(Pseudo-)Vanguard LS 100 in S&S ISA

JFD10

I'm looking at opening my first S&S ISA with Cavendish Online as they offer (one of) the lowest platform charges of 0.25%.

However, they don't offer the vanguard LS 100% equities fund that I was hoping to use as my core holding. I could still go with Cavendish Online and build a close replica of the vanguard LS holdings with the same ratio mix (except the FTSE UK equity index and FTSE UK all-share index as Cavendish do not offer the vanguard variants of these funds, but they have other fund providers that do offer them).

As there are no charges on buying/selling, I'm tempted to go for this option and perform my own rebalancing each quarter (using newly-deposited cash). I'm planning on holding for at least 10 years (probably much longer) and am happy to accept high risk for the chance of higher returns.

Is there anything else that I've missed or would need to take into consideration?

Additional info: the other option I've been tempted towards is iii, but after the reviews I've read on the forum, I'm now much more dubious of investing with them.

ColdIron

Why not have a look at Charles Stanley Direct, they offer the VLS range at 0.25%
To do your own rebalancing seems to me to negate some of the built in advantage of this fund

Linton

Holding a broad range of funds and rebalancing occasionally is standard investment practice, so no problems there. Though I would question why you would want to duplicate the LS100 fund in particular. As you are happy to invest at a higher risk for higher returns you may wish to consider investing in areas that would not feature strongly in the LS100 mix. For example whilst LS100 uses capitalisation weighted trackers and so focuses on the largest companies world wide you may wish to consider including some small companies funds.

On iii - I have a large ISA with them and am perfectly happy with their services.

JFD10

ColdIron wrote: »

To do your own rebalancing seems to me to negate some of the built in advantage of this fund

Linton wrote: »

Though I would question why you would want to duplicate the LS100 fund in particular. As you are happy to invest at a higher risk for higher returns you may wish to consider investing in areas that would not feature strongly in the LS100 mix.

Very solid points there. The initial attraction towards the LS100 was the 'set it and forget it' mindset that I could have with that fund but, since the start of my research, my investment aims and ideas have changed slightly. I'm not sure why I was so hung up on wanting the LS100 now when I'm much more comfortable with the idea of my own rebalancing and drip-feeding cash in on a quarterly investment period.

ChopperST

If you want to be a bit more hands on but still use a tracker fund then I'm pretty sure Cavendish offer the Fidelity and HSBC trackers. You can set your allocation and rebalance quarterly or annually?

Ryan_Futuristics

Just two things I'd say (based on mistakes I made early on)

1) Don't be too reductive in your choice of platform ... A platform like Hargreaves & Lansdown might charge 0.2% more, but unless you want to be a completely passive investor*, don't discount the value of information and research (they want their customers to make money)

2) We all could be wrong on this, but according to the most consistent valuation tools we've got (such as the CAPE ratio and market/GDP), the US market (which features heavily in the VLS funds) looks very overvalued ... Now it probably will continue to rise - and it has risen much further in the past - but it is scheduled for a fall ... So any money you put in now is likely to lose value over the long-term (the worst case scenario would be that you keep putting money in while it's high - it's actually much better to invest while it's nose diving)

H&L's Wealth 150 list is a good representation of where informed investors are investing (mostly UK Income funds and Asia Pacific, and you'll notice no US funds or trackers are recommended while they're so expensive)


* - passive investing with an index tracker has worked well while the US has been on this long-term rise - the UK's actually been quite flat since 1999 ... But with new global markets emerging, and different systems in place affecting markets, the last 10 years doesn't tell you anything about the next 10 years ... Economists are quite split on whether they believe this rise is sustainable in developed markets - either way, avoiding overvalued markets has always been key, and any research on passive funds outperforming tends to start from points where the market's been reasonably cheap (and is likely to rise anyway - which is why chimp funds (random stock selections) also do well on those studies)

jimjames

Ryan_Futuristics wrote: »

Just two things I'd say (based on mistakes I made early on)

1) Don't be too reductive in your choice of platform ... A platform like Hargreaves & Lansdown might charge 0.2% more, but unless you want to be a completely passive investor*, don't discount the value of information and research (they want their customers to make money)

2) We all could be wrong on this, but according to the most consistent valuation tools we've got (such as the CAPE ratio and market/GDP), the US market (which features heavily in the VLS funds) looks very overvalued ... Now it probably will continue to rise - and it has risen much further in the past - but it is scheduled for a fall ... So any money you put in now is likely to lose value over the long-term (the worst case scenario would be that you keep putting money in while it's high - it's actually much better to invest while it's nose diving)

