Proposed Portfolio Opinions

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  • bowlhead99
    bowlhead99 Posts: 12,295
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    BLB53 wrote: »
    Have you considered Vanguard Lifestrategy? It would be much simpler.

    I don't see how it would be "much simpler" than what OP is currently doing in buying a single global index which allocates money into 7000+ companies of all sizes in all regions allocated by market capitalisation and funded by direct debit or standing order or debit card every month or two. Agreed it's simpler than a custom mix as he/she proposes.

    The Lifestrategy fund is just a different mix of assets which as the OP explained in their last post is skewed to certain countries and so doesn't "accurately capture the market" in the way the OP seeks to do. Quite what is meant by "accurately capturing the market" when the OP rejects Global All Cap as not being accurate enough, we wait to hear, with our collective breath bated. :)
  • geeovana
    geeovana Posts: 91 Forumite
    edited 21 February 2018 at 12:26PM
    bowlhead99 wrote: »
    You already have an 'all in one fund', tracking the FTSE global all cap index.
    The idea that you can 'accurately capture the market on your own', *better* than an index which itself captures and represents the market (such as the Global All Cap) , might be far fetched. It sounds so, at face value.

    Presumably the only way you are going to know what are the relative proportions of the various regions in the overall global market (in order to set your portfolio up in the first place) is to look at a global index such as the Global All Cap in which you currently invest. The components of that particular index are not generally easily available daily, but only in a monthly factsheet with something of a delay. Unless you subscribe commercially to FTSE's data.

    So, you would be looking to an index to decide how to structure your holdings of individual specialist index funds, and then you would be incurring transaction costs to build them up, ensuring to invest in the latest correct proportion each time you add money every couple of months.

    In your current plan, where you are investing in the UK all share unit trust for example, that's only 6% of your total bimonthly contribution. I suppose if the bimonthly contribution is £2k, that's £120 for UK and £80 for Pacific ex Japan, but with smaller amounts you may be below the size thresholds for a subscription so you might be juggling each month which funds you actually buy. And the ratio won't stay at 6% each month because global markets move all the time. So sometimes it could be 6%, other months maybe 7% and so on. Modeling a wider index out of component index funds, with ongoing contributions, is a pain when the wider index itself could just be bought.

    Well, you don't seem to have done the splits correctly, if the goal was to mirror your Global All Cap fund at a lower price.

    For example you have under 50% in the US. With 17% in emerging markets. That is much higher than the exposure to emerging markets you would get in FTSE's All World or Global All Cap. They have China about 3% and India or Brazil and South Africa no more than about 1% each, half a percent to Russia. All other smaller EMs are less, so I don't know how you get to 17% if you are trying to capture investible market capitalisation in free float, as the FTSE or MSCI would do in their global indexes.

    Perhaps this is what you meant when you said you can 'accurately capture the market on your own', because you believe that (e.g.) China is underrepresented because some shares can't be bought by foreigners, so you are going to buy more of the shares that can, to try to make up for it, and stack lots of extra cash into emerging markets generally because you think EMs are the future. If so, fair enough, but you are not following the _actual_ public markets that can be generally accessed by an international investor, you are making up your own mix by personal preferences.

    Also, the FTSE global all cap fund includes $5 trillion of smaller companies which are not included in the FTSE all world or MSCI AWCI (such indexes only follow large or medium companies). Your constituents follow the latter approach of only following large and medium market capitalisation companies. The All World is missing over 10% of what the All Cap tracks. While different sized companies may have roughly the same fortunes over time, in both 2016 and 2017 the All Cap result differed from All World by 0.2% ; greater than the operating costs you hope to save.

    By investing in six funds instead of one that's five extra transactions when you buy. Doing it every other month for a year is thirty transactions. At £2 per transaction, £60 a year. If you save 0.1% off the management fees (ocf of 0.14% instead of global all cap OCF of 0.24%) that is a saving to offset the extra transaction costs of £50 per year on a £50k portfolio. So it goes without saying that you should only be thinking about doing this if you have a £50k portfolio or bigger.

    Really, the reason to use specialist single region index funds is because you don't like the mix of a world index but you do like the idea of believing in the mix that the index gives you in each country. Some people say that's flawed logic; "the market-cap weighted index is right" is either a good concept or it isn't, and shouldn't be affected when you invest across borders. Without getting into passive Vs active debates, my point is just that if you can create what you feel is a better mix, for genuinely lower costs, then sure, go ahead, but others would be quite happy to buy something off the shelf as a single product.

    First off, thank you for the effort and time taken in the response.

    I have not created the percentage splits by looking at the all-cap fund, but by finding the most recent data I could on global market capitalisation by country and calculating the splits my self. Is this not how the all-cap fund would have been generated? Now I only picked the top 20 countries so there will be some error in the calculations, however the individual country splits in the six funds above where all very close to my estimated percentages which gave me some confidence I .I can show the data I used and the excel sheet to show my calculations this evening.

