1000 in 1995 to around $10000 today, which is over 100% above the value that would have been achieved by buying and holding the same funds.

During this 13 year period I would have made around 100 trades/fund switches, and I would have had 2 large drawdowns of around 25-30% after the dotcom implosion and the 2006 summer sell-off

I know strategies like this might not work in The US due to limitations in the frequency of trading of funds imposed by US fund companies, and the tax consequences of selling funds.

I'm always looking to improve my system, and so my question is if you folkes in the US had similar tax and trading cost-free advantages, how would you manage your funds to increase returns or lower your risks?

I spend a couple of minutes every day managing my funds. I'll give more details of my basic system if anyone is interested.

[Nomad84]

We have tax advantaged accounts here too. It doesn't sound like ours are as good as yours, but we can use Roth IRAs to pay taxes on the money when it is earned, and then invest the money into a Roth (that's the account type...you can invest in just about whatever you want, subject to some limitations) and never pay a dime in taxes on any investment earnings, provided you don't withdraw the earnings until you are at least 59.5 years old (I think that's the age...) We also have tax deferred accounts where we don't pay tax when we make the money, but we do pay taxes when we withdraw it in retirement. Even so, with these accounts, we would not tax a big tax hit due to frequent trading. I have no input on strategies...just wanted to clarify that if it works there, it should work here too if you use the right kind of accounts.

[DcifrThs]

how much money do you have currently backing your system?

can you publish your backtested monthly return stream here? i.e. just paste the 144 months of return data in a post

thanks,
Barron

[kimchi]

[ QUOTE ]
how much money do you have currently backing your system?


[/ QUOTE ]

Since I'm limited to $14000 tax-free per year, and a chunk of this I put into a separate tax-free cash account (which uses up some of my stocks/bonds tax-free allowance), I've accumulated around $40000 in this account for stocks/bonds.

The tax-free wrapper obviously has many advantages but each year's account is separate, which means I have multiple accounts with a few $K in each. I can't move the money out of stocks/bonds and into cash without losing the tax advantages, and I can't easily manage the whole 40K as one lump sum without splitting funds up when trading - so I split it into 4 or 5 lumps and use this to diversify accross the currently best performing funds.

[ QUOTE ]

can you publish your backtested monthly return stream here? i.e. just paste the 144 months of return data in a post

thanks,
Barron

[/ QUOTE ]

I'm in the office now. I'll put something together for you and post it when I get to my laptop. I'll also try and upload a graph so you can see it's actually quite volotile

Actually, I'd like to do more analysis such as Sharpe ratio (but I don't know what the expected return is - is this the benchmark of B&H funds?).

Also, I have daily EOD results for my system and S&P500 / MSCIworld and other benchmarks. How would you suggest I compare my results with the above benchmarks on a risk-adjusted basis using MS Excel? I don't have Tradestation, Amibroker or XLAnalyzer or anything like that.

[DcifrThs]

your excess return is above whatever your BM would be.

if you are comparing yourself to the S&P500 just use that (that was my plan).

i was going to look at the monthly, rolling semi & rolling annual correlations to the underlying benchmark as well as some other funds' returns.

all in excel.

Barron

[kimchi]

Barron,

Here's the results of a backtest run a couple of months ago you requested. It's from a portfolio of 18 funds, mostly from Vanguard and Fidelity. (Historical data isn't available for UK funds).

I split my capital 3 ways between 3 funds and was fully invested in 3 funds throughout this period. I'm not sure if comparing these returns to the S&P500 will be of value because buying and holding the underlying funds may have outperformed the S&P anyway. I did use several US funds such as large/small growth/value etc, and so rotating between these during the business cycle perhaps increased my overall returns.

I chose these funds based on their diversity, and availability of historical data. I personally now use a portfolio of 32 GBP denominated funds, of which I am fully invested in 4 - 5 at any one time, hopefully reducing my risk.

Anyway, if you do anything with this data, or have any comments, please reply in this thread.

