new to s&s isas

jamesd

loopy lou, if you want easy you could select from one of these Hargreaves Lansdown multi-manager funds (the sort of fund of funds that dunstonh mentioned). One of these will get you started without much work or complexity.

Assuming that you want easy, are interested in the long term and will accept quite a lot of up and down movement, the special situations one looks reasonable. The balanced managed will probably grow less but show less up and down movement.

Hargreaves Lansdown have a good range of funds from many different managers to choose from so you can easily move the money around later if you like.

I don't suggest the Hargreaves Lansdown funds as best, just as a good easy way to get started and do better than trackers without lots of complexity. My impression is that the work involved in HYP and such is more than you're really interested in doing and that you would benefit from the manager selecting a range of funds so you don't need to do that work yourself.

InMyDreams

Hi,
Loopy Lou, hope you don't mind me jumping on your thread, but I'm also in the position of wanting to get into s&s isas and feeling rather bewildered. I also consider myself to be a quite intelligent and financially savvy lay-person but my head is also hurting from reading so many forums and websites.

I had also assumed like you that I could just compare charges and open the cheapest tracker isa and then all I had to do was decide what market I wanted it to track. Easy. Except it seems more complicated than that.

jamesd wrote: »

loopy lou, if you want easy you could select from one of these Hargreaves Lansdown multi-manager funds

Thanks for this link. This looks a bit more straight forward. But I thought that managed funds were not worth the extra expense and on average are not likely to out perform trackers anyway.

dunstonh wrote: »

What is it about a tracker that is desirable to you? Be wary as trackers have negatives as well (just as managed funds do) but many sites, including MF, do not give you the negatives.

Um, for me, it was the fact that a) I wouldn’t have to pay for a managed fund but also b) I wouldn’t have to manage anything myself. I’d be happy to restrict myself to an average return as hopefully it won’t be much worse than average either. You’re going to tell me it’s more complicated than that, aren’t you? So what are the negatives, dunsonh? Apart from there's never any chance of them outperforming the markets.

Also, going back to the link jamesd posted and looking at the Multi-Manager Special Situations. I wonder if someone could gently talk me through what the charges are? Firstly, I see there is a 5% difference between the buy and sell prices. This I understand; my endowment works the same way. On buying the units, I've essentially lost 5% of the value of my payment up front. Is this what is meant by the "5% initial charge"? Or am I charged another 5% on top? What's the 5% 'initial saving' all about? And an annual charge of 1%? Would that be 1% of the value of the fund each year taken off? In which case maybe the charges I'm paying on my endowment aren't as extortionate as I thought. I pay £2.80/month out of my premiums of £15, but as a percentage of the current surrender value that’s more like half a % per year rather than 1%. I’ve posted on the mortgages and endowments board about my endowment because I think I want to cash it in and replace it with a s&s isa, but now I’m thinking maybe I’m better leaving it as it is.

Also, if I used selftrade but didn’t wrap the funds in an isa, would that save me a £25/year fee? I’m not currently a tax payer. I just thought I might as well wrap them up rather than not as hopefully I will be paying tax again in the future.

I’m sure I’ll be back with more questions…

dunstonh

Um, for me, it was the fact that a) I wouldn’t have to pay for a managed fund but also b) I wouldn’t have to manage anything myself. I’d be happy to restrict myself to an average return as hopefully it won’t be much worse than average either. You’re going to tell me it’s more complicated than that, aren’t you? So what are the negatives, dunsonh? Apart from there's never any chance of them outperforming the markets.

FTSE all share trackers tend to come out mid table and FTSE 100 trackers havent made the top half in over 18 years. Indeed, they seem to spend more time at the bottom than anywhere else.

Historically, the UK comes out as best sector around once every 7 years. Going forward it is likely to be less than that with globalisation ever increasing. So, if you invest for 20 years and pick a FTSE tracker, you are likely to be in the best area 2 years out of that 20.

You are putting all your eggs into one medium/high risk basket with a FTSE tracker. That style of investing will fail (it doesnt matter if you picked one managed fund either as that would fail as well). Single sector investing is the cause of most people complaining about their investments going bad.

I mentioned risk but did you realise it was medium/high. FTSE trackers dropped 40/45% in the last crash in 12 months. Are you prepared to accept that sort of loss?

InMyDreams

Thank you so much for your reply. I must be slowly getting there...

dunstonh wrote: »

You are putting all your eggs into one medium/high risk basket with a FTSE tracker. That style of investing will fail (it doesnt matter if you picked one managed fund either as that would fail as well). Single sector investing is the cause of most people complaining about their investments going bad.

