Global Tracker Funds

jdw2000

DrSyn wrote: »

The other side of the same coin is that if you cannot keep up payments, the bank sells the house and you may end up with nothing. Neither house to live in or any money in the bank.

Investment Trusts do a similar thing when they take a loan from the bank to buy shares. All good when those shares rise in price. If those shares became worthless they still have to repay the loan.

Investment Trusts can have a discount/premium. A good reason why they are not suggested to beginners on this forum.

In 1920's USA buying on margin was very popular. That is borrowing money to buy shares. Before the crash, nearly forty cents of every dollar loaned in America was used to buy stocks. It caused a lot of pain when the crash occurred.

Its not recommend you try it!

There's no such thing as a free lunch. Someone has to pay for it, just be careful its not you.

Very interesting stuff. And the thought of that is quite scary. I will stay well clear!

dunstonh

VLS is is a fund comprising of other % stakes in other funds within Vanguard's own (hence "fettered") offerings?

Correct.

fettered = underlying funds are in-house
unfettered = underlying funds are from or include other fund houses
multi-asset = underlying assets (which may be in a single fund or a fund of funds) are spread across the various investment areas and can include bonds and property as well as equities.

And VWRL is an actual fund in its own right as it directly has a stakes of various difference stock exchanges around the world? And VWRL is also a tracker, as it's value tracks the various exchanges within it's fund? And as it simply tracks the exchanges, it is also passive?

Correct.

And aren't all passive funds ultimately sitting on active assets?

I suppose that has to be true. Although in terms of investment management, we tend to look at it as investment decision making. Are you just tracking the index or are you making decisions on how to invest.

HarryFlatters

dunstonh wrote: »

VLS is not a passive fund or a tracker. it is a fettered fund of funds. The underlying funds are passive but to an active asset allocation. The fund is not risk targeted. It is return focused.

For someone that doesnt have the risk profile for 100% equity, a multi-asset fund is usually more suitable.

Thank you
I understand that Lifestrategy cannot be passive as there is an active non proportional asset allocation, i.e. UK focussed which is why I contemplated the Global offering which does appear to invest in market share in a passive format, then add bonds to complete the job.

bowlhead99

Here is an overlong explanation which might help some newbies.

jdw2000 wrote: »

So...

VLS is is a fund comprising of other % stakes in other funds within Vanguard's own (hence "fettered") offerings?

Correct, as explained by Dunstonh.

The management team at Vanguard have built an investment product whereby when someone wants to put a few pounds in to a 'lifestrategy fund', the pounds received are combined with all the pounds received from other investors (net of the pounds they need to give back to the investors who want to redeem their holdings and sell out of the product), and the net new pounds are split up and a few of them invested in their UK equities tracker, some in their japan tracker, US tracker, emerging markets tracker, etc for the major equity markets, and some into their various different bonds trackers.

They only invest in their own company's trackers, no third party funds, so the discretion open to the manager of the lifestrategy products is fettered by needing to use the internal fund options available. The portfolio they construct, in their fund-of-trackers fund, is not directly tracking one published index, but is giving the aggregate result of holding a whole bunch of trackers in a whole bunch of indices.

And VWRL is an actual fund in its own right as it directly has a stakes of various difference stock exchanges around the world?

It is a fund that owns global shares in a specific proportion that follows one published global index, in line with its strategy. It directly has a stake not in 'stock exchanges' as such (because the exchanges are simply markets where people come to buy and sell the shares and bonds in companies like BP and Volkswagen and Apple) but in the shares of those individual companies around the world that are listed for sale on the stock exchanges (i.e. the shares of BP and Volkswagen and Apple) .

And VWRL is also a tracker, as it's value tracks the various exchanges within it's fund?

It is a tracker because it buys shares in the individual companies in all the same proportions that those companies make up in the world index (i.e. 1.5% or whatever of the overall world index is in Apple, some smaller percentage in the other companies that aren't $550 billion giants).

The companies that VWRL buys shares in are large and medium sized companies listed on the different global stock exchanges. As a result of holding all those different company shares in proportion to their market value, the effect is that its portfolio looks pretty much the same as holding all the major world stockmarket indexes in proportion to the relative sizes of those markets.

And as it simply tracks the exchanges, it is also passive?

It is passive because it doesn't make any decisions on what to buy or sell. It simply holds the companies in their world index proportions and if some of them get more valuable they will end up with more value in that company as the company's relative size grows within the index. But the increased value of the holding of Company B is not because they are actively choosing to sell some Company A and buy some Company B, it is just simply because Company B became more valuable than Company A due to market forces.