H&L's Wealth 150 list is a good representation of where informed investors are investing (mostly UK Income funds and Asia Pacific, and you'll notice no US funds or trackers are recommended while they're so expensive)


* - passive investing with an index tracker has worked well while the US has been on this long-term rise - the UK's actually been quite flat since 1999 ... But with new global markets emerging, and different systems in place affecting markets, the last 10 years doesn't tell you anything about the next 10 years ... Economists are quite split on whether they believe this rise is sustainable in developed markets - either way, avoiding overvalued markets has always been key, and any research on passive funds outperforming tends to start from points where the market's been reasonably cheap (and is likely to rise anyway - which is why chimp funds (random stock selections) also do well on those studies)

I think you've been taken in by the HL marketing machine.

Paying double the price for the same product isn't very mse.
The 150 list may be useful as a pointer but you don't need to be a customer to view it.

Ref American funds in the list, they've never had any significant funds on the list for as long as I can remember. Nothing to do with market levels at all. Pretty surprising that they can find plenty of funds elsewhere but not in the biggest stock market really.

Rollinghome

jimjames wrote: »

Ref American funds in the list, they've never had any significant funds on the list for as long as I can remember. Nothing to do with market levels at all. Pretty surprising that they can find plenty of funds elsewhere but not in the biggest stock market really.

Indeed, and until just this year all their sales literature, Investment Times etc. was very adept at dissuading investors from any kind of tracker fund or investment trust: not unconnected with the fact that both paid them no (or minimal) trail commission. The message was that both types of investment were spawn of the devil and they used some very questionable techniques to prove it.

Since the RDR deadline in April with the banning of all commission on new investments, the scare tactics have stopped and it seems that trackers and ITs aren't so bad after all; they're all fine so long as you give HL your money to invest one way or another.

So there may be good reasons to pay HL 0.45% (plus a whole range of other sneaky charges in order to keep their margin close to the 0.65% they've long enjoyed) but being subject to their very effective sales techniques and literature probably isn't one of them.

bowlhead99

Ryan_Futuristics wrote: »

1) Don't be too reductive in your choice of platform ... A platform like Hargreaves & Lansdown might charge 0.2% more, but unless you want to be a completely passive investor*, don't discount the value of information and research (they want their customers to make money)

To someone who is savvy enough to shop around for a cheaper platform, they are probably savvy enough to find their own 'research'. There are always lots of articles and commentary (sometimes thinly veiled advertising) on Trustnet together with a huge amount of data and better graphing tools than HL. Morningstar is another good place for data (and some platforms are linked in with that site's research tools, rather than spending lots of money laying it out in their own proprietary format).

Having said that if you are at the point in your investing career where 0.2% is not a huge actual amount of pounds, and you want a prettier site with famously good customer service, using HL might not be a big deal.

The analogy I used a couple of years ago was - I use an Android smartphone and as a very IT literate person have always valued the extra performance per pound and the less restricted functionality of that platform versus Apple. If I was getting a smartphone for my OAP parents I would probably just get them an iphone because it is pretty intuitive with less to go wrong even though you pay more for it and you can't even do simple things like change the battery or add in a memory card.

Paying more money for a product with worse features would irritate the hell out of me. But my parents don't want to change the battery or add a memory card or multitask or have widgets on their homescreen, they just want an easy interface and all their friends have iphones so why make it more complex for them? They'll do just fine at HL with their extra £20 per £10k invested and they won't care about holding investment proceeds in multiple currencies or booking trades on extended settlement or whatever.

For the OP though, if looking for a supercheap set of trackers like V Lifestrategy at 0.29% or Blackrock Consensus at 0.2% or a Fidelity UK Index at 0.09%, it seems a bit crazy to then pay 0.45% to the platform provider.

2) We all could be wrong on this, but according to the most consistent valuation tools we've got (such as the CAPE ratio and market/GDP), the US market (which features heavily in the VLS funds) looks very overvalued ...

Cape and marketcap/gdp are flawed measures.

Cape for example, it aims to smooth out annual earnings by using a 10 year average of earnings. But earnings generally increase over time. And especially when you have new entrants in a market, particularly in disruptive new industries - technology firms booming, old codgers like print media fading - their earnings of 10 years ago may bear no relation to what they are earning now.

