Investment allocation question

System

adamcartney wrote: »

Thanks everyone. I'll look into the small cap option.

I appreciate what you say about duplication between my company pension and the SIPP. I also think to a certain extent I'll duplicating my Fundsmith ISA which is heavily invested in US and UK equities. As I'm only brave enough to invest in equities and bonds I think I will have to live with the fact that my funds duplicate themselves to a degree. I'm kinda regretting putting all my ISA savings into Fundsmith not because of its performance but because if I'd have gone to a platform I could have combined it with something more adventurous.

I also hold fundsmith directly with them, however am in the process of transferring it to my platform so that I have more flexibility to buy/sell and rebalance with other holdings. Will cost a little more due to platform fee, but well worth it for the flexibility.

guymo

Ryan_Futuristics wrote: »

On the topic of bid/spreads, I prefer Vanguard's Emerging Markets tracker - effectively a 5% buy in fee on BlackRock's

It looks more like 0.4% to me: currently 116.7 vs 116.2 for blackrock emerging markets equity tracker d.

Ryan_Futuristics

guymo wrote: »

It looks more like 0.4% to me: currently 116.7 vs 116.2 for blackrock emerging markets equity tracker d.

I've got Class H at Sell: 115.70p Buy: 122.00p

But that's with fund manager's initial 5% charge discounted

I can't find class D on my broker, but it would be very unusual if they weren't taking that charge from somewhere for the same investment

Kendall80

The fidelity index emerging markets tracker is OEIC if you want equivalent buy/sell values. Although it seems to be lagging a few % behind the blackrock offering.

guymo

Ryan_Futuristics wrote: »

I've got Class H at Sell: 115.70p Buy: 122.00p

But that's with fund manager's initial 5% charge discounted

I can't find class D on my broker, but it would be very unusual if they weren't taking that charge from somewhere for the same investment

Right, I can see that class on Trustnet.

I don't quite understand what's going on, because there's no initial charge on the D-class either, and a much smaller spread. OCF on class D is 0.27 versus 0.25 on class H; maybe that's all it takes. Or is there another difference between the different classes?

guymo

guymo wrote: »

Right, I can see that class on Trustnet.

I don't quite understand what's going on, because there's no initial charge on the D-class either, and a much smaller spread. OCF on class D is 0.27 versus 0.25 on class H; maybe that's all it takes. Or is there another difference between the different classes?

I think I have figured it out, with help from
http://monevator.com/why-investors-should-be-wary-of-discounted-funds/

It looks like Class H is a Hargreaves-Lansdown exclusive, where they kindly rebate you a charge that you don't have to pay if you go with another broker, and have a huge bid-ask spread in exchange for a 2 basis point reduction in OCF. Hmmm. I sort of hope I have got this wrong.

bowlhead99

Ryan_Futuristics wrote: »

I've got Class H at Sell: 115.70p Buy: 122.00p

But that's with fund manager's initial 5% charge discounted

I can't find class D on my broker, but it would be very unusual if they weren't taking that charge from somewhere for the same investment

I think you have confused yourself, and potentially the other readers, because that is the published spread before the fund manager's initial 5% charge is discounted...

Your broker Hargreaves Lansdown publish the official price which includes the 5% entry fee but then if you actually place a trade, you don't pay the 5% entry fee because, as HL love to tell you:

Fund manager's initial charge: 5.00%
HL saving on initial charge: 5.00%
Net initial charge: 0.00%

Which sounds like they are being nice to you but in reality no mainstream DIY supermarket platform (or IFA platform) makes you pay those initial 5% charges on the retail fund classes.

So, the headline bid/offer that you see on the HL site or Trustnet or wherever you go to read the prices, does not reflect the reality of what you expect to pay.

Once you strip out the 5% entry charge that you won't pay anyway, the spreads are comparable between the various clean classes that you might want to invest in.

The two main clean classes are D and H. Class D is a clean priced class, like an institutional one with no trail commission or platform commission built into the OCF, and no 5% entry fees because it was originally designed for big institutions who don't pay any of those. Class H is a relatively new retail class, introduced after the retail market shakeup and superclean funds offered by certain brokers- so it doesn't pay high commissions out of the OCF like the old 'A' retail class, but it does still officially have a 5% entry fee in its quoted prices.

Class D is quoted on Trustnet as 116.2p-116.8p. So you are paying 0.3p above the midpoint when you buy and getting 0.3p below the midpoint when you sell. The 0.3p is about 0.26% of the midpoint and the midpoint will roughly equate to NAV.

Compare that situation to Class H which is 115.7p to sell. If it's 115.7p to sell, we should assume that this means the underlying midpoint or NAV of this class is around 116.0p, because that would make the sell price 0.26% or 0.3p below the midpoint, just like it was on Class D. If there were no messing about with initial charges or entrance fees, the buy price would be 0.26% or 0.3p above that 116.0p midpoint.

