Asset Allocation

dunstonh

By property I'm guessing you mean residential rather than any more allocation to commercial REITs? Having a mortgage free property means quite a bit of our assets are in residential already.

By property, I mean bricks and mortar property funds. Not REITs. Property share funds increase the risk and are still equities. Just focused on property companies. Bricks and mortar funds actually own the property and are lower risk than equities.

darkidoe

What do you all think of Vanguard FTSE All-World UCITS ETF (VWRL) as a globally disversified tracker?

Have been thinking about this alot. It would seem to be sensible to keep costs as low as possible by minimising the number of different funds to hold, so as to minimize trading costs. If I try to build my own diversified porfolio using various domestic index trackers, it would push up overall trading costs.

Having been thinking about buying into the FTSE All-World High Dividend Yield UCITS ETF (VHYL) to give the portfolio a value tilt as well. Maybe at 10-20% of the equities allocation. Is that a good idea?

I intend to also look for a globally diversified small cap fund as well to give it abit of spice.

TheTracker

darkidoe wrote: »

What do you all think of Vanguard FTSE All-World UCITS ETF (VWRL) as a globally disversified tracker?

Have been thinking about this alot. It would seem to be sensible to keep costs as low as possible by minimising the number of different funds to hold, so as to minimize trading costs. If I try to build my own diversified porfolio using various domestic index trackers, it would push up overall trading costs.

Having been thinking about buying into the FTSE All-World High Dividend Yield UCITS ETF (VHYL) to give the portfolio a value tilt as well. Maybe at 10-20% of the equities allocation. Is that a good idea?

I intend to also look for a globally diversified small cap fund as well to give it abit of spice.

Using VWRL as the equity part of your portfolio is a valid option. Plenty of advocates, Lars Kroijer's book spends a couple of hundred pages explaining why, and he has a piece on Monevator explaining succinctly.

I hold the same VHYL as a value tilt. Vanguard recently introduced an actively managed Global Value Factor ETf that is tempting many at 0.22%. VHYL is a pretty poor instrument to tilt to value.

bowlhead99

TheTracker wrote: »

Using VWRL as the equity part of your portfolio is a valid option. Plenty of advocates, Lars Kroijer's book spends a couple of hundred pages explaining why, and he has a piece on Monevator explaining succinctly.

As TheTracker says, there's nothing fundamentally 'wrong' with putting all your money into one fund that just allocates every dollar in the same way that the average global listed equity investment dollars are invested.

It is absolutely the simplest and cheapest way to do it because it never needs to be rebalanced. You put your money into 3000 stocks based on their share of world market cap, and a year later they all go up and down in value relative to each other but are still allocated based on their share of world market cap.

However, having said it never *needs* to be rebalanced, that depends to some extent on how you view risk.

For example, you invest in VWRL today you get 52.5% in USA on a regional basis and 11.5% in Technology on an industry sector basis. Contributing to each of these is your 2.5% in your largest holdings Apple and Microsoft. That's just how the numbers shake out, it doesn't mean you have a strong preference to those companies or regions or industries, you are just doing what the other wise investors are doing.

Now if Apple and Microsoft double in value while everything else stands still, you now have 5% in Apple and Microsoft, 55% in USA and 14% in technology.

Some people would think it sensible to 'rebalance' their money across other industries and geographies when this happens, because they don't want a twentieth of their money in just two companies and they don't want as much as a seventh of their money in technology or eleven twentieths of their money in companies headquartered in the USA... because they feel their money is no longer sufficiently diversified among opportunities and is prone to local (e.g. political / economic) risks in USA or headwinds that might be building up against certain types of computer hardware or software firms.

VWRL says you don't need to worry about any of that, because your money is still allocated in line with how other people's investible dollars are invested, and hey, these are global businesses anyway and their technology is used by other sectors anyway, so there's no problem, there's no such thing as 'overweight' because everything looks like it is in line with how the world is weighted these days. By saving money and effort and staying in the market without rebalancing, you will get the optimum result for your equities allocation.

So goes the theory, but to some, blindly following the market caps of the companies up and down gives you potential for quite high levels of volatility. It's what put a lot of your money in technology before the dotcom crash of 2000 and in financials before the credit crash of 2008. Sounds bad. But on the flip side, staying invested in the tech and financials without rebalancing out of them is what gave you so much money on the cusp of the tech and banking crash to lose in the first place, so you could in fact afford to lose when they fell out of favour.

