It shouldn't happen but...

bowlhead99

BrockStoker wrote: »

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?

Common sense says it is always more risky investing abroad rather than at home.

A fund (or a closed ended investment company) is going to domicile itself whereever works out best for tax neutrality, and access to a wide enough pool of investors, and convenience with their existing admin arrangements/ ease of doing business (legal and tax framework, regulatory conditions), or all of the above. Managers will look to make the most of what is on offer where.

Dublin has lots of hedge funds, lots of UCITS funds, lots of ETFs and is a top choice for those products. Lux probably has the most overall fund domiciliation in the world (after the US). Jersey and Guernsey are more in the closed-ended space and have a couple of hundred billion pounds each of funds under management or administration - real estate and private equity as standouts. Lux or Dublin would be a trillion plus, whether pounds or euros or dollars.

But just because it is good for the manager to be in a location doesn't mean it's good for you to be investing there rather than domestically. If two funds were available with completely equal terms, strategy, taxation, access and investor support, and one was at home and one abroad - I would use the home one. If something goes wrong, you know what you're getting into and maybe your MPs will support you against the bad guys doing their bad business in our land. However, if there isn't a direct UK equivalent I take a pragmatic approach - if the overall proposition is compelling with the 'offshore' one, then I've no issue with using other EU (or Channel Islands) domiciles.

saverpete

bowlhead99 wrote: »

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.

I would prefer to choose a physical ETF over a synthetic ETF. But what do you look for in the fund details that identifies which type of ETF it is?

Yes some areas are harder to split allocation without increasing costs or reducing performance. I wanted to find alternatives to Vanguard Global Small Cap Index Fund Class Accumulation to split between. I need 'Accumulation' funds and the best I can find in terms of cost are:
iShares MSCI World Size Factor UCITS ETF (GBP) | IWFS
SPDR® MSCI World Small Cap UCITS ETF (GBP) | WOSC
But one is quite new, and both seem to have a bit more tracking error than Vanguard. I couldn't find any serious competition for Vanguard's global small cap fund and none, not even Vanguard's fund, are UK domiciled.

bowlhead99

saverpete wrote: »

I would prefer to choose a physical ETF over a synthetic ETF. But what do you look for in the fund details that identifies which type of ETF it is?

if it's not a "fact" on the fact sheet, check the prospectus for what they say they'll do and how they'll do it

I need 'Accumulation' funds and...

Do you really need acc funds rather than just prefer acc funds? If a fund that was 10% of your portfolio spat out 1% of its asset value once a year as income, would it harm your portfolio and how? Most people can handle the odd bit of income without incident as they are investing new money and/or rebalancing from time to time anyway.

the best I can find in terms of cost are:
iShares MSCI World Size Factor UCITS ETF (GBP) | IWFS
SPDR® MSCI World Small Cap UCITS ETF (GBP) | WOSC
But one is quite new, and both seem to have a bit more tracking error than Vanguard. I couldn't find any serious competition for Vanguard's global small cap fund and none, not even Vanguard's fund, are UK domiciled.

When you say they have more tracking error than vanguard - tracking what?

The Size Factor one is not trying to track MSCI World Small Cap, it has an intentionally different methodology. I think I'd be happy to hold it, though I don't (favouring active funds for small or small/mid companies in most regions, where available).

The SPDR one is new as you say so not much history. Only one full year can be tracked, not 3,5 or 10. It delivered 3.8% in USD NAV vs 3.5% for the index in the year to March. The difference is less than a day's market fluctuations and is positive rather than negative. You can have no expectation, based on that limited data, that it will do better or worse than Vanguard over the long term (vanguard returned more than the index this year gross of expenses, but less net of expenses).

In any case, the very idea of holding a fund of small cap stocks while using the strategy of capitalization- weighting your holdings to the very biggest small cap stocks, which is what the SPDR and Vanguard products do, is a bit of a farce. All you are trying to do is get a cheap exposure to the asset class. So whether SPDR's actual holdings gave 0.3% more or 0.3% less than some MSCI defined cap weighted universe of 4300 stocks, is neither here nor there, imho.

SPDR approximate the index with a holding of 1333 stocks, per the March factsheet., with a TER of 0.45%. Vanguard say 4200 stocks and TER of 0.38%, but you have to hold it on a fund platform which will cost upwards of 0.2% depending who your provider is. The driver of which one works out cheapest likely depends on the total value you have and whether you are constantly adding -because trading fees on the ETF could gobble up the savings on platform fee.

saverpete

Thank you bowlhead99. I will look at the ETF fact sheets for the ETFs I mentioned and see if I can interpret from their method whether they are physical or synthetic. Hopefully it will be clear what type they are.

Your warning about ETFs gobbling up fees is a worry. I use YouInvest (Sippdeal) and iWeb. I hold 10 funds on each and rebalance 2 or 3 times a year at most. Sippdeal charges £4.95 per trade and iWeb £5.00. But at the moment I hold Unit Trusts and OEIC funds but am replacing some funds with ETFs. So will there be some hidden extra costs involved if rebalancing requires buying/selling ETFs?

bowlhead99

There are no 'hidden' costs with ETFs. They have internal running costs, potentially a spread between bid and offer price, and transaction fee from your broker, but nothing hidden to watch out for.

What I was getting at was that - generalising about the fee structures of the majority of brokers and platforms - things dealt on an exchange (traded in real time on a market) attract a transaction fee each time you trade, while things that are not traded in real time (like OEICs/UTs) more commonly have annual fixed or percentage based charges to access the fund platform. Youinvest/sippdeal is one that has a pretty low annual platform fee (0.2% vs some rivals at 0.25, 0.3, 0.35 or even 0.45%) and then a small dealing fee even for funds, the 4.95 you mention. If you decide to use ETFs investment trusts or directly held shares or bonds at Youinvest, you won't pay their 0.2% platform fee on those assets but you will pay a higher dealing fee (9.95 a time unless you are trading so much that you qualify for frequent trader rates with large volumes).

