First plunge with Investment trusts

masonic

Ryan_Futuristics wrote: »

(but the ETF route seems prohibitively expensive for us in the UK)

Why do you say that?

Ryan_Futuristics

masonic wrote: »

Why do you say that?

In large part because we don't have trackers for many of the low CAPE regions available in the UK - so you have to buy a lot of US trackers

Which often look like this
http://www.hl.co.uk/shares/shares-search-results/g/global-x-funds-ftse-greece-20-etf

So you couldn't keep it in an ISA, you'd presumably be taxed in the US, you'd pay a dealing fee, and look at that spread (a 14.5% charge off the bat)

Management fees are cheap, but rebalancing wouldn't be

Cambria's GVAL EFT would be another option (as it'd be rebalanced for you) but again you're talking being double-taxed, and a 15% spread


Whereas with something like JPMorgan New Europe, you've got 94% exposure to low CAPE regions, with no spread (potentially no dealing charge), and only a 1% management charge


£100 out of £10,000 to hold a region for a year, tax-free

vs

£1,511.95 out of £10,000 and being taxed twice

masonic

Ryan_Futuristics wrote: »

In large part because we don't have trackers for many of the low CAPE regions available in the UK - so you have to buy a lot of US trackers

Which often look like this
http://www.hl.co.uk/shares/shares-search-results/g/global-x-funds-ftse-greece-20-etf

True, the US listed ETFs are expensive, but there are several UK listed ones, for example iShares has ETFs for Russia, Brazil, Italy, Turkey, Poland; Amundi has one covering Spain. Greece, Portugal and Ireland are trickier, but Lyxor has a range of European ETFs listed in France (e.g. http://www.hl.co.uk/shares/shares-search-results/l/lyxor-intl-asset-mngmt-etf-ftse-athex-20), which look a lot cheaper than the US trackers, and I imagine these should also be more favourable in respect of tax.

Ryan_Futuristics

masonic wrote: »

True, the US listed ETFs are expensive, but there are several UK listed ones, for example iShares has ETFs for Russia, Brazil, Italy, Turkey, Poland; Amundi has one covering Spain. Greece, Portugal and Ireland are trickier, but Lyxor has a range of European ETFs listed in France (e.g. http://www.hl.co.uk/shares/shares-search-results/l/lyxor-intl-asset-mngmt-etf-ftse-athex-20), which look a lot cheaper than the US trackers, and I imagine these should also be more favourable in respect of tax.

Now that Amundi Spain ETF could top up my Spain allocation (that's been a difficulty in my model) ... Interesting consideration on those French ETFs too

Still, with a dozen ETFs, maximum 0.25%-ish hits on TER, spread and platform charges, charges on annual rebalancing, plus a value section of a portfolio probably not exceeding 30% of a total portfolio ...

... (off the top of my head) I think you'd be talking not far off a half £million equities portfolio before you could start calling it a cheap route ... I've always thought of ETFs more as buy-and-hold or market timing tools ... Whereas if I can avoid spreads and dealing charges with open-ended funds (active or passive) I can employ more flexible trading strategies (despite the messiness)

C_Mababejive

How do i find out if an IT is in the FTSE index? I only ask as TD offer DRIP but only for FTSE ITs. Thanks..

Linton

C_Mababejive wrote: »

How do i find out if an IT is in the FTSE index? I only ask as TD offer DRIP but only for FTSE ITs. Thanks..

Any IT you are likely to meet will be in the FTSE - note FTSE doesnt mean FTSE100! I dont know of any which arent, but then I wouldnt hear about them as they would be effectively private companies without publicly available shares or would be listed on a foreign exchange presumably because they were not sold in the UK.

bowlhead99

If you go to the London stock exchange website if you search for any stock and go to its summary page it'll tell you what FTSE UK indexes it's in.
Example TEM, http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB0008829292GBGBXSTMM&lang=en

A rule of thumb is if its market cap (not NAV)is under about £650m it won't be in the FTSE350, which is the index you care about for TD Drip purposes (or if it is, probably won't be for long) ; above that level it probably will be, if it's on the main exchange.I hold HVPE which is getting on for broadly the right size but is not on the main market (Specialist Fund Market instead)

List of constituents here, http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/indices/summary/summary-indices-constituents.html?index=NMX

There's a better tabulation of the 350 on the FTSE site , but you can't click into it: http://www.ftse.com/analytics/factsheets/Home/DownloadConstituentsWeights/?indexdetails=NMX

masonic

Ryan_Futuristics wrote: »

Still, with a dozen ETFs, maximum 0.25%-ish hits on TER, spread and platform charges, charges on annual rebalancing, plus a value section of a portfolio probably not exceeding 30% of a total portfolio ...

... (off the top of my head) I think you'd be talking not far off a half £million equities portfolio before you could start calling it a cheap route ... I've always thought of ETFs more as buy-and-hold or market timing tools ... Whereas if I can avoid spreads and dealing charges with open-ended funds (active or passive) I can employ more flexible trading strategies (despite the messiness)

I haven't crunched the numbers in detail, but these ETFs seem to come with TERs in the range 0.25%-0.75%, so perhaps an average of 0.5%, which could be a saving of 0.25-0.5% over an active OEIC. Spreads on the UK listed ones are low (typically about 0.3%), so are immaterial, especially if your holding period is between 5-20 years. The French listed one I picked out above has a TER of 0.45% and spread of around 0.3%.