The shares within the portfolio held by VWRL will change its proportions every day, as different companies grow or contract, So for example one day you might have 1.7% in Apple and the next day only 1.6%; but this is not happening through active buying and selling decisions from a fund manager, it is simply by VWRL holding the same number of shares in each company from day to day and watching them change. Each quarter end, when some companies are promoted to the index by getting bigger and some are relegated for being too small, there will be a relatively small amount of buying and selling to bring in the new entrants.

And aren't all passive funds ultimately sitting on active assets?

Yes: for example the largest holding of a US equity tracker or a world equity tracker is Apple. Apple is an operating business with factories and software engineers and marketing people. If you put £100 into a world tracker you get between £1 and £2 of Apple. Apple is an active, busy company and you have an ownership share of a real operating business.

You can't actually turn up at the annual Apple general shareholder's meeting and cast a vote, as you don't directly own a share in Apple - you are accessing it through a collective investment scheme. So your money is pooled with other people's money so that when the fund buys a bunch of Apple shares at $107 each, you might have exposure to the performance of one share's worth with the £5000 you put into the fund and I might have exposure to two shares worth because I put £10,000 into the fund.

It is called passive investing because although the shares are in active businesses where board members and senior management and executives and workers make decisions daily, the Vanguard manager in VWRL or the HSBC manager in HSBC's equivalent and so on, does not make any decisions on who to invest in, they just follow a specified index that they chose to track, do very little buying and selling, and passively take whatever return they are given.

---

To compare something like VWRL to VLS100 first you need to understand what VLS 100 does:

The manager of VLS 100 decides he is going to put 25% of VLS's money into their UK tracker because that's how much exposure he thinks his UK investors want to their home market. It's a bit 'overweight' compared to the proportions you would get if you followed the FTSE All-World Index or MSCI All Companies World Index which would suggest less than 10% in companies listed in the UK. But it is a packaged product for their view of what would work for their typical UK-based customer, with some home bias.

He will have to make up for this 'relatively high' 25% UK allocation by putting relatively smaller amounts into the US and Europe and Japan etc. So for example he might only put 44% into North America instead of the ~60% which would be implied by the relative value of the North American companies and the other companies on those world markets.

So let's say you invest £1000 into the VLS100 fund and of that, the manager of VLS has decided that £250 is going to go into UK shares and £440 will go to North America to keep North America at 44% of the total fund size. The North American assets are allocated using passive index funds and we'll say Apple is just under 2.5% by value of all the shares in the North American stock markets, you will end up with about £10 allocated to Apple within the £1000 VLS portfolio, via the North American index funds. At the same time, via those same North American index funds you have maybe £5 allocated to Amazon, and £5 allocated to Johnson & Johnson within your £440 of North American assets.

And at the same time, the manager has decided that 4% of the VLS fund should be in Vanguard's AsiaPacific ex-Japan tracker fund, and we know from consulting an "Asia Pacific developed markets ex-Japan" index that within that tracker fund fund, the Commonwealth Bank of Australia is about 6.5% of those Pacific assets. So that means you have £40 in Pacific ex-Japan and maybe £2.50 allocated to CBA. For the sake of our example, your personal exposure to CBA is exactly half the Amazon or J&J exposure, which is in turn half the Apple exposure. These figures are not far off the real world numbers to help it sound credible, but the maths is not exact per all the factsheets...

OK, so in this theoretical 'what if' scenario: Apple announce that the new iPhone 8 has the power to reincarnate people and Steve Jobs has returned as CEO after 5 years in a pine box. Apple shares double in value overnight while every other company has no change in value as the markets process what the heck has just happened.

Prior to the announcement, your investment in the VLS fund was worth £1000, with £10 of Apple shares, £5 Amazon, £5 J&J, £420 of other North American shares, £2.50 of CBA, £37.50 of other Pacific shares, £250 UK shares and £270 of other world shares. Now Apple has doubled, grown by £10, your investment the next morning would go up from £1000 to £1010: it would now be £20 Apple, £430 of Amazon and J&J and other America shares, £40 Pacific, £250 UK, £270 rest of world.

As a consequence, you now have proportionately more invested in North America as a percentage of your portfolio than you did last night, and proportionately more in Apple shares than any other American share - e.g £20 Apple to £5 Amazon (4x) instead of £10 to £5 (2x).

