It shouldn't happen but...

saverpete

the loop holes are always obvious only after each new scandal wakes up the regulators.

So I was concerned when I read that the most compensation that would be paid out if a company running a UK domiciled investment product fails is £50,000 for all investments you hold with that company. If the company is in Ireland (most ETFs are) or elsewhere its a maximum 20,000 euros or in some cases nothing.

OK so there are supposed to be safeguards to ensure investments are ring-fenced. So the risk is very small (in theory) however it still puts me off putting too much of my investments into the funds of any one company.

I can accept the rollercoaster of longterm equity markets as the required risk/return trade off. But an almost total loss with no chance of recovery is even more downside risk than I like! When I checked I realised that over £250K (a large chunk of my savings and retirement portfolio) is in funds all run by the same company domiciled in Ireland. So if that went up in smoke I'd get back just 20,000 euro.

I have now split these between similar funds run by separate companies. It means a little more dealing costs to rebalance and a bit more admin. The compensation limits also apply if a company running an investment platform gets into financial trouble and exposes clients investments or money. Again this would be very unlikely but the best you can do is to split your investments between a couple of platforms.

Does anyone else split their investments up for these reasons?

bowlhead99

If you do a on the forum you'll find similar posts to yours from time to time.

You are one holder in a collective investment scheme. Say your assets were spread evenly across funds managed by that one manager who had £25 billion under management. If the fund manager puts his hand in the cookie jar and convinces the funds' custodian, depositary and administrator to move £2 billion from the funds' accounts into a dodgy offshore account and then runs off to Brazil to live a life of luxury... Your share of the loss would have been 2/25 of your assets, and that £20k would be what you need to chase the FSCS for to recover your fraud losses?

So, it would seem to take a rather bigger scandal than someone misplacing a few billion, through error or negligence or fraud, and for the company involved not to have any assets at all to cover it for you, for you to have lost more than your £20k compensation limit and be in trouble when the compensation scheme couldn't cover the excess.

Counterparty risk is of course a serious and real risk and the fewer parties involved, the better (platforms, banks, custodians, managers). But I guess the more parties involved, the more people there are to sue and chase up to a compensation limit for that party...

Personally I don't think the fscs 50k ( or 20k) is a great deal of comfort but do not restrict holdings to that level. The one in a million chance of it going wrong is just one risk - a contributory reason to investors overall demanding 5-10% returns from their investments instead of whatever they could get on a bank account or gov't bond.

steelbru

Edited - Oops, got the wrong end of the stick

saverpete

So really it's not worth bothering splitting the largest asset allocations between 2 or 3 funds administered by different companies to reduce the potential worst-case exposure?

kidmugsy

saverpete wrote: »

So really it's not worth bothering splitting the largest asset allocations between 2 or 3 funds administered by different companies to reduce the potential worst-case exposure?

I do it, and we operate on a smaller scale than you. After the Iceland debacle I'm particularly leery of ETFs based in Ireland or Luxembourg. Politicians don't have much incentive to sort out the problems of their non-voters.

masonic

saverpete wrote: »

So really it's not worth bothering splitting the largest asset allocations between 2 or 3 funds administered by different companies to reduce the potential worst-case exposure?

It seems to me this kind of thinking is a slippery slope that leads you not to invest at all, because there are worst case scenarios that could lead you to lose the majority of your money through market risk and there is no compensation available for that. You could spread it if it helps you sleep at night, but I wouldn't split my money into an inferior product just for added counterparty diversification.

BrockStoker

kidmugsy wrote: »

I do it, and we operate on a smaller scale than you. After the Iceland debacle I'm particularly leery of ETFs based in Ireland or Luxembourg. Politicians don't have much incentive to sort out the problems of their non-voters.

Only ETFs, or does the same apply to UTs and ITs?

bowlhead99

kidmugsy wrote: »

I do it, and we operate on a smaller scale than you. After the Iceland debacle I'm particularly leery of ETFs based in Ireland or Luxembourg. Politicians don't have much incentive to sort out the problems of their non-voters.

I realise Ireland and Lux are not exactly the most populous parts of the EU. However, what they do both have is a large and thriving investment funds sector relative to other stuff that goes on there. A massive proportion of Luxembourg's whole economy is financial services.

I guess at the time the Iceland banks went down, they were pretty big compared to domestic GDP too. Still, Iceland wasn't famous for banks in the way Lux's economy is geared around pan-European investment, retail funds, private funds, corporate investment and tax treaties etc. You would think that a funds disaster there is something they would be all over in an instant to try to fix with the minimum of repuational fall-out, and if you've ever tried to do business there you know the CSSF (financial services regulator) has plenty of rules to try to stop things going wrong - despite the small size, it's not some tin-pot banana republic.

When it comes to ETFs though, I do think it's worth being aware of your concentration in single funds and exactly how they operate. One of the reasons being, that index tracking is something which is often easily done with the help of derivatives rather than physical replication of the index constituents, and ETFs that use that approach are going to have a bunch of extra counterparty risk. In market conditions where the Lehman Bros of the world can go belly up and wipe out a great many entities in one hit, I'd lean more towards a marginally more pricy fund or ETF that was focussed on physical assets, rather than the absolute cheapest for a given market.

Combining a few separate holdings to cover your bases rather than having all the eggs in one massive basket seems like common sense, but is perhaps easier to do where the investment strategy is more generic (using trackers) and there are lots of funds that could be interchangeable. If your strategy is to hold £100k of UK stocks on an index approach, not too hard to use five basic FTSE tracker funds or ETFs all doing the same things at similar cost to each other with extremely similar results, instead of just using any one of them at random for every penny of your money that was in the UK sector. Makes perfect sense to carve into chunks and remove the risk of one fund imploding.

However in some other markets, you don't get the same choice to easily split across managers while treating each fund as a homogenous part of the whole allocation. There probably aren't five good cheap uk-accessible Greece Equity trackers, or if you were looking for an active strategy on small cap, emerging markets, equity income etc, the "top four or five" will have wildly different results, meaning it's hard to see them as interchangeable even if they have the same goals.

EdGasket

saverpete wrote: »

So really it's not worth bothering splitting the largest asset allocations between 2 or 3 funds administered by different companies to reduce the potential worst-case exposure?

I'd say it's very well worth doing. Don't have all your eggs in one basket. I use three trading platforms and buy a spread of as many funds and shares as I can afford and manage.

The only problem with spreading investments around is when it comes to pensions because of the charges. It is expensive to have several small pensions when you come to take the pension and cheaper to consolidate them into one and just pay one set of charges for drawdown or whatever.

kidmugsy

BrockStoker wrote: »

Only ETFs, or does the same apply to UTs and ITs?

Given the choice between an ETF from Ireland and an Oeic from the UK, with the two doing much the same job at much the same cost, I'd incline to buy the second.

With ITs, there's a Dutch one I considered and then thought better of. I'm not sure about Guernsey and Jersey: they are a sensible location for ITs with a large part of their portfolios in bonds. I suppose if they tried to let down too many UK investors the Home Office would to twist their arms to pony up.

BrockStoker

kidmugsy wrote: »

Given the choice between an ETF from Ireland and an Oeic from the UK, with the two doing much the same job at much the same cost, I'd incline to buy the second.

Thanks, but what about an EFT domicile in Ireland Vs a UT (or IT) domicile in Ireland?

I was just wondering if there was a particular reason you singled out EFTs as I have a Guinness UT fund (domicile in Ireland), and am wondering if that is perhaps more risky than having an equivalent English UT?