Facebook for example has been having 100%+ earnings growth and is forecast growth of 30%, 40% and 60% over the next 3 years, longer term 30%+ average for 5 yrs. You might not believe that particular firm will achieve the figures as more advertising moves online - but social media has shaken up how people do business and if you look forward it's trading at 30x 2016 forward projected earnings. Maybe not too outrageous in a global growth industry of online advertising and connectivity. But it would be on an outrageous price/earnings if you compared it against the average of its last 10 years annual financial reports.

The other 'feature' of CAPE when applied to the last decade is that we have had two major crashes/recessions which does not always happen in one decade. So, the Q1 2009 shockingly bad earnings reports which helped to drive the US markets down to the bottom in early 2009 (80%,90% down on previous year) are sitting in our 10 year period depressing the average earnings that we are measuring the current prices against.

I get that we are trying to smooth 'cycles' but the world has recovered from those earnings now while they are still counting against us in the CAPE, making it look a relatively high figure (though still a long way below the 1999 levels). The last post- dotcom crash, post-9/11, post-Enron depression of 2002 - 2004 had some pretty bad sets of corporate earnings. As they fall off the chart and are replaced with the much brighter current earnings levels from 2014 we will be looking at the CAPE falling without prices needing to fall at all. As an aside, as the corporate cash piles resulting from cheap finance and uncertain markets have not been fully invested by companies we would expect a good boost to earnings as investment projects come to fruition and 2014/5/16 profits could be a lot better than the 2002/3/4 profits they're replacing within the CAPE calculation.

Also, as you mentioned market cap / GDP looks high, here is a thought. When the first ever company was listed on the stock exchange the market cap of that market as a ratio to GDP went up by infinity percent. It didn't mean the market was inherently overvalued.

As a larger portion of businesses in developed economies move from the unlisted to listed world to raise capital (a healthy public market is a very good thing), market cap to GDP will rise. If facebook was a private business worth $50bn based on phenomenal revenues... and lists on Nasdaq - then suddenly one day the market cap of the Nasdaq increases against the country's GDP even though the revenues moving through the company are the same as they were the day before, right?

Now it probably will continue to rise - and it has risen much further in the past - but it is scheduled for a fall ...

That strikes me as a pretty useless sentence. It is 'scheduled' to fall? but 'probably' will continue to rise? So, it is not scheduled at all. And it has previously risen much further apparently, so has previous form. But also things that go up sometimes go down. So nobody knows.

So any money you put in now is likely to lose value over the long-term

Wow, I'm likely to lose money in the long term by being invested in equity markets now? Don't tell that to the investors of the $30+ trillion currently sitting in equity markets. I'm sure they will dump all their holdings and cause a meltdown.

If I can rephrase for you, you mean that on the balance of probabilities if FTSE capital value closed today at 6741, then it is likely that you can probably invest at a price of lower than 6741 at some time in the next x years. It might be tomorrow or it might be next year. If we knew when next year and by how much it would fall, we could know whether or not to buy today and get another year of dividend's under our belt before selling. Unfortunately we can't know this.

What we can say with a lot of certainty is that buying companies now with FTSE over 6500 is a worse deal than if you were buying them at 3500 and a crazy low PE. With benefit of hindsight that was way too low a level which is why some markets put on 50% very quickly when QE kicked in and they realised access to finance wasn't dead. But you don't need to wait for 3500 again before trying to 'buy on the way down'. Sure, we can go back to the days of Rothschild in the 18th century - 'buy when there's blood on the streets' and find that people have very often made a killing on the markets when fear is gripping those around them. However, you might be waiting 10 years for that...

So instead of waiting and then trying to buy on the way down, buy now, and still buy on the way down, and buy on the way back up, and keep buying. In the end you will have bought a lot over a long and prosperous life and you will have a lot to show for it because FTSE at 6700 (whether on a capital basis or a total return basis) is not as high as it will ever go in your lifetime. If you have had an eye on what looks relatively better or relatively worse as you did all this buying, you will do just fine.

H&L's Wealth 150 list is a good representation of where informed investors are investing

If it is (within HL's investor base), it's because the causation is backwards. They are not saying these seem to be most popular out there, let's write a list. They are writing a list and then they become the most popular.

HL is one of the most popular platforms and people are guided towards those funds that are featured most heavily. The Wealth 150 is a marketing list of funds that they have chosen to promote because they were paid to. They received up to three quarters of a percent of the core management fee, maybe more, plus other un-specified payments, for promoting a fund where the investor paid 1.5% in annual fees. They then rebated a little to the investor and acted like they were doing them a favour.

