Moving away from VLS and home bias

chockydavid1983

Hi

I'm currently invested in a combination of VLS 100 and VLS 20 (mainly 100) and planned on reducing equity exposure over time. I was thinking about adding VG Global Small Cap into the mix too.

However, recently I've been researching and thinking that I don't really like so much home bias and was thinking of switching to VG Global All Cap Index and VG Global Bond Index (mainly All Cap for now).

Does that make sense? Are there other things to consider? I may add physical property at some point too. This is for the long term.

Chris.

AnotherJoe

There are other similar funds* with low cost management fees. But yes those would do the job.

*See post 3 here for some

Audaxer

You could have a look the HSBC Global Strategy funds, which have Cautious, Balanced and Dynamic fund options. They have less UK bias and have some exposure to property as well.

Alexland

UK bias can be useful if you intend to eventually spend the money in this country - not everything we buy is imported a lot of spend is on UK stuff like council tax, plumbers, days out, etc. Also with sterling so weak you are not getting very good value buying overseas assets so there is no harm keeping a bit more in the UK.

chockydavid1983

Thanks guys, at first glance the HSBC Dynamic could be closer to what I'm looking for so I'll need to compare that with the 2 fund VG combination I mentioned...

chockydavid1983

Thanks @Alexland, I'm not sure I follow why the fact that spending the money in this country would be important? In some kind of draw down, I would be selling units of a fund so the only thing that would matter would be the share price at the time?

TheTracker

There's always VWRL.

chockydavid1983

Thanks @TheTracker. I've had a bit of a read up on the difference between index funds and ETFs and they seem largely technical. Are there any practical differences? The VWRL and global all cap seem to have similar exposures and charges and will cost the same for me to trade.

pinkllama

VWRL is approx 3000 large and mid cap companies. Vanguard FTSE global All-Cap is 4800 large, mid and small companies.

bowlhead99

chockydavid1983 wrote: »

Thanks @Alexland, I'm not sure I follow why the fact that spending the money in this country would be important? In some kind of draw down, I would be selling units of a fund so the only thing that would matter would be the share price at the time?

When you retire you will spend a lot of the money on goods and services in the UK. Some of those goods and services will be imported (eg Korean smartphones and Chinese tellies and Japanese videogames and Dutch washing machines and German cars and US movies or cloud computing services) because we live in a global economy; even if you buy some widget made here in the UK, some components of it (together with raw materials used in the metal and plastics etc) will be imported from other parts of the world.

Prices are set for a global market but can reflect the cost base of the people selling the product or service and the amount of money they think they deserve to be paid in their currency of choice, which for all the things mentioned above will probably not be pound sterling. The Germans building you a car want to get EUR 50,000 for it and don't care whether that costs you GBP 40,000 or 30,000 as long as they get their EUR. Netflix movie streaming or Amazon Web Services hosting your music collection on the cloud want to earn $10-20 a month because that's the global price whether than means you paying a lot of pounds or a little depending on the strength of the UK economy.

To brace yourself for all these future expenses which are really denominated in foreign currencies even though you might physically hand over pound coins to a shopkeeper, it is a good idea to own a globally diversified set of assets. So if you own, through your funds, shares of Microsoft and Exxon and Google and Tesla and McDonalds with their huge USD revenue streams, and Samsung earning billions of Won, and Sony earning billions of Yen, and Tencent or Alibaba earning billions of Renminbi and VW and Deutsche Bank earning billions of Euro etc, you will be well placed to be able to afford to buy goods and services from all those countries in the future.

By contrast if you only own shares in UK companies, and UK doesn't do very well within the world economy over the next thirty years so your assets don't grow very much and our pounds are relatively worthless, you'll struggle to have a comfortable retirement. You won't keep up with the Joneses next door who deployed their capital internationally. If a license for Microsoft's Windows 2037 costs $1000 which costs you £5,000 to buy because your pounds sterling have a terrible exchange rate, it is good to have a pile of shares in Facebook and Coke and Citibank which have grown their value in dollars over the years - because if sterling is weak your shares in Citi or Coke etc will be worth a great deal of sterling and so that copy of Windows for your computer will still be relatively affordable.

So, you should have lots of international assets in your portfolio because you need them to keep your place in the world unless you are gambling that the UK is the very best place to invest.

However if you follow a simple 'unbiased' global equity tracker weighted by market capitalisation, it will see you have only about 6% of your money invested in the UK stockmarket and something closer to 95% invested in stocks that are listed on foreign markets. Then when you look at what is in the 'UK' bit of the tracker, you realise that it's very heavily weighted to the largest multinational companies listed in London, things like HSBC, Shell, BP, global pharmaceutical or tobacco giants etc. A massive proportion of the value of the FTSE index that you'd buy today is made up of assets and expected corporate revenues and profits which are physically outside the UK and / or denominated in foreign currencies. So, you thought you had 6% UK exposure but its more like 3%.

A 'purist' might say that he is fine with 97% of his investments either being based overseas or having their values driven by dollar or Euro or RMB or Franc profits, because that's what the stock market weight of Vanguard FTSE All Cap or MSCI All World is telling him. And because the 'average' investor around the world, or the 'average' consumer on the planet, finds that only 3% of his spending needs are in pounds sterling or have costs driven by the performance of the UK economy and how much British companies want to sell their stuff for.

But that sounds pretty extreme. When it's time to move house to your UK retirement village and have someone who lives in that place provide you a cleaning service, deliver council public services, sell you a bacon sandwich or fix your leaking roof, you don't want to be unable to afford it because 97% of your investment fund was invested in companies with US Dollar and Euro and Brazillian Real and Thai Baht assets and they all fell against the pound that year so your fund is looking a little small compared to your pound-intensive lifestyle.

As such perhaps if you 'home bias' your portfolio to companies listed in the UK, you'll end up not with a big pile of dollars tied up in foreign assets but a smaller pile of dollars tied up in those assets and a pile of pounds tied up in shares of Tesco plc, Rightmove, WHSmiths, M&S, Travis Perkins, British Land, Wetherspoon, William Hill or some other UK business present or future. You are not the 'average' person in the world economy as that includes everyone in Russia and India and south-east asia and latin america and sub-saharan africa and so on, who don't need many pounds to buy their bacon sandwiches or to employ a labourer to fix their roof, whereas you do.

Alexland

Bowlhead has explained it better than I could!!