See this is what I'm not understanding. I thought that buying into shares was putting all your eggs into one (or a few) baskets. I thought that a tracker was spreading you out between 100, 250 or 350 baskets. Back to the drawing board for me then...

dunstonh wrote: »

I mentioned risk but did you realise it was medium/high. FTSE trackers dropped 40/45% in the last crash in 12 months. Are you prepared to accept that sort of loss?

Err, yes if a) I knew what I was doing and b) I thought there was a reasonable chance that the opposite was also possible. In fact that's what happened to my endowment and I'm still in there and I'm glad I stuck at it because in the last 3.5 years it's averaged at over 10% per year after charges. But the problem is, I don't know whether that's good or bad. I have a feeling that my endowment is at the high end of risky, in which case with that level of risk, I shouldn't be feeling that I've done so well with a 10% return. And actually, since it actually started in 2000, I've still paid in more than what it's worth at the moment. I'm happy with risk, but that doesn't mean I want to throw my money away flogging a dead horse.

dunstonh

See this is what I'm not understanding. I thought that buying into shares was putting all your eggs into one (or a few) baskets. I thought that a tracker was spreading you out between 100, 250 or 350 baskets. Back to the drawing board for me then...

You are spreading your risk between companies but they are all based in the same country and whilst many will have overseas business they are mostly affected by what happens in the UK. Diversification should include a fixed interest, property, UK, Europe, Far East, Japan, N America, Specialist and of course your cash element (which will typically be a savings account).

I just did an annual review for a portfolio invested in June 2001 and is cautious. That is up 10.91% a year despite the crash. Benchmarking that against a FTSE all share tracker (used HSBC), that averaged 3.81% a year in the same period.

You must look a the bad years as well as the good. Anybody can make money when the markets are good. It's when things are bad that you learn if your portfolio is good for you or not.

In fact that's what happened to my endowment and I'm still in there and I'm glad I stuck at it because in the last 3.5 years it's averaged at over 10% per year after charges.

3.5 years - should be closer to double your money in that period for a medium risk spread.

I shouldn't be feeling that I've done so well with a 10% return

You should be feeling good with a 10% return p.a. if you include the stockmarket crash years as well. Not just the really good years that followed.

InMyDreams

dunstonh wrote: »

3.5 years - should be closer to double your money in that period for a medium risk spread.
You should be feeling good with a 10% return p.a. if you include the stockmarket crash years as well. Not just the really good years that followed.

This is precisely the sort of thing I'm trying to work out, thanks. But is it a medium risk spread? Of all our assets, since things started to recover, our endowment has seen by far the highest returns. (Oh, well, except for the Standard Life shares but we sold them (at huge profit) ages ago as that was just a ludicrously small 'basket'.) But I'm just not sure that they are high enough to justify their risk level. Which you seem to agree with? And maybe even we're lucky that it's even been as high as it has so far, in which case it's really not worth keeping it. Except that I don't actually know what sort of level of risk this product falls into, so I don't know what I should be comparing it with. Yes, it did disastrously in the early years, but then so did other 'cautious' investments at this time. We were fully aware that we were taking a risk. What I realise now was that we never understood (and still don't know) exactly what that level of risk was.

The more I look into it, the more I can't BELIEVE we bought this product. Not that I am against the concept at all, and I fully accept that it was a risk. But the projections we were shown were simply rubbish and I didn't realise. How stupid do I feel! OK there were insurances included in that, but still. It wasn't even projected (assuming a 6% growth) to be worth what we had paid in for over 10 years! And even at term (25 years), had we kept with the original premiums we would have paid in over £55K after 25 years and it was only aiming to make £82.5K. But are these rubbish projections because this is in fact a very cautious investment rather than medium risk???

Now that all the commissions have been paid, and from what I can understand, the fees now seem lower than the Hargreaves Lansdown multi-manager funds (as an example) as I assume I paid through the nose in the beginning instead, would I be shooting myself in the foot by cashing in now, having already paid through the nose for the product? I would never touch this type of investment again with a barge pole, but in the position that I am now, having paid all those fees already which obviously I can't get back whatever I do, is it such a bad investment to be sticking with? How do I go about finding out?

InMyDreams

dunstonh wrote: »

FTSE all share trackers tend to come out mid table and FTSE 100 trackers havent made the top half in over 18 years. Indeed, they seem to spend more time at the bottom than anywhere else.

And yet, from the MFW board,

andrewmoorcroft wrote: »

If we take a 'slightly risky' FTSE100 ISA route and assume a realistic 10% per year (never been that low over 25 years)

Argh... I'm going round in circles here. I think I need to go sleep on it. I'd be happy with 10% even if that's near the bottom, if I thought I had a strong chance of making it over the long term.

jamesd

InMyDreams wrote: »

But I thought that managed funds were not worth the extra expense and on average are not likely to out perform trackers anyway.