The Retail Distribution Review and later Platform Review have changed the market significantly so that they don't get the same massive kickbacks and we all pay them a direct fee and the manager a lower price for our funds (except for tracker investors who never paid a high price anyway, they are paying more now overall with the monster 0.45% platform access fee). The Wealth 150 still exists, with its faults, and is still described as 'our favourite funds' rather than the most popular funds in the whole investment universe.

you'll notice no US funds or trackers are recommended while they're so expensive)

This is a very fundamental misunderstanding. They have never tried to 'call' one sector or another and tell you not to invest in something that looks a bit high!

Instead they used to say something along the lines of, "our team has seen strong returns from XYZ Fund, and market conditions may not continue to be so favourable, but the manager believes that they are well placed to navigate the uncertain times ahead with plenty of opportunities ; if you are as good as this manager is, at finding them". And pocket their payment for marketing and distributing the fund to retail customers. They have never promoted trackers because trackers could not pay them a percent as kickback when the tracker was only taking 0.2% off the investor.

They have now highlighted a subset of their marketing list as the 'Wealth 150+' where they negotiated special fees because of their buying power. So they can get you into a special class of Blackrock or Lindsell Train fund and save you 0.10% on buying the fund somewhere else - and they put a big star over the fund name and tell you it is a screaming bargain. Of course, if you went somewhere else you could very easily afford that fund to be 0.10% more expensive because you were saving 0.2%+ on the platform fee.

And while you're doing that you could look around at other funds and fund managers that they don't have their promotional weight behind, and find that they are as good or better. Still, they don't want you to look around because they need people to invest in the 'special' funds so they can keep getting the bulk-buy discounts on it. So they pump them up with lots of marketing and try to make it simple to stay because they appear so helpful. It is all smoke and mirrors to preserve their revenues at your expense.

* - passive investing with an index tracker has worked well while the US has been on this long-term rise - the UK's actually been quite flat since 1999

UK is probably up 55-60% on a total return basis since 1999, I can't be bothered doing the exact maths. Is that 'quite flat'? I guess it is not a great figure when annualised over 13.5 years and there was certainly a period up to early 2006 when it had fallen and was just recovering the lost ground through capital growth and dividends. But the return since 2006 has easily been inflation-beating.

... But with new global markets emerging, and different systems in place affecting markets, the last 10 years doesn't tell you anything about the next 10 years ...

True. So what you said about whether we are due a correction or not can probably be disregarded, right?

Economists are quite split on whether they believe this rise is sustainable in developed markets - either way, avoiding overvalued markets has always been key

So, developed markets may be overvalued is one school of thought but half the economists don't believe it. The other school of thought is that developed markets will give a significantly better return than undeveloped markets once you adjust for risk.

If you look at the big emerging markets, IMF forecasts for Russia over the next 5 years are to have lower GDP growth than the UK and US; Brazil not much higher than the US; China right up at the top end at 7% a year but this is a significant comedown from the 10% managed over the last decade which was the basis for EM's previous high valuations. So EMs are not necessarily the no-brainer way forward if you have money to invest and you can see UK and US growing again with the benefits of more robust stable markets rather than whatever environment the EMs can cobble together.

Personally I like EMs. But there is no point saying it's key to avoid overvalued sectors if you are going to then say that actually economists and fund analysts are split about what sectors are overvalued and where the growth will come from and whether the market growth is correlated with the GDP growth etc etc.

and any research on passive funds outperforming tends to start from points where the market's been reasonably cheap (and is likely to rise anyway - which is why chimp funds (random stock selections) also do well on those studies)

I've dedicated some pretty big posts before to refuting the notion that passive is best and that all the research speaks for itself and does not have flaws and that passive index funds are the ideal solution to any problem in any market. Because they are one solution to one strategy.

However I think it is disingenuous to use the simplistic argument that all the research for passive funds always cherry picks its dates. Any reasonable study uses a whole load of date ranges and a whole load of start points to try to prove its point. You are right of course that in an environment where the total market is going up then a chimp fund will also be successful. But whenever people here are talking about passive fund research, they are usually shouting that it works over every reasonably long time period - because cherry picking dates would just see them shot down instantly with a different set of dates.

jimjames

Ryan_Futuristics wrote: »

Just two things I'd say (based on mistakes I made early on)

H&L's Wealth 150 list is a good representation of where informed investors are investing (mostly UK Income funds and Asia Pacific, and you'll notice no US funds or trackers are recommended while they're so expensive)

Having had more chance to read your post and the subsequent replies I think HL will be disappointed in your incorrect interpretation of everything they say in almost every issue of Investment Times.

