Global (ex UK) v US/Europe/Japan trackers

MrLeek

I'm struggling to see the pros and cons over using a global tracker instead of a separate tracker for the US, Europe, etc.

So far I recognise that it could be a little harder to manage overall (since there's more parts to keep in balance). There's also the potential of increased fees - except if I went with a percentage-fees broker (Charles Stanley) then that doesn't apply? Plus one global tracker I looked at had an OCF of 0.39% (GB00B84K1975). So maybe that argument doesn't necessarily apply? Or am I missing something substantial?

If it helps - the rough rule-of-thumb I'm using at the moment (to help me process the information) is this (in a 65/35% split between equities and gilts):

Percentage Allocation Asset Class
15 UK Equitities
45 US Equitities
15 Europe
12 Pacific (inc Japan)
10 Emerging Markets

Then again I've yet to see an index fund that covers both the Pacific and Japan in one bite, meaning yet another fund to track. I recognise that I've got a lot more learning/understanding to do (Tim Hale's book is getting read slowly) but I recognise that I need to get a balance between diversity and having too many moving parts.

TCA

If you're not happy with the geographic split as offered by global trackers (or global ex-UK trackers), then you'll need to do it yourself with individual trackers to an extent.

If you haven't done so, you might want to check out Vanguard LifeStrategy funds and BlackRock Consensus funds, which offer a readymade tracker mix and self balance periodically.

P.S. Your spelling of "Equitities" might need some revision!

bowlhead99

The main reason for individual country funds is extra control over asset allocation, especially if you have other funds in the portfolio which may contain different geographic elements.

Say for example, Apple grows its market cap by a half while everything else stands still including all other company values and exchange rates.

If you have just the one all-world tracker, your exposure to Apple will go up from about 2% to about 3% and your total fund value will go up from, say, £100 to £101. With that, your exposure to US companies in general including the newly enlarged Apple will go up from £50 to £51, i.e. from perhaps 50% to something greater than that. You take no action and so in your new revised portfolio of one fund, you simply have more US exposure and more consumer electronics/software exposure and more Apple exposure.

If you had regional trackers, you would initially feel the same effect, but then you would rebalance and sell your US fund back down to the "50% of my portfolio" level so that you only have £50.50 in the US fund and an extra 50p in the other countries so you are buying more Samsung in Korea and Sony in Japan and HSBC and Shell and Lloyds and Tesco over here and Volkswagen in Germany and blah blah blah.

Using the "individual countries" method, within your USA fund, you still have a greater proportion of Apple than you did before - you can sell 50p of the fund to buy other funds, but Apple's weight has still grown by 50% compared to everything else listed in the US. But you avoid creating a US- heavy portfolio.

If you had used an active fund manager for your US exposure and they saw that Apple had experienced a good run and was now dominating the portfolio even more than it had been before, they would probably sell some of that extra exposure and allocate it across other US listed companies, but the passive fund won't do that of course and will keep its allocations in line with market cap because it's cheaper to do so.

Arguably if you are taking the active decision to have only 50% allocated to USA when global market cap implies 51%, you are making an active decision anyway, to reduce your "eggs in one basket" country risk; but perhaps on grounds of cost you're happy to simply take your in-country exposure based on a simple size index.

Allocating your portfolio into regional geographic funds - whether active or passive is your preference - as well as different asset classes, allows you to benefit from rebalancing over an economic cycle. When the US has a crazy dotcom bubble or government bonds get priced at all-time highs, or the FTSE100 goes through the roof because of quantitative easing, you can naturally rebalance your portfolio to avoid over-exposure by selling off some of those things and buying more of what has performed relatively less well (perhaps Europe or Japan which will be next in line for QE, or emerging markets, or natural resources companies or whatever).

This has two benefits- reducing over-exposure back to broadly diversified holdings which suit your risk preferences, and the effect of "selling high, buying low". Those twin opportunities which you access by having multiple specialist funds, can be positive for your long term returns while reducing volatility.

By contrast, if you buy a single world equity tracker (or, if one existed, a multi-asset total market tracker with no rebalancing), you may end up with a portfolio which from time to time is concentrated in individual countries or sectors and you will certainly not sell high buy low, you will just buy and wait until Apple or dotcoms or banks have had their time in the sun, crashed back down and let the next thing take over as flavour of the year.

AndyT678

TCA wrote: »

"Equitities" might need some revision!

Defined by the Uxbridge English Dictionary as, "unusually symmetrical breasts".

