Advice for entering the S&S ISA world

elwy

I'm currently choosing new index trackers as I've realised my old inclusive HSBC trackers are far too expensive. I've chosen to replace them with Legal & General index trackers which have ongoing charges of 0.10% for US and UK, about the same as Vanguard. Also it looks like my platform levies an ISC charge for buying UK Vanguard funds for some reason. Otherwise I can't see much difference between the basic Vanguard vs. L&G trackers?

bowlhead99

elwy wrote: »

Also it looks like my platform levies an ISC charge for buying UK Vanguard funds for some reason. Otherwise I can't see much difference between the basic Vanguard vs. L&G trackers?

The UK Vanguard funds have a one-off preset dilution levy on investors joining the fund.

It is their standard way of doing business, making joiners pay for themselves when the addition of new joiners to a fund is likely to create extra costs of doing business for the fund. The extra levies are not kept by the manager they are thrown into the fund's cash pot as new assets which means they offset the expenses that the fund necessarily incurs.

If you buy an HSBC or L&G fund without a dilution levy then whenever someone joins the fund and causes the fund to go out and spend £1000 on new shares there will be a fiver lost to stamp duty and perhaps some more for broker/ custodian/ bank fees etc. There is no extra money coming in from the new investor so these costs just get borne by all existing investors causing the fund to lag the raw index.

Vanguard charge joiners and leavers a one-off 0.2% on every new contribution, so the ongoing returns after the 0.08% annual TER are preserved as far as possible and will look pretty good. L&G don't so all their investors are exposed to these additional duties whenever new investors come in and cause the fund to grow.

With Vanguard the 0.2% is a guesstimate of what they really need to cover stamp duties and other related costs. If you imagine they get £100,000 of new money on any given day to invest for every £60,000 of people leaving, there is a net £40,000 of fresh money that has to be spent buying shares of BP and HSBC etc to keep the fund invested rather than having the £40,000 sit useless in the bank account. That will necessarily incur half a percent of stamp duty on the £40,000, or £200, effectively dead money. So they say that the people putting in the £100,000 need to pay 0.2% (£200) of extra cash to cover this cost.

L&G don't do this so even if they have the same TER as Vanguard and track the index just as accurately, the performance will be worse (assuming the fund is growing) because it keeps blowing £200 a day on stamp duty - the dead money is borne by all investors as reduced investment returns.

If the cost of new joiners ends up being more than 0.2% (because the fund is growing quicker and stamp duties become more than 0.2% of new joiner subscriptions) then the costs will not be fully covered by the levies but the investors as a group will be better off than if they hadn't charged one at all. Similarly if the fund size is static and there is no cost of new joiners then taking the 0.2% from new joiners anyway will produce a welcome boost to returns. The 0.2% figure may change from time to time to make it more reflective of reality.

If you are only in the fund for a year or two you might be better in a fund with no dilution levy. If you are going to be in it for a decade then you will think that Vanguard's method is 'fairer' to you as the £200 you paid to invest your £100,000 will be more than offset by your share of the £200s thrown into the pot by all new joiners over the decade which will only be a number that increases over time once you're in.


Some detailed comments here last year: https://forums.moneysavingexpert.com/discussion/5074395

badger09

bowlhead99 you are awesome :A

Not only do you know your subject, but you explain it in a way that even a badger with very little knowledge of said subject can understand

Thank you for devoting so much time and effort to this forum:T