Anyone investing in Vanguard's UK Equity Income Index fund?

gterr

Hi there,

My S&S portfolio is approx. 70% passive, and heavily invested in Vanguard funds. Overall I have approx. a 70%:30% Equities to Bonds ratio.

I dither a bit about equity income funds: should I hold more of these so that if equities tank I do still get decent dividend payments to soften the blow. At the moment the income funds I do hold are active funds.

I was wondering if anyone here was invested in the Vanguard UK Equity Income Index fund. Might this be a way forward for me: more exposure to decent dividend payers, but with lower fees than the actively managed counterparts?

I wonder if anyone here has considered making this index fund the major (?only) equity holding in an income portfolio?

Thanks for your time.

ChopperST

Its a sensible fund to fold in a diversified portfolio but you are [STRIKE]heavily[/STRIKE] solely reliant on the success of the UK.

How about diversifying to include the US, Japan, Asia / Pacific and Emerging markets.

Do you have a timescale on when you want to draw down? It looks quite into the future with your bond / equity mix?

gterr

ChopperST wrote: »

Its a sensible fund to fold in a diversified portfolio but you are [STRIKE]heavily[/STRIKE] solely reliant on the success of the UK.

How about diversifying to include the US, Japan, Asia / Pacific and Emerging markets.

Do you have a timescale on when you want to draw down? It looks quite into the future with your bond / equity mix?

Yes, sorry, should have been clearer: I do have a diversified portfolio, also a long time scale for investing (20+ years, though will want to start taking an income, either from the dividend income or total return, starting in about 5 years' time).

I have passive investments with Vanguard Lifestrategy funds, including the 100% fund which has some exposure to Japan and Asia. In addition, I have some side funds to cover Emerging Markets, UK and Global Small Caps, Property etc.

I was wondering if the VG UK Equity Income index fund could replace my existing UK equity income funds, and if perhaps this holding should account for a higher proportion of my whole portfolio, to give some protection should UK equities suffer a setback.

ChopperST

If you are looking at taking an income in the next 5 years I'd strongly consider your bond equity split?

Potentially rebalance into two portfolios (one for the 5 year time frame and one for the 20 years).

Doesn't the lifestrategy fund also invest in the UK giving you an element of overlap if you do take out the UK equity fund?

Edit - Its about 35% UK bias if you have the 100% Equity fund

Perhaps listing all your holdings will help as there appears to be a lot of duplication?

JohnRo

On a (not very) similar note, I've been giving thought to the idea of shifting my diversified tracker portfolio to a more focused investment, solely in the vanguard global smaller companies tracker fund.

A high risk, regional and sectoral diversification and a long term punt on the entire capitalist world as we know it not ending in the next decade or two.

Linton

I dont think that you should look to Equity Income funds to reduce the capital value volatility in your UK investments. Income funds were badly hit in 2008/9 as the banks used to provide good dividends. Since then dividend paying shares have performed better in capital value than the index, probably because people have invested in them as an alternative to low interest rates. So arguably they will suffer when interest rates return to normal. Income funds in my view are best used for income.

I personally invest directly in some 20 UK shares split fairly evenly between the FTSE100 and FTSE250, and in a range of managed funds for foreign income.

There are some good dividend paying investment trusts which you may find worthwhile investigating. Several of these have never reduced their dividend for many decades.

Linton

JohnRo wrote: »

On a (not very) similar note, I've been giving thought to the idea of shifting my diversified tracker portfolio to a more focused investment, solely in the vanguard global smaller companies tracker fund.

A high risk, regional and sectoral diversification and a long term punt on the entire capitalist world as we know it not ending in the next decade or two.

In my view apart from the regional and sectoral diversification not a great idea for a serious investor....

I am a great fan of small companies investments however I would not consider putting anything more than 10-20% of my money in them. They are much more volatile than larger company funds perhaps dropping 50% in 2008/9.

Small Companies is one area where I believe there is good reason to believe that managed funds have an advantage as most of the market ignores it and so research on individual companies is rarely available to the general public. It is only recently that trackers have moved into the area; there is very little long term evidence.

Small company investing I believe depends on good local knowledge. So I am suspicious of any global small companies fund. Over the past 3 years the Vanguard fund has been running, it and its index (and a randomly chosen managed global SC fund) have been roundly beaten by average focused UK and US SC managed funds.

Finally, the concept of a capitalisation weighted small companies tracker seems somewhat bizarre to me - why would one want to invest predominantly in the largest "small companies" and then suddenly stop investing in them when they grow too large to be eligible?

JohnRo

Linton wrote: »

Finally, the concept of a capitalisation weighted small companies tracker seems somewhat bizarre to me - why would one want to invest predominantly in the largest "small companies" and then suddenly stop investing in them when they grow too large to be eligible?

Presumably because the growth that catapulted them to being "too large" to be included in the index (if indeed they ever do mange that) is what the fund specifically aims to capture.

What it lacks in individual weight is made up in quantity and such growth will invariably at some point limit future growth potential (at least as an aggregate) because the increasing weight of a company provides a future growth drag that wasn't there as a much smaller company.

Perhaps I'm barking up the wrong tree entirely but the analogy I picture is speed and wind resistance, talking in broad general terms of course, where faster equates to larger but also where it's the acceleration you're seeking and trying to capture by placing small bets on a large number of competitors who've at least managed to get themselves off the starting line.

As for the potential market falls, that is genuinely a risk I'd be willing to take, you mentioned 2008 specifically, which is probably about as bad as it can get but the recovery in price since then reflects the nature of the investment and helps to put those price drops in context somewhat.

gterr

ChopperST wrote: »

If you are looking at taking an income in the next 5 years I'd strongly consider your bond equity split?

Potentially rebalance into two portfolios (one for the 5 year time frame and one for the 20 years).

Doesn't the lifestrategy fund also invest in the UK giving you an element of overlap if you do take out the UK equity fund?

Edit - Its about 35% UK bias if you have the 100% Equity fund

If the stockmarket continues to follow its normal upward trend, albeit with some volatility, then I don't need to rely on the natural dividend yield from my portfolio to produce an income if/when I need it, since I'm happy to generate income from the total return, by selling funds at the same time as annual rebalancing.

The reason I'm wondering about increasing my holding of funds that produce above average dividends (and that's the spec of the Vanguard UK Equity Index fund) is to provide a little protection in the event of a longer term market setback. I have three years' buffer in cash, but should a market slump last more than three years I might need to sell funds at that stage to satisfy my income requirements. If I held more 'good' dividend payers that might satisfy more of my income requirements, and reduce the need to sell funds at unfavourable times.

Also, since I'm largely a passive investor, I am attracted by the low fees for holding this Vanguard index fund.

I'd rather not complicate the issue by holding three separate pots: a short-term portfolio, a long-term portfolio, and a cash buffer.

When it comes to Equities: bond split - I used to know what I thought was best for my age, but increasingly I think the older guidelines have little relevance, especially for someone like me who is entering retirement but NOT intending to buy an annuity any time soon. I've revised my targets all the way up from 40:60 equities: bonds to 70:30 equities: bonds, and even then my bond holdings are high in corporate bonds and low in gilts.
But, as I said above, I have a 3-year income buffer as cash, plus another 30k emergency cash fund, and this lowers the effective overall equity percentage.

You are right about overlaps between fund holdings. It's very hard to avoid.