    Please let me know if I am talking dribble here.

    I agree with the statement on charges and yes, my portfolio is approaching the £50K mark.
    BLB53 wrote: »
    Have you considered Vanguard Lifestrategy? It would be much simpler.

    I have explained previously when others have suggested the same thing that I am attempting to lower fees. You pay a premium in OCF for an all-in one fund. I realise I will be paying more in commission charges, however currently I would only pay £72.00 in commission charges a year with the above plan. Considering that the 0.1% saved in OCF on even just a 100K portfolio is £100.00, it will be a lot cheaper in the long run as your portfolio increases towards £1,000,000.00 at which point you would be saving £1000 / year in charges.
    bowlhead99 wrote: »
    I don't see how it would be "much simpler" than what OP is currently doing in buying a single global index which allocates money into 7000+ companies of all sizes in all regions allocated by market capitalisation and funded by direct debit or standing order or debit card every month or two. Agreed it's simpler than a custom mix as he/she proposes.

    The Lifestrategy fund is just a different mix of assets which as the OP explained in their last post is skewed to certain countries and so doesn't "accurately capture the market" in the way the OP seeks to do. Quite what is meant by "accurately capturing the market" when the OP rejects Global All Cap as not being accurate enough, we wait to hear, with our collective breath bated. :)
  • coyrls
    coyrls Posts: 2,423
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    Considering that the 0.001% saved in OCF on even just a 100K portfolio is £100.00
    0.001 of 100K is £100
    0.001% of 100K is £1
  • Why not go for a HSBC global Strategies investment. OCF including transaction costs about 0.2%.

    Has the representative allocation to the US, no need to faff about rebalancing your proposed portfolio which will be time consuming and it!!!8217;s cheaper.
  • BLB53
    BLB53 Posts: 1,583 Forumite
    I have explained previously when others have suggested the same thing that I am attempting to lower fees.
    Have you taken into account the costs of rebalancing your portfolio as there will be some hefty charges..£12.50 on each sale for example. The VLS funds are auto rebalanced and this alone may cover the slight addition in OCF.
  • economic
    economic Posts: 3,002 Forumite
    BLB53 wrote: »
    Have you taken into account the costs of rebalancing your portfolio as there will be some hefty charges..£12.50 on each sale for example. The VLS funds are auto rebalanced and this alone may cover the slight addition in OCF.

    Plus the bid-offer on ETFs which amount to about 0.145% for the Vanguard NA ETF.

    Although i don't really believe in strict re-balancing as such, as i don't like the idea of taking money out of good performing assets into weaker under performing assets.
  • A a 50/50 split between Vanguard FTSE Global Equity and Global Bond fund would give you charges of 0.2%.

    It's good that you are looking to reduce fees and the number of funds in your original portfolio is not excessive, but I question the utility of having individual funds that make up less than 10% of your portfolio. With your existing proposed portfolio you might find yourself doing a fair bit of rebalancing. But the glaring issue is the 100% equities, you should diversify.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • bowlhead99
    bowlhead99 Posts: 12,295
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    geeovana wrote: »
    First off, thank you for the effort and time taken in the response.

    I have not created the percentage splits by looking at the all-cap fund, but by finding the most recent data I could on global market capitalisation by country and calculating the splits my self. Is this not how the all-cap fund would have been generated?
    No. The published market indexes are free float adjusted. So, you might hear that (eg) China has a bigger stock market than the UK by value; that's true. However, much of it is only available to be owned by domestic local investors, or companies are part owned by government and simply not available for you, or your index fund, to purchase. You can't just rock up to the Shenzhen exchange and get your cheque book out and buy into everything. So, the index will by design only allocate money to the shares on a float-adjusted basis.

    Also there will be liquidity rules and market volume rules for all the markets covered by the index, about what worldwide shares are actually, practically, able to be bought and sold in decent volume.

    So in the end you end up with the China component of a global or emerging markets index allocating value to certain larger internationalised companies, covering $1.7 trillion of market cap, while overall the Chinese market might be four or five times that size really. Meanwhile your UK allocation through the index and in reality might only be $3tn - twice the size of China in the world index factsheets, but half the size out in the real world. If, in your 'real world', you mean including the shares you can't actually buy, within the China allocation (so not very 'real world' really).

    So, "the world index" wants to put 3% into China. However you have heard China should be bigger so you might want to put 10% of your capital into it, like you are doing with Japan. But the way you are accessing China is to use an EM tracker. So to 'overweight' China to get it up to what you perceive to be the right weight, you will necessarily be overweighting India and Russia and Romania by the same fraction.

    And by overweighting it to give you a set of holdings you prefer to the conventional index -what is this extra weight you're buying? Alibaba and Tencent are about 8% of the whole FTSE emerging markets index between them. China Mobile and Ping An Insurance another 1% each. The banks ICBC and CCB are another 3.3% between them. So, if you want to (say) double or triple your exposure to China versus what you get in the AllCap, to make up for all the Chinese companies 'missing' from the AllCap, you are going to be doubling or tripling your exposure to the EM index, and then necessarily doubling or tripling the exposure to a individual Chinese mobile phone company or bank or insurance company or tech company, as part of that process.

