Cheapest Way Into Global Tracker Funds

bowlhead99

stphnstevey wrote: »

It has been mentioned missing out on the growth of EM, but not the flip side of the losses. Yes they can be +20% but also -40%.

Yes, the disparity between EM and developed can be large and when I said it can sometimes be 20%+ I was not only meaning EM was always going to be 20% better. Just 20% different. Which makes a mockery of avoiding the sector entirely to save 0.02%

As mentioned, if you wanted to invest in UK or US alone you can save money by buying cheaper funds that are not as broadly invested. But why ignore all the other developed companies in the investible universe - their returns will be 20%+ different, so look further and spend a little more OCF. Then you are at MSCI or FTSE World with 20-25 developed countries instead of one country. But from there it's the exact same argument: why ignore all the emerging companies in the global indexes - their returns will be 20%+ different, so look further and spend a little more OCF. In the end, you get to FTSE Global / All World, or MSCI All Countries World Index, as a position that's capturing at least some element of the returns that worldwide countries have to offer.

You are still missing some frontier markets with small or interesting companies to offer but if you are cap-weighting things anyway you are not going to move the needle by including them at market weight, so you can ignore them. However, the sum total of market cap in free float in emerging markets is $5 trillion and for smaller companies in the developed world is probably another $5 trillion market cap and those areas can make a difference.

So the idea of investing in a Global All-Cap fund covering $50 trillion of market cap instead of an MSCI developed world fund covering $40 trillion of market cap, is wholly reasonable, when the all-in cost of doing so is only 0.02% a year on your ongoing charges.

If your in a passive tracker, then your risk levels are probably fairly low

Not in my book.

The people with a vested interest in selling cap-weighted passive trackers to the public may like the naive public to think that it is 'low risk' to invest 100% of their money in world equities with a fiftieth of that in Apple or whatever, but it's rubbish.

Equities are high risk. Concentrating your money in company types with high valuations is high risk (c.f. tech companies in 1999, banks in 2007) Deciding that you will follow the rollercoaster of a global equities tracker up and down with peak-to-trough movement potential of 50% +, is high risk.

Someone who doesn't want to just ride the rollercoaster up and down, might employ an active manager to allocate his money in a way other than just putting the most money in the biggest/most expensive companies. With the aim of reducing volatility, producing long term reliable income etc, whatever strategy. But to assume that a tracker is low risk and an active fund is high risk is a fundamental mistake.

If you look at portfolio index/ market theory, it will tell you that any strategy that departs from the allocation of "all your money allocated in the same proportion as the entire market" is employing higher risk. So OK, that's how their definitions work. There is a risk of not getting the same return as 'the market'. But that is just terminology. It does not mean on a practical level, following a global equity tracker is what the layman perceives as a low risk solution and everything else is a higher risk solution. Active fund managers come up with all kinds of custom allocations to meet their investor objectives - such as wanting lower volatility.

The layman might not understand that, because he has heard that simple cheap trackers are the way to go, and might have also heard that the market theory guys said departing from the market is taking a risk of not getting the same result as the market (which is undeniably true), and he doesn't want to be in a situation where the breakfast telly said the FTSE was up 3% yesterday and he's only up 0.5% because then he is embarrased.

So some novice investor might use the tracker not because he has fundamentally understood all the arguments but because the results are 'safe'. He won't be in a postion that the market is up 3% when he's only up 0.5%, or the market lost 1% and he lost 10%.

The problem is that when the tracker is down 58% from its peak (as happened to FTSE All-World between 2007 and 2009, measured in dollars) he may not look at his 58% loss and say "yeah that's fine, no worse than the market, glad I chose this low risk investment". He will say, "!!!!!! happened to all my money, I thought trackers were supposed to be low risk!"

bowlhead99

eskbanker wrote: »

^ Has that train STILL not arrived yet?

You wouldn't believe how long it takes a BBQ to get up to temperature when the people lighting it are incompetent and the guy with all the smarts is busy messing around on his phone on some forum.

firestone

By saying i have a DIY scatter gun plan it was meant more in the sense that compered to say VLS or just a Fundsmith type fund i have a property fund,bond fund,private equity and global funds with no two the same otherwise i would just have picked one fund and i would not expect all the funds to be up or down at the same timeThere is a strategy in my thinking (but may not be the right one granted:)) and i don't think its a mess - but agree to an expert or passive investor it may not be the thing to do.But would think most active fund pickers use more then one fund and area as to follow just one theme you may as well go back to passive?

bowlhead99

firestone wrote: »

By saying i have a DIY scatter gun plan it was meant more in the sense that compered to say VLS or just a Fundsmith type fund i have a property fund,bond fund,private equity and global funds with no two the same otherwise i would just have picked one fund and i would not expect all the funds to be up or down at the same timeThere is a strategy in my thinking (but may not be the right one granted:)) and i don't think its a mess - but agree to an expert or passive investor it may not be the thing to do.But would think most active fund pickers use more then one fund and area as to follow just one theme you may as well go back to passive?