MrLeek

Appreciate the posts - if I'm interpreting this correctly the advantage of using multiple funds means that I can lock in gains in one market, using the 'profit' from selling (e.g.) US index funds back to 50% to buy more in my Europe Index fund. I get more flexibility overall.

The downside is that I will have more moving parts: a simple 70/30 split between a world Index and UK Gilts is a lot easier to manage. But strong gains in one geographical sector could be smoothed out somewhat by the performance elsewhere. Is that a fair summary?

A slightly un-related question: Is it fair to say that having sub-5% in a single fund means I'm not gaining much from that fund in general? If so then it does create a 'soft cap' on the number of funds in total that will give me the exposure I want. As a rule of thumb I'm working from the basis that 8 different funds will provide a reasonable amount of diversity (obviously it doesn't guarantee it - 8 different funds that focus on oil/gas is not diverse!)

AndyT678 wrote: »

Defined by the Uxbridge English Dictionary as, "unusually symmetrical breasts".

I fail to see what's wrong with this! :rotfl:

bowlhead99

MrLeek wrote: »

Appreciate the posts - if I'm interpreting this correctly the advantage of using multiple funds means that I can lock in gains in one market, using the 'profit' from selling (e.g.) US index funds back to 50% to buy more in my Europe Index fund. I get more flexibility overall.

I'd rephrase as "an advantage"rather than "the advantage"; yes it enables you to partially exit high markets as you switch from one to the other, which can give a boost to returns, but that is simply one part of getting you back to a target allocation that ensures you maintain eggs in multiple baskets without being heavily reliant on the returns from one market.

Just because US markets are high it doesn't mean they won't outperform Europe or Emerging next year and as such keeping it all in the world tracker might actually be a better performance for 2016;so some die-hard passive investing fans will tell you that you don't need to look beyond a single world-ex-UK tracker. However, that puts a lot of trust in that one dominant market which may not make sense if you are truly looking for a good sense of balance among opportunities.

The downside is that I will have more moving parts: a simple 70/30 split between a world Index and UK Gilts is a lot easier to manage. But strong gains in one geographical sector could be smoothed out somewhat by the performance elsewhere. Is that a fair summary?

However you run your portfolio if you have exposure to multiple markets you will have the good smoothed out by the bad. But if you never rebalanced between those markets you would end up with a portfolio skewed to whichever components have just had a good run. While good runs can last a long time, we know every party always comes to an end and when someone is starting to throw his weight around and threatens to spoil the party, it might be time to "have a word" and bring them back into line

A slightly un-related question: Is it fair to say that having sub-5% in a single fund means I'm not gaining much from that fund in general? If so then it does create a 'soft cap' on the number of funds in total that will give me the exposure I want. As a rule of thumb I'm working from the basis that 8 different funds will provide a reasonable amount of diversity (obviously it doesn't guarantee it - 8 different funds that focus on oil/gas is not diverse!)

5% is not very much but if it's a 5% chunk that *doesn't* lose half its value when the other 95% does, it is worth having. I have some specialist holdings below that level. But yes as a rule, if something could double or half yet just be lost in the roundings of the rest of the fund, probably not worth having because you will struggle to define its role.

So yes there is a practical cap on what it's worth your while managing. If you are looking at individual sector or regional funds then 8 is probably the minimum to do it properly, up to maybe 12 or so, for some. Others will get by with just one or two multi asset funds which are rebalanced internally.

grey_gym_sock

bowlhead99 wrote: »

If you had used an active fund manager for your US exposure and they saw that Apple had experienced a good run and was now dominating the portfolio even more than it had been before, they would probably sell some of that extra exposure and allocate it across other US listed companies

or they might be very postitive about apple's future prospects, or be trying to follow its momentum, and therefore buy even more apple shares. who knows what they'd do? active managers are unpredictable.

if you really want the manager to trim back growing holdings, you could use an equal-weighted tracker for your US exposure. i'm not especially advocating this - just mentioning the possibility.

collingbone614

Don't forget about the on-the-ground practicalities of using multiple different funds.

If you are an investor putting in perhaps a few hundred a month, then you may struggle to clear the hurdle for minimum monthly purchase amounts.

E.g. - say you want to use three funds in order to obtain broad global equities coverage:

1. A FTSE Developed World ex-UK fund
2. A UK FTSE All-Share fund
3. An emerging markets fund

If you are trying to invest a total of £200 a month spread between these, in rough proportion to their global weighting, then you will struggle to clear low minimum purchase amounts. On some platforms the minimum monthly purchase amount is £25. If you want to buy 10% of UK FTSE All Share a month, you are a fiver short of the minimum purchase amount. This means you would need to either over-allocate money to the UK in order to clear the minimum purchase amount, or focus money on one fund for one month, then focus on the others the next month.. This could soon become a cumbersome administrative burden. And it hasn't yet included bond funds, property, etc.