1st of month equity % change
Aug-94 £1,000
Sep-94 £991 -0.91%
Oct-94 £963 -2.91%
Nov-94 £967 0.41%
Dec-94 £891 -8.53%
Jan-95 £872 -2.18%
Feb-95 £831 -4.93%
Mar-95 £863 3.71%
Apr-95 £902 4.32%
May-95 £924 2.38%
Jun-95 £961 3.85%
Jul-95 £1,022 5.97%
Aug-95 £1,093 6.50%
Sep-95 £1,128 3.10%
Oct-95 £1,167 3.34%
Nov-95 £1,185 1.52%
Dec-95 £1,202 1.41%
Jan-96 £1,185 -1.43%
Feb-96 £1,224 3.19%
Mar-96 £1,227 0.24%
Apr-96 £1,260 2.62%
May-96 £1,309 3.74%
Jun-96 £1,326 1.28%
Jul-96 £1,328 0.15%
Aug-96 £1,280 -3.75%
Sep-96 £1,257 -1.83%
Oct-96 £1,377 8.71%
Nov-96 £1,378 0.07%
Dec-96 £1,444 4.57%
Jan-97 £1,428 -1.12%
Feb-97 £1,508 5.31%
Mar-97 £1,492 -1.07%
Apr-97 £1,445 -3.25%
May-97 £1,479 2.30%
Jun-97 £1,535 3.65%
Jul-97 £1,640 6.40%
Aug-97 £1,703 3.70%
Sep-97 £1,638 -3.97%
Oct-97 £1,740 5.86%
Nov-97 £1,606 -8.34%
Dec-97 £1,587 -1.20%
Jan-98 £1,611 1.49%
Feb-98 £1,607 -0.25%
Mar-98 £1,644 2.25%
Apr-98 £1,726 4.75%
May-98 £1,727 0.06%
Jun-98 £1,715 -0.70%
Jul-98 £1,758 2.45%
Aug-98 £1,695 -3.72%
Sep-98 £1,438 -17.87%
Oct-98 £1,415 -1.63%
Nov-98 £1,507 6.10%
Dec-98 £1,626 7.32%
Jan-99 £1,744 6.77%
Feb-99 £1,852 5.83%
Mar-99 £1,738 -6.56%
Apr-99 £1,889 7.99%
May-99 £1,903 0.74%
Jun-99 £1,845 -3.14%
Jul-99 £2,114 12.72%
Aug-99 £2,111 -0.14%
Sep-99 £2,250 6.18%
Oct-99 £2,366 4.90%
Nov-99 £2,552 7.29%
Dec-99 £2,834 9.95%
Jan-00 £3,516 19.40%
Feb-00 £3,319 -5.94%
Mar-00 £3,915 15.22%
Apr-00 £3,576 -9.48%
May-00 £3,412 -4.81%
Jun-00 £3,144 -8.52%
Jul-00 £3,569 11.91%
Aug-00 £3,375 -5.75%
Sep-00 £3,714 9.13%
Oct-00 £3,545 -4.77%
Nov-00 £3,484 -1.75%
Dec-00 £3,475 -0.26%
Jan-01 £3,652 4.85%
Feb-01 £3,446 -5.98%
Mar-01 £3,492 1.32%
Apr-01 £3,404 -2.59%
May-01 £3,532 3.62%
Jun-01 £3,585 1.48%
Jul-01 £3,473 -3.22%
Aug-01 £3,289 -5.59%
Sep-01 £3,367 2.32%
Oct-01 £3,401 1.00%
Nov-01 £3,393 -0.24%
Dec-01 £3,459 1.91%
Jan-02 £3,498 1.11%
Feb-02 £3,652 4.22%
Mar-02 £3,776 3.28%
Apr-02 £3,979 5.10%
May-02 £4,018 0.97%
Jun-02 £4,144 3.04%
Jul-02 £3,616 -14.60%
Aug-02 £3,241 -11.57%
Sep-02 £3,381 4.14%
Oct-02 £3,312 -2.08%
Nov-02 £3,261 -1.56%
Dec-02 £3,316 1.66%
Jan-03 £3,537 6.25%
Feb-03 £3,530 -0.20%
Mar-03 £3,499 -0.89%
Apr-03 £3,438 -1.77%
May-03 £3,626 5.18%
Jun-03 £3,797 4.50%
Jul-03 £3,867 1.81%
Aug-03 £3,792 -1.98%
Sep-03 £3,977 4.65%
Oct-03 £3,985 0.20%
Nov-03 £4,294 7.20%
Dec-03 £4,432 3.11%
Jan-04 £4,611 3.88%
Feb-04 £4,733 2.58%
Mar-04 £4,959 4.56%
Apr-04 £4,969 0.20%
May-04 £4,416 -12.52%
Jun-04 £4,281 -3.15%
Jul-04 £4,386 2.39%
Aug-04 £4,377 -0.21%
Sep-04 £4,452 1.68%
Oct-04 £4,589 2.99%
Nov-04 £4,742 3.23%
Dec-04 £4,932 3.85%
Jan-05 £4,997 1.30%
Feb-05 £5,035 0.75%
Mar-05 £5,210 3.36%
Apr-05 £5,103 -2.10%
May-05 £5,065 -0.75%
Jun-05 £5,183 2.28%
Jul-05 £5,450 4.90%
Aug-05 £5,844 6.74%
Sep-05 £6,164 5.19%
Oct-05 £6,818 9.59%
Nov-05 £6,490 -5.05%
Dec-05 £7,053 7.98%
Jan-06 £7,444 5.25%
Feb-06 £8,291 10.22%
Mar-06 £8,360 0.83%
Apr-06 £8,462 1.21%
May-06 £8,978 5.75%
Jun-06 £8,130 -10.43%
Jul-06 £8,303 2.08%
Aug-06 £8,183 -1.47%
Sep-06 £8,467 3.35%
Oct-06 £8,281 -2.25%
Nov-06 £8,776 5.64%
Dec-06 £9,105 3.61%
Jan-07 £9,272 1.80%
Feb-07 £9,505 2.45%
Mar-07 £9,446 -0.62%
Apr-07 £9,893 4.52%
May-07 £10,227 3.27%