The VLS manager will look at this, stroke his chin and say hmmmmmm.... My American shares are still in the 'right' proportion for today's American index. Apple is now correctly 4x the size of Amazon, just as it was correctly 2x the size of Amazon yesterday. I have the same number of shares of both companies that I had yesterday, and don't need to do any reallocations of holdings among the American stocks because it is completely fine for Apple to be twice as big relative to everything else in America, compared to yesterday. Market forces.

However: I wanted 44% America, 4% AsiaPacific, 25% UK, 27% rest of world. But actually today I have £450/£1010 (44.55%) America, 40/1010 Pacific (3.96%), 250/1010 UK (24.75%), 270/1010 rest of world. Compared to my targeted percentages, I have too much America and not enough in my home market of the UK, nor in everything else for that matter. I need to 'rebalance' and sell a bit of USA to top up everything else.

So, the VLS manager proportionately sells down all of his American shares (keeping Apple 4x the size of Amazon and J&J), until he has sold the America position down from £450 to only £444.40 which is his target 44% of the £1010 portfolio. Apple after its rise but before the rebalance was £20/£450 of America, while Amazon after Apple's rise but before the rebalance was £5/450. With the rebalance moving America's total down to £444.40, Apple should only really be £19.75 and Amazon a quarter of that at £4.94.

At the same time as part of this rebalance, he uses the cash released from America to buy other shares, increasing AsiaPacific for example to £40.40 (4% of £1010 instead of 4% of £1000). CBA is still the same proportion of the Pacific market as previously, so it will have gone up from £2.50 to £2.525.

OK, as a result of that, you as the investor have made £10 profit if you were to sell out of the fund, turning £1000 of assets into £1010. But you are not going to sell out you are going to stick around and you want to know that you are in a suitable portfolio. After all of the VLS internal rebalancing, you still have no more than 44% of your money in America, no less than 4% in Asia and no less than 25% in the UK. From a geographic risk perspective you are happy with it because you're happy still having a quarter in the UK and a twentyfifth in Asia and the 44% America exposure.

But when we look at individual companies, the picture is a little different. You have four times as much in Apple as Amazon which sounds fine if Apple is four times as valuable a company as Amazon. The US company proportions are all fine relative to what the market thinks they are each worth. However, if you look internationally, this has not worked the same, due to the intentional rebalancing where the American holdings got sold down a little to avoid the investors getting a high concentration in one region.

As a result of this selling down and rebalancing, you have £19.75 in Apple and £4.94 in Amazon, right? We can see that Commonwealth Bank Australia is £2.525 and Amazon is £4.94. Previously CBA was exactly half of Amazon (£2.50 to £5). Nothing changed on the stock market price of those two companies as it was only Apple that woke up the next morning doubled in size. But now CBA is a bit more than half of Amazon, due to the fact that Amazon was sold down to help make way for the enlarged Apple without taking total America shares over 44%. Amazon has been squeezed out a bit, to fit Big Apple in without taking US exposure too high.

And Apple which was previously 4x CBA, doubled in size on the stock exchange, hence you might expect it to go to 8x CBA... but it doesn't, it is 'only' £19.75 compared to CBA's £2.525. Apple along with other US shares has had its proportions of the total portfolio trimmed back a bit because the Vanguard VLS manager does not want total America assets to go over 44% or AsiaPacific assets to go under 4% or UK assets to go under 25%.

So, if you are still with me, you can see that the VLS manager is doing some 'active' work to keep UK at 25% and US at 44% in the face of daily market changes. In reality he will not always do this daily or hourly, just every so often so that what people buy is not changing too much in terms of global exposures.

It might be that he is completely OK with America increasing from 44% to 44.55% when Apple grows, because after all, the US is now a relatively bigger stockmarket than it once was, and there is no marketing document where the VLS manager told the public that the US ratio would never ever ever be allowed to grow as high as 44.55%. But the decision to either let it grow, or rein it in and rebalance, is a management decision, made by the fund-of-funds manager.

If there are major intentional strategic shifts (like when they dropped the UK exposure to 25% from 30%+ a few years back), these usually get announced. In the interim they will periodically rebalance between regions and asset classes - so that whenever you buy in, e.g. the VLS 80 will have its equities at 80%, not much more or less, and will have about 25% of its equities in UK, not much more or less, because that is what they told investors they would do.