So, if you were buying or selling 10 ETFs every month or two, it could get expensive, because depending on the value you actually have on the platform, those higher trade fees could dwarf the platform costs of your UTs/OEICs.

An advantage of Youinvest and some other brokers over the cheapest platforms such as IWeb is that they offer a 'regular investing' scheme where you can purchase monthly for a discounted rate of 1.50 a trade. This covers a range of funds, FTSE 350 shares, some former-350 shares, and a selection of ETFs and investment trusts. Effectively they buy in bulk on a fixed day each month on behalf of lots of customers and allow you to get a good discount on the fees for trading in real time on your own preferred days.

However, they don't cover every share and every obscure IT or ETF. If the ETFs that you want are on the list, you are in luck, because you can constantly change your 'regular investing' monthly orderbook, and just do something like buy ETF 1 and 2 in month one, ETF 3 and 4 in month two, ETF 5 and 6 in month three, and repeat, so you end up withe a portfolio of 6 ETFs which are all being added to about once a quarter and only paying £3 a month in dealing fees.

However, if you are rebalancing your portfolio by doing a lot of sales (rather than simply by diverting your new money towards the smaller holdings) then you will still be paying the 9.95 dealing fees to trim the larger holdings, which is expensive on a small portfolio.

There is nothing inherently wrong with using ETFs to access markets but the fact you need to trade them on an exchange means they can be expensive for the type of people who want to keep adding to or taking away from their individual holdings, as nobody really offers free trades. If you just buy and hold, it's fine. By contrast, UTs and OEICs are more suitable for people who are adding and rebalancing and fiddlling, because the cost structure is usually such that you can place orders for relatively low cost as long as they are still getting their annual fees for platform access.

saverpete

bowlhead99, thank you again for your full and clear explanations.

saverpete

If an investor holds two or three funds, each administered by a separate company, but all within the same group of companies, is the investor then covered for each fund, or only once?

As an example:

The investor holds 3 investments - 2 ETFs and 1 fund, each managed by a separate company:
BlackRock Advisors (UK) Limited (ETF fund domicile Ireland)
BlackRock Asset Management Ireland (ETF fund domicile Ireland)
BlackRock Fund Managers Limited (fund domicile UK)

But these companies are all part of Blackrock Inc. :

BLACKROCK INC (USA)
BLACKROCK LUXEMBOURG HOLDCO SARL (LUXEMBOURG)
BLACKROCK INVESTMENT MANAGEMENT IRELAND LIMITED
* BLACKROCK ASSET MANAGEMENT IRELAND LIMITED
BLACKROCK FUND MANAGEMENT COMPANY (IRELAND) LIMITED
BLACKROCK INVESTMENT MANAGEMENT (DUBLIN)
BLACKROCK UK HOLDCO LIMITED
BLACKROCK UK 1 LP
BLACKROCK FINCO UK LTD
BLACKROCK GROUP LIMITED
* BLACKROCK ADVISORS (UK) LIMITED
BLACKROCK PENSIONS NOMINEES LIMITED
BLACKROCK FINANCE EUROPE LIMITED
BLACKROCK ASSET MANAGEMENT UK LIMITED
BLACKROCK ASSET MANAGEMENT INVESTOR SERVICES LIMITED
BLACKROCK EXECUTOR & TRUSTEE CO. LIMITED
BLACKROCK INTERNATIONAL LIMITED
BLACKROCK LIFE LIMITED
BLACKROCK PENSIONS LIMITED
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
* BLACKROCK FUND MANAGERS LIMITED
BLACKROCK PROPERTY EUROPE LIMITED

So if anything happened to Blackrock as a whole group, or to the three example fund companies, is the investor covered 3 times (2 x 20,000 Euro in Ireland and 1 x 50,000 GBP in UK)?

EdGasket

I think a Blackrock fund that invests in physical securities like many of the iShares funds will have it's investments ringfenced from the fortunes of Blackrock the management company. If Blackrock went under, then as I understand it, another management company would simply take over running the fund. You are not investing in Blackrock, you are investing in FTSE shares or whatever which should be held completely seperately from any Blackrock inc. accounts.

saverpete

I agree that's the theory. But I think it would still be reassuring to know how the compensation limits would be applied. Whether each fund managed by a separate Blackrock company is covered by a separate 50,000 GBP or 20,000 EUR, or whether the investor is only covered once for 50,000 GBP in the UK and once for 20,000 EUR in Ireland for all funds/investments they have with the Blackrock group.

Blackrock is just as an example of course.

masonic

saverpete wrote: »

But I think it would still be reassuring to know how the compensation limits would be applied. Whether each fund managed by a separate Blackrock company is covered by a separate 50,000 GBP or 20,000 EUR, or whether the investor is only covered once for 50,000 GBP in the UK and once for 20,000 EUR in Ireland for all funds/investments they have with the Blackrock group.

It works in exactly the same way as the FSCS scheme for cash deposits, so you would get protection per 'banking license' of the equivalent for investment companies. So, unless the various divisions of Blackrock were registered as separate legal entities, you would only be able to claim a total of £50k from the UK scheme and a total of EUR20k from the Irish scheme. You would need to check how Blackrock is registered in Ireland to determine whether a second EUR20k is available for the second division of the company, but I suspect the two would be treated as the same entity.