[DcifrThs]

before i do, how did you decide to "rotate funds"

lets say it was at time t, i hope there was no information into your system for any time greater than t.

thanks,
Barron

[kimchi]

I simply use a simpled smoothed ranking system to ensure I am always invested in the top performing fund of the last n days, and I sell when that fund drops out of the top x decile of funds according to my system.

It takes about 2 - 3 days from the day a sell signal is issued to the day I am actually holding the new fund. This is the times it takes the fund company to sell units in one fund and position them into another. I factored this into the above data.

I disn't use any future data in the above backtest if that's what you're wondering. It is basically trend-following and with the smoothing constant, my trades actually significantly lag the market.

[kimchi]

Here's the list of values for the system (middle column) and Buying & holding the underlying funds (last column)

I've ran about 20 of these backtest with varying parameters with a starting equity of $1000 in 1994 and the one I've posted here is the test with the median result. The highest result over 13 years was $19700 and the lowest $7900, so the one I've posted ($10227) should avoid any suspitions of curve-fitting. The buy & hold returned $4577 and just out of interest, buying & holding 33% of each large growth, large value, and small growth would have returned around $4100.

I want to run a test over a longer time period which will include the inflationary market conditions of the 1970s /80s, and the 1987 crash to see how I would have fared. I don't have fund data going back that far, so if anyone has any ideas - please let me know.

These tests generated between 40 and 150 fund switches (not round trip trades) over the 13 years depending upon the parameters used. The reults below generated 63 trades.