VLS does not really commit to specific proportions other than the main headlines of 80% equities in VLS 80, 60% in the VLS 60 and so on. It targeted 25% in the UK and 6% emerging markets on its VLS100 product at the start of this year but will not always stay there. It promotes a key feature being the ongoing rebalancing to avoid 'drift' where one class of assets slips and slips and ends up being quite different from where it started. However they acknowledge that some allocations will shift from time to time in line with market movements.

As a practical example, the brochure for VLS100 showed an example target allocation of 6% emerging markets as of January 2016, but by the September 2016 factsheet, the holdings of emerging markets was up to 7.3%. The end of last year saw emerging markets having a tough time and being generally smaller relative to developed markets, thus the 6% target compared to when I first invested in the product in 2012 and it was something like 7 or 8%. Now back up to 7.3% as EM has rallied significantly and a 6% allocation would look quite small compared to the free float value of companies in those countries. So it's not true that all allocations between regions will all stay the same. What they say will stay the same is the equity/bond split.

----
So, anyway, if you have that straight in your head, the above is a general example of a fund-of-funds juggling its holdings of other funds to deliver the results it intends to deliver through a periodic rebalance process without allowing much in the way of slippage between asset classes.

Compare that to what happens in VWRL. In that investment vehicle there's greater US exposure as they are trying to follow the relative proportions of all major world stocks on a world stage. If Apple doubles in size overnight, and your £15 of a £1000 investment becomes £30 of £1015 investment, they are *not* going to sell some Apple and some Amazon and some J&J to pare back your US exposure. You will keep your Amazon and J&J and Commonwealth Bank Australia at their same values relative to each other, and only Apple got bigger, perhaps taking your US holdings from 60% to 61.5% of the new pie.

Some people don't like this 'free roaming' with no control of slippage against a target. The reason for there being no control is intentional of course, because the intention is not to have a fixed target of regional and industry sector allocations, but to follow a raw world index, and if US is now 61.5% of the world market capitalisation: so be it.

The fact that some investors don't believe you should have over 60% in the USA... or close to 2% in one company... or have your UK allocation at under 10%... or have your UK allocation sit there with a really prominent allocation to a few oil, banking and pharmaceutical giants... are all examples of reasons that people will cite as they depart from using pure index funds.

Active management can generally refer to stock picking within a sector or region (deciding we want as much Sainsbury as Tesco, instead of only half as much in Sainsbury like the index tells us). You or your fund manager are also taking an active decision when you make the higher level allocation choices like not wanting as much in US or as little in UK or emerging markets as the index gives us, especially if you vary that choice from time to time. And active decisions are also involved in the strategic level stuff of thinking how do I really want to allocate between shares, bonds and others from time to time, what is my strategy for buying and selling and my risk management plan to reduce the volatility of monthly swings in value if that's something that might concern me, etc etc.

VLS funds do not do 'active decisions' in that last category of 'split between shares and bonds', they passively rebalance the equity/bonds proportions of a VLS 60 back to the 60% equities target and leave *you* to decide if 60% equities and 40% bonds is OK with you. Their choice of split of equity regions within the 60% and the different types of bonds within the 40% is something that can drift from time to time even if it appears relatively constant, because all they are defining up front is the percentage equities and the fact the equities component is targeted at ~25% UK (for now...)

HarryFlatters wrote: »

Thank you
I understand that Lifestrategy cannot be passive as there is an active non proportional asset allocation, i.e. UK focussed which is why I contemplated the Global offering which does appear to invest in market share in a passive format, then add bonds to complete the job.

Yes, you can build your own portfolio of funds of course using a global tracker and a bunch of bond funds. However, by day two, the split between equities and bonds will already have changed because they grow and shrink at different rates and different times.

You would need to decide if you were going to 'rebalance' by selling out of one asset class and buying into the other every day, week, month, quarter, year etc etc to preserve your favoured split of allocations and not let equities get massive compared to bonds or vice versa.
HTH :beer:
*edit: woo, thanked in 3500 posts, cheers

jdw2000

bowlhead99 wrote: »

Here is an overlong explanation which might help some newbies.


Correct, as explained by Dunstonh.

The management team at Vanguard have built an investment product whereby when someone wants to put a few pounds in to a 'lifestrategy fund', the pounds received are combined with all the pounds received from other investors (net of the pounds they need to give back to the investors who want to redeem their holdings and sell out of the product), and the net new pounds are split up and a few of them invested in their UK equities tracker, some in their japan tracker, US tracker, emerging markets tracker, etc for the major equity markets, and some into their various different bonds trackers.