However, we know the fund manager officially charges a 5% entrance fee on this class so that would be 5% of 116.0p or 5.8p. So if you are going to buy into this class it costs 116.0p 'midprice' or NAV, plus the 5.8p entry fee plus the 0.3p spread = 122.1p. So, if the dealing spread on this class H is comparable with the dealing spread on Class D above, we would expect the pricing to read 115.7p-122.1p ?

And, surprise surprise, that is exactly what the pricing for Class H actually is quoted at.

If you buy Class H without paying the initial charge, via HL or pretty much anywhere else that puts it on their platform in due course... you will save the 5.8p within the quoted spread but you'll still pay the rest of the spread.

guymo wrote: »

Right, I can see that class on Trustnet.

I don't quite understand what's going on, because there's no initial charge on the D-class either, and a much smaller spread.

Hopefully this now makes sense, just take the 5% initial charge out of it and it works.

OCF on class D is 0.27 versus 0.25 on class H; maybe that's all it takes. Or is there another difference between the different classes?

You can probably ignore the minor differences between the OCFs. They are only forecasts anyway. Class D will be a forecast based on previous 12 months to September or October or whenever they drew the factsheet up. Class H only has about 6 or 7 months of operating history so the number is just a guesstimate. According to Trustnet, Class L was 0.27 too, but then if you click through to "manager's own factsheet" they claim 0.26. Basically on a clean class it will be somewhere around that ballpark.

Obviously 0.01, 0.02 difference is an irrelevance, even if the couple of basis points saving on Class H does transpire (i.e. because it's not simply a difference in estimation but an official underlying saving, deliberately built in to make that class look attractive). It's a pound per £10k invested and you need to consider what it costs to access that class rather than the other more widely available classes.

Re the other Clean Class, L (if it's like the other Blackrock funds, the old class D was renamed as L when the new class D was launched):

L is an Institutional fund with £1million minimum initial purchase so you might not expect to see that on retail platforms - although some with a lot of money on platform might be able to get you in. However, when you're dealing with funds where most of the cheap clean classes were only launched recently, it is sometimes useful to look at these older classes to see performance history. Class L has outperformed Class A over the last 3 years by a percent or so because it doesn't have the high management fees of Class A which we no longer pay anyway...

Kendall80 wrote: »

The fidelity index emerging markets tracker is OEIC if you want equivalent buy/sell values. Although it seems to be lagging a few % behind the blackrock offering.

Unless you're trading frequently (which, given dealing lead-times is not particularly sensible to do via OEICs and UTs) it may not make a massive difference whether you are quoted "equivalent buy/sell values" or not.

If it's single priced they will tweak that single price based on the volume of buy and sell orders that come in, so you still may be paying more or less than the underlying NAV, it's just not transparent.

The idea of a bid offer spread when buying into a fund is to help cover the costs of the activities relating to joiners and leavers. If everyone is let into and out of the fund exactly at NAV then that cost is borne by everyone in the fund. While if people pay premiums to get in and accept discounts when they leave, the average person who is sitting and holding the fund should in theory do better. So the price chart might look better. Unless you run it on an 'offer to bid' basis where you see literally what you would have paid to buy in on day one and what you would get back on the subsequent days if leaving.

Obviously a 5% entry fee that goes to the Fund Manager's pocket is something to be avoided. Easy to do, just find a broker that doesn't charge it. But there is no fundamental flaw in selecting a UT fund that has a small spread rather than an OEIC with no visible spread, unless you know you're going to exit pretty soon and feel that the extra costs that you as a joiner and leaver will pay through the UT's visible spread will be greater than the OEIC's invisible background adjustments and ongoing running costs.

It looks like Class H is a Hargreaves-Lansdown exclusive, where they kindly rebate you a charge that you don't have to pay if you go with another broker, and have a huge bid-ask spread in exchange for a 2 basis point reduction in OCF. Hmmm. I sort of hope I have got this wrong.

Fortunately you have got this wrong, in that the huge bid ask spread is not going to be paid, it is just their practice to include the 5% entry fee within the published spread because that's the price feed they are given from the fund manager.

If Class H is a Hargreaves exclusive that is designed to really hit 0.25% OCF instead of 0.26 or 0.27 OCF because Blackrock have cut them a deal where they'll make a low fee version available if HL promote it as a 'core tracker' with flashing lights on the website driving big volumes - then it sounds like HL is the place to go buy it, and maybe they really will deliver you that 0.01 or 0.02% saving. Or does it

Of course, as the Monevator article pointed out, saving 2 basis points on the Blackrock costs but paying 20 extra basis points to access the HL platform over Charles Stanley (or 25 extra basis points over Youinvest), is a false economy.

badger09

Thanks bowlhead99.

Another detailed explanation which helps to blow away some of the 'smoke and mirrors' surrounding investments.

But is it really any wonder that the average Joe Public is completely bamboozled, so either keeps all their hard earned savings in 'safe':cool: cash, or if they're really brave, in a FTSE100 tracker from their local bank?

bowlhead99

badger09 wrote: »

But is it really any wonder that the average Joe Public is completely bamboozled, so either keeps all their hard earned savings in 'safe':cool: cash, or if they're really brave, in a FTSE100 tracker from their local bank?