Personally I don't want the result of a single cap weighted index - and as I'm not trying to allocate $30 trillion across all opportunities I don't need to weight so heavily to the largest companies that can accommodate my money. But there are others that swear that it has a sound basis.

One relevant point is that in Kroijer's piece for monevator he mentions about a single global index being "the broadest, cheapest, and most tax efficient". From his time in the US he would be right about it being tax efficient because over there, when a fund churns its portfolio the investors will suffer a tax charge on all the little capital gains and losses, so a portfolio with minimal changes will 'win' the tax game.

However over here, the trading activities of OEICs and ITs do not result in such tax charges. You only crystallise your capital gains or losses when you sell your share in the fund. The only bit of extra tax efficiency the VWRL provides is making sure there is no unnecessary stamp duty wasted when churning the portfolio to rebalance into the few countries that have stamp duty.

So actually, for those of us who don't mind rebalancing, it's quite useful to be selling down your US fund and topping up your Europe fund once a year, because realising some of the gains from Apple and Microsoft allows you to use up your annual CGT allowance for that year. By contrast, 'letting it run' in a single global fund saves annual rebalance work but stores up a very large tax bill in the end which might not be covered by one year's allowance.

For some people tax doesn't matter (e.g. in an ISA or SIPP) and you can obviously stay exposed to a single global index by selling out of Vanguard's global tracker and buying Blackrock's global tracker and so on, to use your tax allowances. But just an example of why it can still be valid to challenge viewpoints, even if they are written by someone who has a 200 page book on the merits of cap weighted indexes.

I hold the same VHYL as a value tilt. Vanguard recently introduced an actively managed Global Value Factor ETf that is tempting many at 0.22%. VHYL is a pretty poor instrument to tilt to value.

Essentially VHYL is tilting to dividend yield which is a crude way to judge 'value'. The MSCI or FTSE or Vanguard proprietary 'value factor' indexes use a weighting that's driven by such measures as sales to market value, earnings to market value, cash flow to market value and as such might be considered more useful if value is what you're going for. I don't know to what extent Vanguard's new ETF is 'tempting many' because it only launched in December with a few million dollars in the fund. It will take quite some time before we see whether it ends up at $100m or a billion.

But of course, the extent to which the measures highlight 'value' of a company when they are working off *historic* revenues or profits or cashflows or dividends against *current* price, can be limited.

Without wanting to waste space rehashing comments already made by people on other threads, there are obviously lots of 'factors' you can use to tilt a portfolio. Value, yield, size, 'quality', profitability, momentum etc.

You say you are also looking for a smallcap fund to give some 'spice'. So in one part of the portfolio you are looking for companies that show 'value' but are not particularly small, but in another part of the portfolio you will be looking for companies that are small and volatile and probably the ones you find in a smallcap global tracker fund will not be particularly exhibiting a lot of 'value'.

Arguably what you really want is not a concentration into the very biggest or the smallest or the least value or the most value... but a whole bunch of small, mid-sized and large companies broadly diversified by geography and sector with perhaps a tilt to 'value' (though the latter is something not easy to determine by robot).

Constructing such a portfolio through one or more funds requires, IMHO, someone to be a bit more 'hands on' than just buying 90% global equity tracker and 10% global bond tracker (or whatever sounds simplest and cheapest on a passive investment website). As such, don't disregard actively managed funds, although that of course comes with cost and I know TheTracker doesn't like them so much

TheTracker

FWIW Mr Kroijer lived in the US between 1994 and 1999. He moved to London in 1999 and has lived here ever since, including the writing of his book and article.

And if two stocks in a global cap weighted fund double while at 2.5% of the total cap they'd represent 4.75% of the new index, not 5% and 13.3% in tech not 14%

bowlhead99

TheTracker wrote: »

FWIW Mr Kroijer lived in the US between 1994 and 1999. He moved to London in 1999 and has lived here ever since, including the writing of his book and article.

Ah, in that case it's not possible that his generalisation about the extra tax benefits were coloured by his time in the US, from where he got his degree and MBA, as that five year period is not long enough to pick up bad habits; his assertion should not be challenged. My mistake

And if two stocks in a global cap weighted fund double while at 2.5% of the total cap they'd represent 4.75% of the new index, not 5% and 13.3% in tech not 14%

If the index has a market cap of $100bn and the two stocks are worth $2.5bn between them and the other stocks worth 97.5bn...

