UK Index Trust

marrioa

I have details of an index tracking range. One of the funds is the UK Index Trust which has no initial fees and0.5% annual management charge. The minimum investment is £50 and there are no withdrawal fees. There are transaction expenses which are not specified in £ or %. It also mentions something called a Portfolio Turnover Rate of 2% - haven't a clue what that means, even though I've read the paragraph several times!!! The effect of deductions after 10 years @ £50 a month is £230. if you have accumulation units.
Does this sound like a reasonable investment?

dunstonh

First of all, what index?

A tracker may be cheap but pick the wrong index and that cheapness has earned you nothing. (5 years ago a FTSE100 tracker with 5000 invested would have around £5100 in it. A FTSE250 tracker would be closer to £8000). Most managed funds have managed to beat FTSE100 trackers over the last 5 years. Going cheap isnt always the best thing. Pick the area(s) to invest first, then pick the the funds and consider the charges.

Could you give us information on the fund and provider?

Deemy

marrioa wrote:

I have details of an index tracking range. One of the funds is the UK Index Trust which has no initial fees and0.5% annual management charge. The minimum investment is £50 and there are no withdrawal fees. There are transaction expenses which are not specified in £ or %. It also mentions something called a Portfolio Turnover Rate of 2% - haven't a clue what that means, even though I've read the paragraph several times!!! The effect of deductions after 10 years @ £50 a month is £230. if you have accumulation units.
Does this sound like a reasonable investment?

I presume your referring ot the Legal & General UK index Trust, the aim of which is to track the FTSE All share index.

Looking at its portfolio, its heavy in banks and oils, and low in utilities, and resources.

Size wise at about £3.5 billion it is on the bigger than usual size, and pays a fair dividend of 2.46%.

Looking at past performance, its neither a shining star nor a disasterous record... rather does what it says which is to track the all share index.

Personally I would go for specific sectors / emerging markets rather than an all round market tracker, though that would require a more hands on approach i.e. with regards sector rotation timing.

EdInvestor

marrioa wrote:

One of the funds is the UK Index Trust which has no initial fees and 0.5% annual management charge. The effect of deductions after 10 years @ £50 a month is £230.

50 pounds a month is 600 pounds a year
600 pounds @ 0.5% = 3 pounds a year
3 pounds a year X 10 years = 30 pounds

But the "effect of charges" is 230 pounds.

That's equivalent to 23 pounds a year,almost eight times as much as you might think from reading there is an 0.5% annual charge.

That's why the "effect of charges" is important.

dunstonh

Its not that important at all.

Is it better to get 10% minus 0.5% p.a. growth = 9.5% or get 4% without knowing what charges are?

EdInvestor

Over on the Fidelity funds network site they have some info on this L&G fund in the charges section, including the fact of an 0.9% bid offer spread which I hadn't heard mentioned before.

Initial amount invested £1,000
Normal initial charge 0.00%
FundsNetwork™ direct initial charge 0.00%
You save 0.00%
Additional bid-offer spread 0.91%
Annual management charge 0.50%
Other annual expenses 0.02%
End year/ Investment to date/ Effect of deductions to date/ What you might get back at 6.0%
1 £1,000 £15 £1,040
3 £1,000 £30 £1,160
5 £1,000 £48 £1,290
10 £1,000 £111 £1,680

The last line in the table shows that over 10 years, the effect of total charges and expenses could amount to £111. Putting this another way, this would have the effect of bringing the illustrated investment growth rate down from 6.0% to 5.3% a year.

Note they quote 6% for the standard unit trust.

Quite frankly a growth rate of 5.3% a year if compared with cash @4% does not present anything like an adequate risk premium IMHO, especially considering that trackers are a fairly high risk way of investing in equities.

EdInvestor

Note that 1000 quid compounded up at 4% over 10 years would produce 1,480 with no risk.

dunstonh

Quite frankly a growth rate of 5.3% a year if compared with cash @4% does not present anything like an adequate risk premium IMHO, especially considering that trackers are a fairly high risk way of investing in equities.

6% is the required growth rate to be quoted on all unit trust/OEICs. It doesnt mean the fund is going to perform to 6%.

The L&G fund grew by 23.16% in the 12 months from 1 feb 05 to 31st Jan 06. So, take your 0.7% reduction in yield and you still got in excess of 22%.

All that being said, it isnt a fund I would have.

TheShadow_2

EdInvestor wrote:

Quite frankly a growth rate of 5.3% a year if compared with cash @4% does not present anything like an adequate risk premium IMHO, especially considering that trackers are a fairly high risk way of investing in equities.

If trackers are a risky way of investing in equities what are safer more effective ways as i have currently got all my shares in trackers of some kind or other.
My Portfolio is split between these 3 as this is my first year investing this is what i did with my isa. next year i will move to something different if trackers aren’t a good bet.

L&G European Index Trust (R) Acc
L&G UK 100 Index Trust (R) Acc
L&G UK Index Trust (R) Acc

I am open to some suggestions not advice just what you may do next year.

dunstonh

Probably a good idea to diversify a bit more. This will include areas that dont have trackers but then your investment choice should never be based on charges as first priority.

We cannot really advise you as to what funds as we dont know your risk profile, we dont know the amounts involved, we dont know the timescales and we dont know your ISA provider. Although it appears you like L&G!

TheShadow_2

The reason for L&G was because i am just starting out with investments and i chose them for my ISA. So this is my first year investing in something other than cash ISA, savings accounts.

I am now looking to move away from L&G and hopefully find a company that will allow me to buy shares or funds inside the isa wrapper.. But if that's not possible just straight shares or funds.

Risk wise I would be looking at medium/high risk as this will only be a proportion of my savings accounts the rest in various cash accounts.

Timescale I would be looking at 5-7 Years