They only invest in their own company's trackers, no third party funds, so the discretion open to the manager of the lifestrategy products is fettered by needing to use the internal fund options available. The portfolio they construct, in their fund-of-trackers fund, is not directly tracking one published index, but is giving the aggregate result of holding a whole bunch of trackers in a whole bunch of indices.

It is a fund that owns global shares in a specific proportion that follows one published global index, in line with its strategy. It directly has a stake not in 'stock exchanges' as such (because the exchanges are simply markets where people come to buy and sell the shares and bonds in companies like BP and Volkswagen and Apple) but in the shares of those individual companies around the world that are listed for sale on the stock exchanges (i.e. the shares of BP and Volkswagen and Apple) .

It is a tracker because it buys shares in the individual companies in all the same proportions that those companies make up in the world index (i.e. 1.5% or whatever of the overall world index is in Apple, some smaller percentage in the other companies that aren't $550 billion giants).

The companies that VWRL buys shares in are large and medium sized companies listed on the different global stock exchanges. As a result of holding all those different company shares in proportion to their market value, the effect is that its portfolio looks pretty much the same as holding all the major world stockmarket indexes in proportion to the relative sizes of those markets.

It is passive because it doesn't make any decisions on what to buy or sell. It simply holds the companies in their world index proportions and if some of them get more valuable they will end up with more value in that company as the company's relative size grows within the index. But the increased value of the holding of Company B is not because they are actively choosing to sell some Company A and buy some Company B, it is just simply because Company B became more valuable than Company A due to market forces.

The shares within the portfolio held by VWRL will change its proportions every day, as different companies grow or contract, So for example one day you might have 1.7% in Apple and the next day only 1.6%; but this is not happening through active buying and selling decisions from a fund manager, it is simply by VWRL holding the same number of shares in each company from day to day and watching them change. Each quarter end, when some companies are promoted to the index by getting bigger and some are relegated for being too small, there will be a relatively small amount of buying and selling to bring in the new entrants.

Yes: for example the largest holding of a US equity tracker or a world equity tracker is Apple. Apple is an operating business with factories and software engineers and marketing people. If you put £100 into a world tracker you get between £1 and £2 of Apple. Apple is an active, busy company and you have an ownership share of a real operating business.

You can't actually turn up at the annual Apple general shareholder's meeting and cast a vote, as you don't directly own a share in Apple - you are accessing it through a collective investment scheme. So your money is pooled with other people's money so that when the fund buys a bunch of Apple shares at $107 each, you might have exposure to the performance of one share's worth with the £5000 you put into the fund and I might have exposure to two shares worth because I put £10,000 into the fund.

It is called passive investing because although the shares are in active businesses where board members and senior management and executives and workers make decisions daily, the Vanguard manager in VWRL or the HSBC manager in HSBC's equivalent and so on, does not make any decisions on who to invest in, they just follow a specified index that they chose to track, do very little buying and selling, and passively take whatever return they are given.

---

To compare something like VWRL to VLS100 first you need to understand what VLS 100 does:

The manager of VLS 100 decides he is going to put 25% of VLS's money into their UK tracker because that's how much exposure he thinks his UK investors want to their home market. It's a bit 'overweight' compared to the proportions you would get if you followed the FTSE All-World Index or MSCI All Companies World Index which would suggest less than 10% in companies listed in the UK. But it is a packaged product for their view of what would work for their typical UK-based customer, with some home bias.

He will have to make up for this 'relatively high' 25% UK allocation by putting relatively smaller amounts into the US and Europe and Japan etc. So for example he might only put 44% into North America instead of the ~60% which would be implied by the relative value of the North American companies and the other companies on those world markets.

So let's say you invest £1000 into the VLS100 fund and of that, the manager of VLS has decided that £250 is going to go into UK shares and £440 will go to North America to keep North America at 44% of the total fund size. The North American assets are allocated using passive index funds and we'll say Apple is just under 2.5% by value of all the shares in the North American stock markets, you will end up with about £10 allocated to Apple within the £1000 VLS portfolio, via the North American index funds. At the same time, via those same North American index funds you have maybe £5 allocated to Amazon, and £5 allocated to Johnson & Johnson within your £440 of North American assets.

