Choosing funds - diversification

Surreyboy

I feel quite sad posting this on a Saturday night - I must get out more :-)

I have a pension, & a S &S ISA which I'm treating as an extension to the pension. The investment period for both is about 25 + years, when I retire.

I want to invest in a global tracker now and I may invest in a UK tracker in the future. I was considering investing in the Fidelity Index World tracker which has a TER of about 0.15% (& seems to have a low tracking error), but this includes the UK and if I subsequently invest in a UK tracker there would be overlap. Does this matter much? I think the Fidelity fund only has about 8% in the UK. Alternatively, I could invest in the Vanguard FTSE Developed World ex-Uk , but this has twice the TER of the Fidelity fund.

On a similar note, I have part of my pension in a UK Smaller Companies fund (about 6-7% of my entire 'portfolio'). I was thinking of investing in a global smaller companies fund in my ISA and the best/most consistent seems to be the F &C Smaller Companies trust, but this has 27% in the UK. Again would this be too much overlap? (smaller comps may be due for a bit of a fall, but I'm investing for the long term and was going to invest monthly to spread risk).

(I have a reasonably diversified portfolio with property, some bonds and global shares)

Thanks!

masonic

Overlap doesn't really matter as long as you spot it and correct for it to end up with the overall percentage allocation you intended.

In terms of the smaller companies, the FTSE All share is composed mostly (about 80%) of companies from the FTSE 100, leaving about 20% of smaller companies, so you're unlikely to go overboard on UK smaller companies by adding the smaller companies fund.

Surreyboy

Thanks for the reply. I was really just thinking about overlap between global (incl UK) tracker vs Uk tracker, and, separately ,Uk Smaller comps vs global (incl UK smaller comps).

masonic

Well, it would be helpful to understand what percentage you were planning to invest in each fund, but taking an example where you wanted 60% Global ex-UK, 30% UK All-companies, 10% Global smaller companies:

Investing in the Fidelity fund gives you 8% exposure to the UK, so with a 60% allocation, the UK part would be 4.8% of your whole portfolio, so you could invest 55% in the Fidelity fund and 25% in a UK tracker to end up with 60:30 overall (which would be equivalent to holding the Vanguard fund and UK tracker in the original proportions).

Next, the global smaller companies fund. You already have 6% of your portfolio allocated to UK smaller companies, mostly coming from the UK tracker. If you add your 10% allocation to the global smaller companies fund, you'll end up with an additional 2.7%, making a total of 8.7% UK smaller companies and 7.3% global ex-UK smaller companies (I'm ignoring any global ex-UK smaller companies exposure coming from the Fidelity fund - that could add 5% or more depending on what is classed as a smaller company). The allocation to UK smaller companies is only one and a half times as much as you would already get from the UK index fund.

Edit: and for the avoidance of any doubt, the UK part of the Fidelity tracker should overlap almost perfectly with the UK tracker as they will both consist of mostly the FTSE 100. However, the UK part of the Global smaller companies fund will probably differ substantially from the smaller companies part of a FTSE All-share tracker, so there you will get a 'dampening down' of the active management strategy, which could be a good thing or a bad thing depending on the fund manager's performance.

Surreyboy

Thanks for your advice!