They may not be worth the extra expense if and only if you can and want to do it yourself. If you don't, you have to pay someone somehow and those charges are one way of doing it. The people who say it's not worth it are people who can do it themselves and want to.

An average fund may not beat a tracker, but why would you buy an average fund when you can select one of those that does better than average historically?

Personally I wouldn't buy any of the HL managed funds but that's because I'd rather go looking for those I think might do better. For someone who doesn't want to do that the HL funds are a reasonable starting point. Someone can buy those today and switch to others as they become more comfortable, if they like.

InMyDreams wrote: »

Also, going back to the link jamesd posted and looking at the Multi-Manager Special Situations. I wonder if someone could gently talk me through what the charges are? Firstly, I see there is a 5% difference between the buy and sell prices. This I understand; my endowment works the same way. On buying the units, I've essentially lost 5% of the value of my payment up front. Is this what is meant by the "5% initial charge"?

Right. The 5% initial charge is in the form of the higher Buy price.

InMyDreams wrote: »

Or am I charged another 5% on top?

No extra charge.

InMyDreams wrote: »

What's the 5% 'initial saving' all about?

If you buy this fund from HL you won't pay the higher Buy price because all of that 5% price premium is discounted. Instead you will get it for the Sell price.

It's one reason why I'm happy to suggest them for people who want easy: it's cheap to buy and sell them since you don't lose that 5% initially. Not best, but easy to start with and not bad.

InMyDreams wrote: »

And an annual charge of 1%? Would that be 1% of the value of the fund each year taken off?

Right. 1.5 is very common, 1% is fairly low

But you also need to look at the total expense ratio (TER) because that covers other costs involved in buying, selling and managing that reduce returns. In the case of a fund of funds those could be higher than usual because of the annual charges of the funds the fund of funds holds inside it. You can see on the "Key Features" tab that the "Total expense" is 2.03 and that's a very high level because it includes those costs of the underlying funds. This 2.03% isn't in addition to the base 1% - it's that plus the underlying funds', effectively two lots of 1%.

This TER is where you're paying that extra cost for selecting the funds - the 1% of the funds plus the 1% on top for the manager who picks them.

A more normal TER might be 0.2% higher than the annual management charge (AMC).

InMyDreams wrote: »

In which case maybe the charges I'm paying on my endowment aren't as extortionate as I thought. I pay £2.80/month out of my premiums of £15, but as a percentage of the current surrender value that’s more like half a % per year rather than 1%.

The endowment will also have charges. They just aren't shown in the same way, more likely just to be not disclosed at all and hidden in a lower overall return.

InMyDreams wrote: »

I’ve posted on the mortgages and endowments board about my endowment because I think I want to cash it in and replace it with a s&s isa, but now I’m thinking maybe I’m better leaving it as it is.

It's just less transparent about the charges, not necessarily better. One of the good trends in funds compared to endowments is better disclosure of charges.

InMyDreams wrote: »

Also, if I used selftrade but didn’t wrap the funds in an isa, would that save me a £25/year fee? I’m not currently a tax payer. I just thought I might as well wrap them up rather than not as hopefully I will be paying tax again in the future.

I don't know about Selftrade charging. Using the wrapper is a good idea, whoever it's with.

InMyDreams

jamesd wrote: »

An average fund may not beat a tracker, but why would you buy an average fund when you can select one of those that does better than average historically?

Aha! I've been listening too hard to the 'previous performance is no guarantee' line. I've been hearing 'previous performance is no indication'. :rolleyes: I see the difference. Thank you. This is like saying an average savings account won't beat your mortgage rate/inflation (except that then at least the interest is guaranteed, at least until they change the rate...)

jamesd wrote: »

Personally I wouldn't buy any of the HL managed funds but that's because I'd rather go looking for those I think might do better. For someone who doesn't want to do that the HL funds are a reasonable starting point. Someone can buy those today and switch to others as they become more comfortable, if they like.

This also makes perfect sense now. I need to decide what to do with my endowment pot, so it sounds like HL might well be an option while I find my feet and decide if I want to try to do better myself. We're also not talking a huge amount of money at the moment (~£6.5K). Cheap to move around and set up sounds good. Not like an endowment which even if it does exceptionally well, the front loaded fees mean you inevitably loose money to start with. That's the trap I'm scared of. I *did* understand the endowment concept when it was sold to me and I would never claim it was miss-sold. I just didn't do my homework to realise that better alternatives were available.

jamesd wrote: »

Right. The 5% initial charge is in the form of the higher Buy price.