It's not that surprising, no

Re: smoke and mirrors - Fund managers and fund supermarkets will of course have various marketing 'tricks' to make it look like they are the best option.

But similarly in a real supermarket rather than a fund supermarket, you always see products marketed as being great discounts off the RRP, or being exclusive supercheap own brands, when everyone else is also offering good discounts and own-brands. You get a quarter of the bottles of wine on a shelf perpetually on 'special offer' at £5-6 instead of £8-9 official price; the discounted brands rotate but the weighted average price people pay over a year for any of them is nowhere near £9. You get furniture stores selling a £1000 sofa with a 'free' £500 chair for 6 months of the year, and the other 6 months they give you a 33% discount off the £1500 cost if you buy them both together. That way, all year round it sounds like a bargain but you can't even compare it to the shop down the street because it is not a direct like-for-like with the one at the next furniture warehouse on the next business park.

It is hard to legislate against this sort of stuff and improve the retail environment - whether shopping for goods or for funds - because it's difficult to enforce 'principles-based' rules ; and if you make 'explicit' rules then someone will just dodge it by doing something subtly different.

The problem is that smoke and mirrors when you are trying to build a lifetime financial plan and deploy your life savings is rather more serious than finding the cheapest tin of beans or working out the true 'value' of a sofa or mattress. You don't need lots of higher education to fathom how shares or markets or funds 'work': if you are of average IQ you can read around a subject and figure it out given enough time. Of course, half the people in the country are of below average IQ and the other half don't necessarily have enough time or inclination.

As investment is a complex area with lots that can go wrong, we have to caveat products with risk warnings and create a fear factor so nobody 'accidentally' puts their hand in the fire. That will put some people off and keep them in 'simple' products like bank accounts or single country trackers, neither of which are probably appropriate for the long term.

People don't speak freely among their friends about investing strategies that went well or badly, because money matters are considered private, nobody wants to talk about how much they have, nobody wants to admit mistakes, etc etc. If you have mastered managing your family budget and actually have a meaningful amount to invest, you will be ahead of many of your peers and therefore only a minority of them would have experiences you can learn from anyway. People may hear down the pub about a particular fund that has given great returns, but without really knowing if their mate came across it by luck or judgement and without having a clue whether it is suitable for them or not.

If you can't afford professional advice, which many can't, you have to do some research, and impatient youngsters or set-in-their-ways OAPs or people in between who have families and jobs to worry about, are not always going to want to do that even if somebody gave them some free pointers. They will put their head in the sand and say they were never any good at maths and it is too complex or that savings accounts always served their grandparents just fine or that they once bought at £1000 and decided to sell at £600 in a crash so they are not going anywhere near the markets again.

Then they discover a site like this and come on here sounding clueless about how to build a basic portfolio for their £1000, and after a couple of reasonable answers people will reply to someone else's side question and it all heads off on a tangent about the mechanics of spreads and dilution levies, or another person will pipe up about whether some recent research suggests a particular global market or industry sector is fundamentally overvalued or undervalued etc etc.

Some of the newbies will embrace this and join in the banter and debate ; some will run a mile because they only really wanted to invest a few pounds a month in something with a longer term view than a savings account and it is all sounding pretty heavy. And you can't even say the word savings account anymore without people forcefully correcting you that you should be using current accounts, or how dare you use a cash ISA

You hear a lot about how primary and secondary school education does not seem to prepare kids for the financial world and they ought to understand savings, interest, budgets and credit, and what is the best way of doing this. The next logical progression is to educate those people who have mastered 'living within their means' on how to prepare for longer term goals. There's no point trying to include that as mandatory education in school or university because it will not be a priority for anyone among all the competing objectives.

But it's certainly difficult to pick up later because you can't get a quality structured education in the subject from your pals, and if you google 'investment courses and seminars' you only find people wanting to sell you pyramid schemes or something which is much more of a moneyspinner for them than it is for you. Difficult to find a solution if you don't want to work at it, and many don't, so they will lose out in the long term - especially as their jobs are replaced by technology and they're resigned to living off investments and pensions.

Apologies to the OP for a bit of an offtopic rant .

FWIW, I would not try and have dedicated fund allocations to 5% niche sectors when I was only contributing £200pm and only had a small total pot. A generalist global fund is fine. Some are tracker based if that is your thing (e.g. Blackrock Consensus or your VLS or Dunstonh's L&G). Others are actively managed. If you have £200 going in each month you could just do a couple of generalist funds. A core-and-satellite approach is not needed until the core is quite a lot bigger. If the £10 per month in Emerging grows by 9%p.a. instead of 8% p.a. on your other £190 per month we are not talking about a lot of different in overall performance.

And then, taking the 'keep it simple' concept a bit further - if you're only looking at generalist funds and not holding individual super-specialist funds or individual shares and bonds, a SIPP may be overkill unless the wrapper is extremely cheap. You can consider 'normal' personal pensions if you don't actually need that ability to have heavily tailored holdngs using the absolute cheapest trackers you can possibly identify. At £20-£50k, or if you are a control freak, a SIPP may be of more interest. At £1k it sounds like overkill.