And at the same time, the manager has decided that 4% of the VLS fund should be in Vanguard's AsiaPacific ex-Japan tracker fund, and we know from consulting an "Asia Pacific developed markets ex-Japan" index that within that tracker fund fund, the Commonwealth Bank of Australia is about 6.5% of those Pacific assets. So that means you have £40 in Pacific ex-Japan and maybe £2.50 allocated to CBA. For the sake of our example, your personal exposure to CBA is exactly half the Amazon or J&J exposure, which is in turn half the Apple exposure. These figures are not far off the real world numbers to help it sound credible, but the maths is not exact per all the factsheets...

OK, so in this theoretical 'what if' scenario: Apple announce that the new iPhone 8 has the power to reincarnate people and Steve Jobs has returned as CEO after 5 years in a pine box. Apple shares double in value overnight while every other company has no change in value as the markets process what the heck has just happened.

Prior to the announcement, your investment in the VLS fund was worth £1000, with £10 of Apple shares, £5 Amazon, £5 J&J, £420 of other North American shares, £2.50 of CBA, £37.50 of other Pacific shares, £250 UK shares and £270 of other world shares. Now Apple has doubled, grown by £10, your investment the next morning would go up from £1000 to £1010: it would now be £20 Apple, £430 of Amazon and J&J and other America shares, £40 Pacific, £250 UK, £270 rest of world.

As a consequence, you now have proportionately more invested in North America as a percentage of your portfolio than you did last night, and proportionately more in Apple shares than any other American share - e.g £20 Apple to £5 Amazon (4x) instead of £10 to £5 (2x).

The VLS manager will look at this, stroke his chin and say hmmmmmm.... My American shares are still in the 'right' proportion for today's American index. Apple is now correctly 4x the size of Amazon, just as it was correctly 2x the size of Amazon yesterday. I have the same number of shares of both companies that I had yesterday, and don't need to do any reallocations of holdings among the American stocks because it is completely fine for Apple to be twice as big relative to everything else in America, compared to yesterday. Market forces.

However: I wanted 44% America, 4% AsiaPacific, 25% UK, 27% rest of world. But actually today I have £450/£1010 (44.55%) America, 40/1010 Pacific (3.96%), 250/1010 UK (24.75%), 270/1010 rest of world. Compared to my targeted percentages, I have too much America and not enough in my home market of the UK, nor in everything else for that matter. I need to 'rebalance' and sell a bit of USA to top up everything else.

So, the VLS manager proportionately sells down all of his American shares (keeping Apple 4x the size of Amazon and J&J), until he has sold the America position down from £450 to only £444.40 which is his target 44% of the £1010 portfolio. Apple after its rise but before the rebalance was £20/£450 of America, while Amazon after Apple's rise but before the rebalance was £5/450. With the rebalance moving America's total down to £444.40, Apple should only really be £19.75 and Amazon a quarter of that at £4.94.

At the same time as part of this rebalance, he uses the cash released from America to buy other shares, increasing AsiaPacific for example to £40.40 (4% of £1010 instead of 4% of £1000). CBA is still the same proportion of the Pacific market as previously, so it will have gone up from £2.50 to £2.525.

OK, as a result of that, you as the investor have made £10 profit if you were to sell out of the fund, turning £1000 of assets into £1010. But you are not going to sell out you are going to stick around and you want to know that you are in a suitable portfolio. After all of the VLS internal rebalancing, you still have no more than 44% of your money in America, no less than 4% in Asia and no less than 25% in the UK. From a geographic risk perspective you are happy with it because you're happy still having a quarter in the UK and a twentyfifth in Asia and the 44% America exposure.

But when we look at individual companies, the picture is a little different. You have four times as much in Apple as Amazon which sounds fine if Apple is four times as valuable a company as Amazon. The US company proportions are all fine relative to what the market thinks they are each worth. However, if you look internationally, this has not worked the same, due to the intentional rebalancing where the American holdings got sold down a little to avoid the investors getting a high concentration in one region.

As a result of this selling down and rebalancing, you have £19.75 in Apple and £4.94 in Amazon, right? We can see that Commonwealth Bank Australia is £2.525 and Amazon is £4.94. Previously CBA was exactly half of Amazon (£2.50 to £5). Nothing changed on the stock market price of those two companies as it was only Apple that woke up the next morning doubled in size. But now CBA is a bit more than half of Amazon, due to the fact that Amazon was sold down to help make way for the enlarged Apple without taking total America shares over 44%. Amazon has been squeezed out a bit, to fit Big Apple in without taking US exposure too high.