Yay :T I'm not as daft as I thought.

jamesd wrote: »

But you also need to look at the total expense ratio (TER) because that covers other costs involved in buying, selling and managing that reduce returns. In the case of a fund of funds those could be higher than usual because of the annual charges of the funds the fund of funds holds inside it. You can see on the "Key Features" tab that the "Total expense" is 2.03 and that's a very high level because it includes those costs of the underlying funds. This 2.03% isn't in addition to the base 1% - it's that plus the underlying funds', effectively two lots of 1%.

This TER is where you're paying that extra cost for selecting the funds - the 1% of the funds plus the 1% on top for the manager who picks them.

A more normal TER might be 0.2% higher than the annual management charge (AMC).

Oh, this is starting to make so much more sense now :j
So would these extra costs due to the charges of the underlying funds be taken into account with a lower unit price then? Is that why you can't see them?

jamesd wrote: »

The endowment will also have charges. They just aren't shown in the same way, more likely just to be not disclosed at all and hidden in a lower overall return.

Yes, I appriciate that. But I had assumed though that all these extra charges would have been paid up front and would be why the endowment made so little money in the early years. (Well, that and the poor performance of the markets, obviously). But even when we took it out and we didn't know the markets would crash and even then it was projected to be worth a big fat zero after 12 months, despite paying in over £2K. So when it was actually worth about £750 I was quite pleased. Are you saying that I'm *still* paying even more hidden charges and that's being reflected by a lower unit price? My thinking was that as I had already paid all the high charges, from this date forward I have few charges left to pay so it might be worth sticking with. The disaterous effect of having all those charges front loaded will stay with me whether I move my money or not.

Am I getting close to understanding all this?

But hang on... if the charges are just being reflected in lower unit prices, wouldn't that just look like the fund itself was not performing so well? So by looking at the performance and the charges, you're taking the charges into account twice.

Oh dear... I'm sure I'll get there in the end. Thank you for your patience.

dunstonh

FTSE UK Trackers are in the "UK All Companies Sector". As the name suggests, all the funds that invest in the UK stockmarket are in there. This includes trackers, active manged and passive managed funds.

Take a look for yourself at http://www.trustnet.com/ut/funds/perf.asp?sort=30&ss=0&txts=&txtss=&columns=&page=2&booIMA=1&reg1=all&sec=all&ima=ukallcos&unit=all&type=all

This is a table of UK All companies sorted with 3 year cumulative performance. Remember, we are lookin at historical performance only. Not future potential.

You have 344 funds in this sector. The FTSE 100 trackers are there around the 200-250 mark and FTSE all share trackers are there around the 150 mark.

The MF use a bit of SPIN in their promotion of trackers. A FTSE100 tracker should outperform a passive managed UK Growth fund investing in the FTSE100. No argument there. However, most funds in that sector dont track or include only the FTSE100 and therefore dont suffer the problems associated with large caps over the last 10 years.

Also, MF do not present the real risk of trackers. FTSE All share/100 trackers are typically medium/high. When they say "If we take a 'slightly risky' FTSE100 ISA route" that is misleading. They are not slightly risky. On a 1 to 10 scale a FTSE100 tracker would around 7. There are a lot of equity options rated at 5 and 6.

I'd be happy with 10% even if that's near the bottom

You wont get that with a FTSE 100 tracker. Lets look at the popular L&G UK 100 index tracker.
Cumulative (sector average in brackets)
1 year 8.23% (12.01%)
2 year 38.18% (49.10%)
3 year 51.27% (61.38%)
4 year 76.91% (102.26%) <----remember what I said about doubling in that period. Average fund or higher did. Not the FTSE100 tracker though
5 year 37.51% (58.00%)
6 year 20.04% (41.31%)
7 year 15.57% (39.41%)
8 year 12.49% (47.63%)

So you can see that not once if you had started at any point in the last 8 years (since fund launch) would you have come close to sector average. Remember sector average is just the middle point. Not the best point.

Individual year performance shows that in that 8 year period the fund was bottom quartile 4 years, 3rd quartile for 2 years and 2nd quartile for 2 years. It hasnt made top quartile and has spent more time at the bottom than anywhere else.

With this fund, yes it would be cheap but over 8 years you would have turned £10,000 into £11,249. The average fund would have been £14,763.

Who would be happier? the person with the tracker only getting £1249 but paying slightly less charges or the person with £4,763 (after charges).

Charges are a secondary consideration. Look to where and how you want to invest first, then look at tax and charges second.