When the market capitalisation of those two companies double, such that they are now worth $5bn, and the other companies are still worth 97.5bn, the market capitalisation of the entire index moves up to $102.5bn.

The two companies in question, assuming no rebalancing, are now worth 5/102.5ths of the index, which is 4.878%. It's probably acceptable to round this to 5% because the original weighting of 2.5% was only a guesstimate anyway and it explains the point well enough for anyone who doesn't want to work to more accuracy than half a percent.

If you like, you could round the 4.878% down to 4.75% as you have done. No harm in working to quarter percents of course. But as 4.878 is nearer to 5.00 than 4.75, most of us would round up instead of down. I'm not going to bother trying to second guess how you think (11.5+2.5)/102.5 should round down from 13.66% to 13.3%. Maybe there are 200 pages of analysis in Kroijer's thesis, which I haven't read.

Or maybe it's me who has made a stupid maths error and will later look like a tool for trying to be sarcastic on an internet forum...

dunstonh

FWIW Mr Kroijer lived in the US between 1994 and 1999. He moved to London in 1999 and has lived here ever since, including the writing of his book and article.

If that is the case, then what other mistakes has he made then?

grey_gym_sock

dunstonh wrote: »

If that is the case, then what other mistakes has he made then?

do you mean other than not moving to norfolk?

TheTracker

QUOTE=bowlhead99;69936867]Or maybe it's me who has made a stupid maths error and will later look like a tool for trying to be sarcastic on an internet forum...
[/QUOTE]

Oh, I read that the 2.5% was in each of the tech giants, not in aggregate, accounting for the alternative numbers.

Anyway this is all friendly jousting, we are in agreement that a vehicle like VWRL is a valid option many people, but not all, for their equity needs.

I did return to the referred book to see what he said about tax and it is all UK tax specific. I don't think it right he declared a global tracker as the "most ... Tax efficient", but the English language can be funny like that.

bowlhead99

TheTracker wrote: »

I did return to the referred book to see what he said about tax and it is all UK tax specific. I don't think it right he declared a global tracker as the "most ... Tax efficient", but the English language can be funny like that.

The bit i was referencing was the succinct summary he did for monevator which you were referring us to, which is at http://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/ ; his opening paragraph was

"I believe the only equity exposure you should buy is the broadest, cheapest, and most tax efficient – which is a total world equity index tracker."

Not sure if i made the point clearly enough on the US vs UK tax treatments. In the US that structure of fund with minimum trading is most tax efficient for individuals because any profits from trading within the mutual fund is chargeable on the individual in the year it happens, so less tax is lost if less is traded. In the UK the individual investors would only worry about getting taxed when they voluntarily sell their holding, so it's no more tax efficient to get a global tracker than a different single fund that had underlying regional exposures whose assets kept getting rebalanced.

A separate concept - of using one equities fund rather than multiple equities funds rebalanced - can theoretically give a better result because paying tax at the end is cheaper than paying tax annually and having the tax leakage compound up. However, waiting to pay tax at the end takes away the opportunity for a UK individual investor to use their annual CGT allowances, which might favour more frequent "cashing out" of gains across multiple funds because it can keep total tax cost down to zero.

This second point wouldn't be so useful for investors in some non UK countries that have not got a dedicated "annual gains allowance" or only have a small one.

So, although the author is ostensibly thinking about UK specific tax effects, it's quite possible some of his general comments are borne of writing for a global audience (his book is on sale in USA too). Bcause the "and most tax efficient" does not really seem to apply here unless it's a reference to stamp duty- which will only give immaterial differences on a globally focused fund rebalanced periodically versus not rebalanced at all.

Hope that makes sense but yes I agree a single tracker can be a way of taking exposure of course, it just doesn't have the characteristics I like in my funds.

I do actually have a global tracker (size factor) etf in one of my portfolios; it's not cap-weighted and it does rebalance, so quite a bit different from VWRL. I only picked it up to watch as a bit of a curiosity. Quite a big weighting to Japan which I'm comfortable with in the context of other holdings in that portfolio, though not a market that has performed great in recent months as a sterling investor.