They never advocate timing the market and certainly don't remove funds from the 150 based on market values. The mantra they repeat is "time in the market not timing the market", pretty much the opposite of your suggestion.

I'm sure they will be pleased with your assessment of their marketing list they call the Wealth 150 though as it is based on their views not what investors have bought - though that may happen from the list but as a trailing measure not leading one.

Ryan_Futuristics

@bowlhead

1) If I was purely passively investing in a local market, then every 0.1% would count

I invest directly in funds and trusts as much as possible (although H&L is 0.25% as soon as you're over £250k), but coming here, many people are talking about investing in US trackers and bond funds, and that makes me think people would benefit from more guidance early on (I certainly did) ... Information has an economic value - and I believe Investor's Chronicle is the only major site which doesn't receive commissions to recommend funds (I'd have to double check that)


2) re: losing value long-term

CAPE, price/book, GDP, Gordon Growth, PE, etc are imperfect ... But the US's Cape ratio's been usefully predictive of annualised 10-year returns and market crashes, and CAPE-based asset allocation strategies (as demonstrated by Meb Faber) have exponentially outperformed market-weighted indexes

Right now, almost every metric makes the US overvalued ... If you believe the US market can continue to rise over the next 5-10 years without a major correction or long-term downtrend, then you're a 'bull'

It's certainly possible, and bulls have conviction in their beliefs, but the best predictive models we've got are generally not supportive ... And one thing that is true: good models have always outperformed human intuition over the long-term


3) The UK's been in a cyclic bear/bull since the late 90s - so your capital growth would depend entirely on which point in the phase you got in - right now we're at the worst point: the top ... (although adjusting for inflation, it's been on a downward trend)

The most positive voice for the UK market is the CAPE ratio - on PE and price/book, we look overvalued - but our CAPE's been getting healthier as we've been on this inflation-adjusted downtrend

(Incidentally, I tend to think Neil Woodford's fund being public will ensure all the companies he buys remain persistently overvalued, as many funds and investors follow his lead ... I'd certainly bet on it desicively outperforming the index over the next 10 years)


4) History doesn't tell you anything about future

It doesn't, but markets reverting to Mean (whether it's Cape or m/GDP) is about the closest to a certainly you can find


5) re: Russia vs US GDP growth

This is one of the most interesting aspects of value investing

If the US is 50% overvalued (according to Cape or market/GDP) then it has to grow its market considerably just to maintain its valuation - it's playing catchup

If Russia is 50% undervalued, then even with very minimal GDP growth (just enough to avoid 'despair') all it has to do is revert to Mean to give you a 200% return

When you look at long-term global CAPE, the high returns are largely coming from market correction - the fact the countries had low CAPE was predictive of relatively poor GDP growth

If you always invest purely on growth, you'll always be investing in overvalued markets (investment trusts are a great example - you have to balance growth potential with value ... You buy 10% above nav, you could still lose money if the fund grew 9%)


@jimjames

Value investing shouldn't be muddled with market timing ... Buying cheap is the basic rule of investing

In their current Investment Times they're recommending Japan because it's cheap compared to where it's traded in the past, they're also generally dissuading people from bond funds because they're expensive

Value is really knowing how much to weight your portfolio to different regions and sectors - any financial advisor or fund manager is likely thinking as much about value as growth

Market timing is more about trying to second guess market volatility ... Value is how markets tend to move when you smooth out the volatility


Re: 'Time in the market'

Almost every global market has had periods of 20-30 years negative growth ... Even the US ... You have to take this into account (a lot of the 'popular' advice floating around at the moment comes from studies which only look at a specific period in the market ... There have been many periods where time in the market would have taken a long time to break even ... Pick the right markets)


Re: Hargreaves & Langston's charges

If they're charging an extra 0.2%, but giving you a 0.5% discount on a few core holdings, it might be saving you money

Also if you're rebalancing a portfolio regularly (which you should be) zero charges on fund dealing save a lot early on, and likewise paying into trusts/shares monthly is generally cheap with them

I'd also factor in how well covered they are (knowing of people in the US whose investment platforms went bankrupt and how little money they've managed to get back)

And I'd add, when I started out, if I arranged funds by percentage gain after a while, it would be 4 out 5 at the top were Wealth 150, while the bottom were all bad calls I'd made using other sites, such as Morningstar (which tend to weight much more heavily on past performance)