And Apple which was previously 4x CBA, doubled in size on the stock exchange, hence you might expect it to go to 8x CBA... but it doesn't, it is 'only' £19.75 compared to CBA's £2.525. Apple along with other US shares has had its proportions of the total portfolio trimmed back a bit because the Vanguard VLS manager does not want total America assets to go over 44% or AsiaPacific assets to go under 4% or UK assets to go under 25%.

So, if you are still with me, you can see that the VLS manager is doing some 'active' work to keep UK at 25% and US at 44% in the face of daily market changes. In reality he will not always do this daily or hourly, just every so often so that what people buy is not changing too much in terms of global exposures.

It might be that he is completely OK with America increasing from 44% to 44.55% when Apple grows, because after all, the US is now a relatively bigger stockmarket than it once was, and there is no marketing document where the VLS manager told the public that the US ratio would never ever ever be allowed to grow as high as 44.55%. But the decision to either let it grow, or rein it in and rebalance, is a management decision, made by the fund-of-funds manager.

If there are major intentional strategic shifts (like when they dropped the UK exposure to 25% from 30%+ a few years back), these usually get announced. In the interim they will periodically rebalance between regions and asset classes - so that whenever you buy in, e.g. the VLS 80 will have its equities at 80%, not much more or less, and will have about 25% of its equities in UK, not much more or less, because that is what they told investors they would do.

VLS does not really commit to specific proportions other than the main headlines of 80% equities in VLS 80, 60% in the VLS 60 and so on. It targeted 25% in the UK and 6% emerging markets on its VLS100 product at the start of this year but will not always stay there. It promotes a key feature being the ongoing rebalancing to avoid 'drift' where one class of assets slips and slips and ends up being quite different from where it started. However they acknowledge that some allocations will shift from time to time in line with market movements.

As a practical example, the brochure for VLS100 showed an example target allocation of 6% emerging markets as of January 2016, but by the September 2016 factsheet, the holdings of emerging markets was up to 7.3%. The end of last year saw emerging markets having a tough time and being generally smaller relative to developed markets, thus the 6% target compared to when I first invested in the product in 2012 and it was something like 7 or 8%. Now back up to 7.3% as EM has rallied significantly and a 6% allocation would look quite small compared to the free float value of companies in those countries. So it's not true that all allocations between regions will all stay the same. What they say will stay the same is the equity/bond split.

----
So, anyway, if you have that straight in your head, the above is a general example of a fund-of-funds juggling its holdings of other funds to deliver the results it intends to deliver through a periodic rebalance process without allowing much in the way of slippage between asset classes.

Compare that to what happens in VWRL. In that investment vehicle there's greater US exposure as they are trying to follow the relative proportions of all major world stocks on a world stage. If Apple doubles in size overnight, and your £15 of a £1000 investment becomes £30 of £1015 investment, they are *not* going to sell some Apple and some Amazon and some J&J to pare back your US exposure. You will keep your Amazon and J&J and Commonwealth Bank Australia at their same values relative to each other, and only Apple got bigger, perhaps taking your US holdings from 60% to 61.5% of the new pie.

Some people don't like this 'free roaming' with no control of slippage against a target. The reason for there being no control is intentional of course, because the intention is not to have a fixed target of regional and industry sector allocations, but to follow a raw world index, and if US is now 61.5% of the world market capitalisation: so be it.

The fact that some investors don't believe you should have over 60% in the USA... or close to 2% in one company... or have your UK allocation at under 10%... or have your UK allocation sit there with a really prominent allocation to a few oil, banking and pharmaceutical giants... are all examples of reasons that people will cite as they depart from using pure index funds.

Active management can generally refer to stock picking within a sector or region (deciding we want as much Sainsbury as Tesco, instead of only half as much in Sainsbury like the index tells us). You or your fund manager are also taking an active decision when you make the higher level allocation choices like not wanting as much in US or as little in UK or emerging markets as the index gives us, especially if you vary that choice from time to time. And active decisions are also involved in the strategic level stuff of thinking how do I really want to allocate between shares, bonds and others from time to time, what is my strategy for buying and selling and my risk management plan to reduce the volatility of monthly swings in value if that's something that might concern me, etc etc.

VLS funds do not do 'active decisions' in that last category of 'split between shares and bonds', they passively rebalance the equity/bonds proportions of a VLS 60 back to the 60% equities target and leave *you* to decide if 60% equities and 40% bonds is OK with you. Their choice of split of equity regions within the 60% and the different types of bonds within the 40% is something that can drift from time to time even if it appears relatively constant, because all they are defining up front is the percentage equities and the fact the equities component is targeted at ~25% UK (for now...)