1st of month equity B&H
Aug-94 1,000 1000
Sep-94 991 1035
Oct-94 963 1030
Nov-94 967 1032
Dec-94 891 987
Jan-95 872 975
Feb-95 831 951
Mar-95 863 952
Apr-95 902 977
May-95 924 1010
Jun-95 961 1045
Jul-95 1,022 1062
Aug-95 1,093 1105
Sep-95 1,128 1124
Oct-95 1,167 1136
Nov-95 1,185 1120
Dec-95 1,202 1146
Jan-96 1,185 1182
Feb-96 1,224 1226
Mar-96 1,227 1221
Apr-96 1,260 1236
May-96 1,309 1264
Jun-96 1,326 1273
Jul-96 1,328 1279
Aug-96 1,280 1241
Sep-96 1,257 1257
Oct-96 1,377 1306
Nov-96 1,378 1311
Dec-96 1,444 1365
Jan-97 1,428 1353
Feb-97 1,508 1393
Mar-97 1,492 1402
Apr-97 1,445 1354
May-97 1,479 1379
Jun-97 1,535 1459
Jul-97 1,640 1514
Aug-97 1,703 1565
Sep-97 1,638 1515
Oct-97 1,740 1595
Nov-97 1,606 1504
Dec-97 1,587 1482
Jan-98 1,611 1496
Feb-98 1,607 1524
Mar-98 1,644 1571
Apr-98 1,726 1626
May-98 1,727 1642
Jun-98 1,715 1550
Jul-98 1,758 1581
Aug-98 1,695 1530
Sep-98 1,438 1321
Oct-98 1,415 1351
Nov-98 1,507 1486
Dec-98 1,626 1532
Jan-99 1,744 1582
Feb-99 1,852 1579
Mar-99 1,738 1535
Apr-99 1,889 1650
May-99 1,903 1776
Jun-99 1,845 1721
Jul-99 2,114 1836
Aug-99 2,111 1794
Sep-99 2,250 1824
Oct-99 2,366 1816
Nov-99 2,552 1876
Dec-99 2,834 1952
Jan-00 3,516 2088
Feb-00 3,319 2066
Mar-00 3,915 2147
Apr-00 3,576 2179
May-00 3,412 2126
Jun-00 3,144 2106
Jul-00 3,569 2204
Aug-00 3,375 2170
Sep-00 3,714 2303
Oct-00 3,545 2225
Nov-00 3,484 2168
Dec-00 3,475 2059
Jan-01 3,652 2086
Feb-01 3,446 2182
Mar-01 3,492 2063
Apr-01 3,404 1925
May-01 3,532 2102
Jun-01 3,585 2119
Jul-01 3,473 2075
Aug-01 3,289 2023
Sep-01 3,367 1954
Oct-01 3,401 1787
Nov-01 3,393 1883
Dec-01 3,459 1946
Jan-02 3,498 2006
Feb-02 3,652 1980
Mar-02 3,776 2029
Apr-02 3,979 2100
May-02 4,018 2091
Jun-02 4,144 2058
Jul-02 3,616 1923
Aug-02 3,241 1769
Sep-02 3,381 1793
Oct-02 3,312 1726
Nov-02 3,261 1791
Dec-02 3,316 1871
Jan-03 3,537 1872
Feb-03 3,530 1823
Mar-03 3,499 1799
Apr-03 3,438 1819
May-03 3,626 1951
Jun-03 3,797 2067
Jul-03 3,867 2116
Aug-03 3,792 2124
Sep-03 3,977 2246
Oct-03 3,985 2294
Nov-03 4,294 2392
Dec-03 4,432 2454
Jan-04 4,611 2556
Feb-04 4,733 2592
Mar-04 4,959 2672
Apr-04 4,969 2700
May-04 4,416 2545
Jun-04 4,281 2554
Jul-04 4,386 2592
Aug-04 4,377 2556
Sep-04 4,452 2623
Oct-04 4,589 2708
Nov-04 4,742 2743
Dec-04 4,932 2904
Jan-05 4,997 2964
Feb-05 5,035 2972
Mar-05 5,210 3072
Apr-05 5,103 2988
May-05 5,065 2958
Jun-05 5,183 3065
Jul-05 5,450 3130
Aug-05 5,844 3264
Sep-05 6,164 3341
Oct-05 6,818 3442
Nov-05 6,490 3343
Dec-05 7,053 3531
Jan-06 7,444 3680
Feb-06 8,291 3840
Mar-06 8,360 3839
Apr-06 8,462 3910
May-06 8,978 3979
Jun-06 8,130 3841
Jul-06 8,303 3853
Aug-06 8,183 3814
Sep-06 8,467 3933
Oct-06 8,281 3926
Nov-06 8,776 4058
Dec-06 9,105 4198
Jan-07 9,272 4252
Feb-07 9,505 4339
Mar-07 9,446 4287
Apr-07 9,893 4409
May-07 10,227 4577

[DcifrThs]

1 question:

are there costs involved in fund switches? i.e. if i sell a fund and buy another am i subject to trading costs on both trips?

Barron