So it's more practical for someone making lower monthly purchase amounts to make them into a multi-asset fund. Such as a BlackRock Consensus fund, or Vanguard LifeStrategy Fund, or Legal & General Multi-Index fund. All of which allow you to purchase a single security which holds the multiple underlying securities for you.

Or just a global equities tracker and a Brit Gov gilts fund. This approach is advocated by Lars Kroijer in his book Investing Demystified.

Worth considering these issues if you are investing relatively small amounts on a monthly basis, which is what many people are doing.

MrLeek

bowlhead99 wrote: »

I'd rephrase as "an advantage"rather than "the advantage"; yes it enables you to partially exit high markets as you switch from one to the other, which can give a boost to returns, but that is simply one part of getting you back to a target allocation that ensures you maintain eggs in multiple baskets without being heavily reliant on the returns from one market.

Just because US markets are high it doesn't mean they won't outperform Europe or Emerging next year and as such keeping it all in the world tracker might actually be a better performance for 2016;so some die-hard passive investing fans will tell you that you don't need to look beyond a single world-ex-UK tracker. However, that puts a lot of trust in that one dominant market which may not make sense if you are truly looking for a good sense of balance among opportunities.

I think it's the balance that's been throwing me a little over the original question. On the one hand having a single world-ex-UK tracker means I'm covering all the bases, but it does mean that it feels a little 'blunt instrument' (if you'll forgive the lack of subtlety in that expression!). Using your analogy it's important that I keep things balanced into the margins that I want (for the risk/reward parameters I've settled on).

I'm also aware that it's easy to say that I'll be happy to sell 10% of the overheating index fund to reinvest in the poorer performing option....it's another thing to be able to do it for real and not assume that the party is going to keep on going.

bowlhead99 wrote: »

5% is not very much but if it's a 5% chunk that *doesn't* lose half its value when the other 95% does, it is worth having. I have some specialist holdings below that level. But yes as a rule, if something could double or half yet just be lost in the roundings of the rest of the fund, probably not worth having because you will struggle to define its role.

So yes there is a practical cap on what it's worth your while managing. If you are looking at individual sector or regional funds then 8 is probably the minimum to do it properly, up to maybe 12 or so, for some. Others will get by with just one or two multi asset funds which are rebalanced internally.

I think where the 8 is going to come under pressure is when I factor in small/value companies, emerging markets plus something else to add more diversity (Tim Hale talks about property-related funds, but this is an area of further research for me). Part of this may come down to my appetite for risk so it's something to think about carefully.

Ditto bonds/gilts as it happens. I was researching a Vanguard Gilt Index fund earlier (GB00B45Q9038) which, on the face of meets part of the defensive elements of the portfolio. But this is (yet another) research area for me - a part of me wants to start investing in the things I'm happy with (e.g. FTSE all-share index fund, etc.) as I continue to research the remaining elements. Not sure if that's a smart idea or not.....

MrLeek

@Collingbone - very good point. I intend to scale up so that I'm investing £750 per month as a routine. I could invest more, but that's the figure I'd be expecting to work with (the rough calculations suggest that's the figure needed for the amount I'm aiming for).

Then again, my partner's health is not great either. So I need to calculate what things would look like in a few different scenarios. If (for example) I had to drop to £300 per month then 12 funds would be very awkward to manage. That forces some portfolio contracting, which could be selling at a market low....... Unless I'm mis-understanding this element?

grey_gym_sock

MrLeek wrote: »

If (for example) I had to drop to £300 per month then 12 funds would be very awkward to manage. That forces some portfolio contracting, which could be selling at a market low....... Unless I'm mis-understanding this element?

if you're switching between almost equivalent funds, it doesn't especially matter if it happens to be a market low, because the funds you're switching from and to are probably both low. so in effect, you are staying invested for the market bounce, whichever fund you're in.

with smaller monthly contributions, you could for instance put each month's contribution all in 1 general purpose fund which roughly matches your asset allocation; and then perhaps once a year, sell your total holding in the general purpose fund and use the proceeds to buy holdings in your 8 or 12 separate funds in whatever proportions you want. (and even rebalance between those holdings at the same time - e.g. if a holding is supposed to be 20% of the separate holdings, but it's outperformed your other holdings, so it's now 25%, then you'd put less than 20% of the cash from selling the general fund into this separate fund, so that it's set back to 20% of the (now enlarged) holdings in separate funds.)