Don't get me wrong, you don't automatically get a 'mess' by buying multiple funds . I agree that many/ most active fund pickers will have more than one fund ; and users of passive funds will generally have more than one as well, because to cover the different regions or sectors and get the diversification benefits of rebalancing, you can use multiple funds to cover the asset classes and areas that have a place in your portfolio.

I'm don't doubt that there's some sort of strategy in your thinking, but when people talk about a scattergun approach they are describing firing a gun into the air and wherever it lands they will be happy, they are not targeting anything specific, which ties in to what you were saying about your success with BG funds just being a lucky pick from a newspaper ad without doing masses of fundamental research.

It sounds like your approach is not really scattergun, you have method behind the madness and have made an effort to cover bonds, property, public and private equities, and are using more than one managed or active global or regional fund etc. There's nothing unusual about that - massive institutions such as pension funds, insurance companies and sovereign wealth funds do the same. It's not that case that if you have more than one fund you might as well be passive, because the allocation from your multiple funds might be very different from the passive one. But you do have to consider what 'improvement' you will get from the addition of each new fund.

The point about just adding a new fund into an existing mix because it sounds interesting, is just you should take care that it really makes sense as an improvement to what you've got.

If you are already satisfied that you have a 'good enough' allocation as a consequence of your existing bond, property, public equities, private equities, domestic, global etc etc etc holdings, why would you be on the lookout for another fund that does some sort of GDP allocation? If it's that your exposure to China or India or SE Asia or Russia is low compared to those areas' population or GDP, then look for an emerging markets fund with a bit more China or India or SE Asia or Russia etc.

Choosing to buy a fund on top of your existing portfolio that adds a GDP-contributing tilt (like that HSBC one you mentioned) is a strange choice; the idea of the fund is 'interesting' but if you have already built your portfolio over the years you will have all the exposure you need to big retailers like Walmart etc and so the idea of buying the fund whose biggest investment is Walmart to help you with a low China or Russia allocation does not sound top drawer.

firestone

It was a good job i did not mention something like ishares Timber ETF you would have been typing all weekend:)

Thrugelmir

grey_gym_sock wrote: »

i'm also not seeing any evidence of higher returns from emerging markets. the credit suisse global investment returns yearbook 2014 included a study comparing the returns from developed and emerging markets going back to 1900, and developed actually came out ahead (mainly due to 1 very bad period for emerging, around the late 1940s - without that, it would be close to a tie).

That ignores the very fundamental shift of financial power which is evolving.

grey_gym_sock

Thrugelmir wrote: »

That ignores the very fundamental shift of financial power which is evolving.

i'm not so much ignoring it as expressing a robust agnosticism about whether or not that shift will involve emerging markets outperforming developed markets over the next few decades

partly for reasons already touched on. higher economic growth doesn't appear to be correlated with higher returns from equities. perhaps because that's in the price - e.g. just about everybody expects this power shift to happen. perhaps because gains may not accrue to holders of shares in the companies already listed in emerging markets, but to shareholders of companies not yet listed. or not to shareholders at all.

also, the expected power shift is generally towards asia, not equally to all emerging markets (and not equally to all of asia). so what does it tell us about how emerging markets globally will perform? not much.

so i'm dubious about this as a reason to include emerging markets when you're investing in equities via a simple global equities tracker. though i should say that, in my own more complicated portfolio, i do try to give asia a bit more weight (partly via the developed markets in asia).

mrke

Original Poster here with an update.

What amazing replies, theories, ideas and suggestions. Thank you all.

I mulled over the possibilities mentioned and have now started investing £100/m with Vanguard in their "FTSE Global All Cap Index Fund Accumulation" with an all in fee of 0.39%.

I was nearly completely blown off course and very tempted to go with Vanguards' S&P500 ETF as the cost is so low, but managed to talk myself out of it as I know I really want long term global diversification.

At least my investing journey has now started at long last.........

bostonerimus

mrke wrote: »

Original Poster here with an update.

What amazing replies, theories, ideas and suggestions. Thank you all.

I mulled over the possibilities mentioned and have now started investing £100/m with Vanguard in their "FTSE Global All Cap Index Fund Accumulation" with an all in fee of 0.39%.

I was nearly completely blown off course and very tempted to go with Vanguards' S&P500 ETF as the cost is so low, but managed to talk myself out of it as I know I really want long term global diversification.

At least my investing journey has now started at long last.........

The S&P500 by itself wouldn't have given you much geographical diversity. I think you made a good choice........now get ready for the "Trump Tariff" roller coaster as the major economies play chicken.