In terms of trading costs, perhaps it is sensible to allow 1 trade per holding per year on average (including the final sell), say at £10 a trade. To make it cost effective, you'd want at least £2-4k invested per ETF to make that charge equivalent to the 0.25-0.5% you have saved in management charges. This would mean a holding of around £24-48k in this value part of your portfolio and therefore at least a £70k-£140k portfolio overall. At those levels, you would surely be invested using a platform that charged a flat fee, so this would also be immaterial.

However, you might have a total portfolio of about £36k held on a platform with a percentage based platform charge, say 0.25%-0.45%. In that situation you could opt to hold the ETFs separately with a low cost sharedealing service with no custody fee and low dealing charges, say £6. That would mean you'd save between 0.5-1% in ongoing charges using the ETFs. If you invested £1,000 per ETF, at 1 trade per holding per year you'd be paying 0.6% extra in trading costs, but saving around the same amount in ongoing fees.

Neither of these examples show a significant cost advantage, but they do compare favourably on a cost basis with building a patchwork quilt of OEICs that would give a similar overall geographic exposure and offer the advantage of simplicity.

Ryan_Futuristics

masonic wrote: »

I haven't crunched the numbers in detail, but these ETFs seem to come with TERs in the range 0.25%-0.75%, so perhaps an average of 0.5%, which could be a saving of 0.25-0.5% over an active OEIC. Spreads on the UK listed ones are low (typically about 0.3%), so are immaterial, especially if your holding period is between 5-20 years. The French listed one I picked out above has a TER of 0.45% and spread of around 0.3%.

In terms of trading costs, perhaps it is sensible to allow 1 trade per holding per year on average (including the final sell), say at £10 a trade. To make it cost effective, you'd want at least £2-4k invested per ETF to make that charge equivalent to the 0.25-0.5% you have saved in management charges. This would mean a holding of around £24-48k in this value part of your portfolio and therefore at least a £70k-£140k portfolio overall. At those levels, you would surely be invested using a platform that charged a flat fee, so this would also be immaterial.

However, you might have a total portfolio of about £36k held on a platform with a percentage based platform charge, say 0.25%-0.45%. In that situation you could opt to hold the ETFs separately with a low cost sharedealing service with no custody fee and low dealing charges, say £6. That would mean you'd save between 0.5-1% in ongoing charges using the ETFs. If you invested £1,000 per ETF, at 1 trade per holding per year you'd be paying 0.6% extra in trading costs, but saving around the same amount in ongoing fees.

Neither of these examples show a significant cost advantage, but they do compare favourably on a cost basis with building a patchwork quilt of OEICs that would give a similar overall geographic exposure and offer the advantage of simplicity.

That's definitely something to think about ... Limiting to one trade per year is an idea, and also of course you don't have to hold 12 regions - you could probably limit it to Brazil, Russia, Italy, Spain and Turkey and just accept slightly higher volatility

I guess the sensible thing would be to back test things like 1 trade per year, and see whether that's likely to compromise performance beyond saving ... but I've also got my own (largely unscientific) concerns about market weighted indexes in general


There are some strange anomalies comparing funds ... E.g. we may think of the index as a market fundamental, but really it's just a particular screening strategy that we've adopted as a market indicator (I think it was the a Benjamin Graham beginner's strategy)

But when you compare index tracker performance to things like random portfolios, and the example I heard the other day, weighting a portfolio by how many ppl in the boardroom wear bow ties, you usually beat the index

For me it's not active/passive - I think the real issue is people piling into the same stocks and driving up fundamentals ... There are so many UK equity income funds copying each other's holdings (and you can see that push fundamentals into US equity-like overvaluation) - and I think active management actually has its work cut out matching an index of generally lower valuations (as I think Michael Douglas said "Why do fund managers struggle to beat the index? Because they're sheep, and sheep get slaughtered")

But the popularity of index trackers has risen so rapidly, and I see the same thing happening once it tips past a certain point ... And I think it may hit them harder (when there's effectively no one driving)

Ryan_Futuristics

beancurd wrote: »

True enough, but that's simple maths and markets. No one who knows how an index works or indeed a market should be surprised by it. It's just modern portfolio theory and high school mathematics. It'd be astonishing if the reverse were true. Check out A Random Walk Down Wall Street. It could equally be said a bunch of monkeys beat the average active investor.

Yep ... But at the same time I don't consider that means we're simply at the mercy of chaos, or that a good fund manager doesn't add value

To me it really demonstrates that value is the only consistent driver of returns ... There's also the "growth paradox" - that the lowest growth regions have traditionally given better returns than the highest ... Which is why CAPE models predict better returns from Russia than the US - and I suppose in principle why there's always been an inverse relationship between risk and return

For me the problem with the average active fund is that as long as boards and investors are focused on 1, 3 and 5-year returns, value is going to be a difficult thing to chase ... Bringing it back on topic, I think the out-performance of Investment Trusts comes down to more knowledgable investors, longer horizons, and freedoms and tools given to managers (such as gearing) which allow them to act in contrarian ways