    So you end up with (say) twice as much invested in an individual Chinese mobile phone company as you do in a South Korean one of the same size and significance which was in the developed market index instead so doesn't get doubled up.

    It is unclear that you have actually "fixed" the problems inherent in coming up with a published index of investible stocks, by adding more of the stuff that was investible but might be dominated by particular industries or company types.
    Now I only picked the top 20 countries so there will be some error in the calculations, however the individual country splits in the six funds above where all very close to my estimated percentages which gave me some confidence
    within reason, it doesn't matter. There are 20+ developed countries and 20+ emerging ones to consider but the smaller ones obviously make less of a difference. The important bit is whether what you end up with, makes sense. If it makes sense to you, why not. But what you end up with is a custom index that the market at large isn't buying. They are buying packaged products and recognised indexes.
    I agree with the statement on charges and yes, my portfolio is approaching the £50K mark.

    I have explained previously when others have suggested the same thing that I am attempting to lower fees. You pay a premium in OCF for an all-in one fund. I realise I will be paying more in commission charges, however currently I would only pay £72.00 in commission charges a year with the above plan. Considering that the 0.1% saved in OCF on even just a 100K portfolio is £100.00, it will be a lot cheaper in the long run as your portfolio increases towards £1,000,000.00 at which point you would be saving £1000 / year in charges.
    It's all very well thinking you are building the optimum portfolio that will deliver a great cost saving if it's a million pounds in size. As a thought experiment. But in reality, it's not a million pounds in size, its £50k, so a tenth of a percent in charges saved is fifty quid. And you are spending sixty quid a year, over and above the costs of using one single global index fund, to run it.


    So really it's not much of a cost saving exercise, it's a cost creating exercise, and it's more effort, but if you enjoy it you could call it entertainment that you don't mind paying for. If it makes you a "better" portfolio because it turns out to be worth overweighting Emerging Market companies above their float-adjusted market cap, and stripping out small caps that were available in the Global All Cap due to it being difficult to buy them region by region through indexes... then, fair enough.

    Investing is about opinion and all opinions can appear valid, though some stand scrutiny better than others.
  • I do love reading these threads and the debate around them.

    Too many people think they have a crystal ball which surprises me still, given even recent events such as the Brexit vote and Trumps victory have completely compounded prior market forecasts.

    Crucially the research, time and stress of trying to refine these investment strategies to the nth degree negates any marginal gain that there is only the 'possibility' of achieving, particularly when using a market replication product over an active investment.

    For the vast majority of people the most diverse global tracking product (global tracker), coupled with low risk gilts in their own currency, weighted to their risk tolerance, is the way to go. Save regularly over the long term and use a platform with the lowest charges and you have got a solid approach.

    So why bother going to the trouble of trying to work all this out when you can buy a single fund or ETF to do it for you? It will be re balanced every month/ quarter (no additional re balancing costs) and in holding just one fund you will also save on dealing charges.

    If you honestly think that over an 'n' year period you can achieve a better return from over-weighting a particular market by 1-2% then you are clearly saying that you know far better than the markets. And you would need to be repeatedly correct over investment time horizon as market weightings fluctuate quite significantly over time.

    In my opinion people spend far to much time worrying about, what is essentially supposed to be a set and forget product.

    If you do have insight beyond the markets then set aside a proportion of your capital to pick up some active funds or make some direct stock investment. You can then compare the returns with your global tracker to see if you really do posses the ability to outperform.
  • TheTracker
    TheTracker Posts: 1,223
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    forextc wrote: »
    I do love reading these threads and the debate around them.

    If you honestly think that over an 'n' year period you can achieve a better return from over-weighting a particular market by 1-2% then you are clearly saying that you know far better than the markets. And you would need to be repeatedly correct over investment time horizon as market weightings fluctuate quite significantly over time.

    If you do have insight beyond the markets then set aside a proportion of your capital to pick up some active funds or make some direct stock investment. You can then compare the returns with your global tracker to see if you really do posses the ability to outperform.

    "you would need to be repeatedly correct over investment time" - agree with this, but disagree with most of the rest.

    Being persistent (holding across swathes of time) is just one measure. Your strategy must also be evidenced by pervasiveness (holds across regions and sectors), robust (holds against various definitions, eg how value is measured), and sensible (risk- or behavioural-based explanations).

    Very few strategies stand up to this test, but two that do have been a size premium and a value premium. "Overweighting" these areas, in most regions, across the last 100 years, has been a successful strategy. The idea that you *need* to go active to follow these premiums, and pay a fee along the way, is madness. In fact, many claim that all active funds do is follow such strategies themselves.
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