Yes, you can build your own portfolio of funds of course using a global tracker and a bunch of bond funds. However, by day two, the split between equities and bonds will already have changed because they grow and shrink at different rates and different times.

You would need to decide if you were going to 'rebalance' by selling out of one asset class and buying into the other every day, week, month, quarter, year etc etc to preserve your favoured split of allocations and not let equities get massive compared to bonds or vice versa.
HTH :beer:
*edit: woo, thanked in 3500 posts, cheers

Great post as always. Thank you for that. Read it slowly and took in as much as possible. Thanks for sharing.


Regarding dividends and accumulators, can you choose which you have for different products? ie, each month any money that I make on my invested £2K gets paid into my nominated bank account, or it gets left in my investment to grow.

JohnRo

jdw2000 wrote: »

Regarding dividends and accumulators, can you choose which you have for different products? ie, each month any money that I make on my invested £2K gets paid into my nominated bank account, or it gets left in my investment to grow.

It's platform dependent, there may be some platforms that don't give you the option.

Normally the platform presents you two options, to pay away any dividends into your nominated bank account, which will typically happen on a given date each month irrespective of what day the dividends are received, or the option to retain dividends as cash on account in your investment portfolio.

** I know CSD give you the option to either retain income, pay away all income, or pay away a set amount of income each month.

bowlhead99

jdw2000 wrote: »

Regarding dividends and accumulators, can you choose which you have for different products? ie, each month any money that I make on my invested £2K gets paid into my nominated bank account, or it gets left in my investment to grow.

An 'accumulating fund' is a special class or type of investment fund that does not pay out any dividends to you at all and the money received from its underlying investee companies is automatically reinvested within the fund without ever being paid over to your ISA account or investment account or pension account on your platform, so you don't get the opportunity to pay it out to your bank account.

Whereas if you invest directly into an individual company or into the 'income' version of the fund, the dividends arising would generally be paid into your account that holds the investment (isa account / investment account /pension account). Your platform may or may not offer the facility to automatically invest the received dividends back into buying more units of the investments. If it didn't, you would have to do it manually.

As JohnRo says, some platforms support automatically paying the dividends out to your bank every so often (whether a fixed amount by standing order or just the total amount that's been received in the period, from quarter to quarter).

You can decide fund by fund whether you would like to hold an accumulation version or an income version. But the platforms don't typically allow you to pick which particular fund's dividends you want to sweep to your bank account, it's either all the income you receive into the investment account or nothing (unless you're doing it as a fixed amount by standing order, which could be set at less than the total of the dividends you expect to receive).

As a general rule, accumulation funds which don't physically pay out dividends - and simply reinvest them internally - are quite useful for ISAs, because unless you're actually retired and living off the income being generated, you probably don't want the money. If you've topped up your ISA account to the maximum annual allowance, it's unlikely you are going to want to pull the dividends out of it again and reduce the value of your ISA when you are already stuck with money or investments that don't fit inside the ISA.

By contrast, if your holdings are unwrapped and in a general investment account outside an ISA or pension, then when you receive dividends it could be quite useful to have the fund be an 'income' version that sends the income it receives out to your investment account. You may or may not want to take it away and spend it, but at least you can see how much it is and track how much of it is being reinvested. You need that information for tax purposes anyway - i.e. even if you don't owe tax on the amounts because of fitting inside your allowances and exemptions, you need to keep records of much income you made and how much your investments really 'cost' for tax purposes.

While a great many 'funds' structured as unit trusts or OEICs are available in either accumulation or income flavours, the funds structured as ETFs are mostly just simple income payers. Sometimes you do find accumulating versions of ETFs but not for all of them. Similarly investment trusts will be income payers rather than accumulation.

greenglide

In my experience TD Direct and Youinvest both hold money from dividends until you decide what to do - nothing, pay out or invest.

Fidelity automatically reinvest to the same fund (at least on their funds platform) or pay all to your back account in the following month.

Linton

iii have the options of
a - leaving the money in the account
b - pay out monthly
c - pay out each dividend when it oocurs. This only operates for dividends of £25 or above. Dividends of less than that amount stay in the account.

MPN

After doing some research I've noticed there are some good more specialist global trackers such as the L&G Global Health & Pharmaceutical Index & the L&G Global Technology Index or if you prefer a fund the Fidelity Global Technology Fund. Higher risk scores but some great returns if you prefer the higher exposure to these individual markets. Morningstar give them all a 5 star rating.