Dealing with a lump sum investment - £76K

Linton

savingsguy wrote: »

Thanks again. Here is my attempt at untangling some of the pricing. I have been struggling with the different structures. If someone could please check and confirm that I’m doing the right thing, that would be great.

Assuming I have £40,000 to invest in a S&S ISA.

Also, is ‘Vanguard LifeStrategy 100% equity’ is an index tracker/ETF or ‘fund’. ‘Fund’ seems loosely used, as a newbie I find it confusing?

A fund is just a collective investment, ie a container for a set of individual investments. An index tracker is a fund that chooses its investments to follow a stock market index - eg FTSE100. Any fund could in principle be held as a Unit Trust/OEIC where you buy and sell units in the fund with the fund manager, as an Investment Trust which is structured as a company with normal stock exchange shares so you buy and sell with other investors, or as an ETF which uses the stock exchange mechanisms for buying and selling but whose value is controlled by the fund manager.


VLS100 is a unit trust/OEIC that holds other funds in a ratio determined by the fund manager. It therefore is not a tracker. However the funds it holds are trackers.

Fund example - LifeStrategy 80% Equity Fund - Accumulation

• Ongoing charge 0.22%
• There is no initial charge!
• They mention a transaction fee of 0.5% - not really sure what this is?
  When are ongoing charged charged - are these annual charges?

0.22% fund charge=£88 per year
0.5% transaction fee=£200 per year (this seems a bit sneaky, it would be nice to know the total fund charge upfront unless I have it wrong)
Total cost=£288 (is this correct?)
.....

Every time you buy or sell you may be charged a transaction fee to cover the platforms costs. You will generally be charged for an IT or an ETF. Depending on the patform you may or may not be charged for a Unit Trust/OEIC. So the platform cannot give you an upfront total because it does not know your trading pattern. Buying shares usually incurs stamp duty. Shares in general and some Unit Trusts have a higher price for when you buy than when you sell. This is known as the bid/offer spread.


EDIT: the "fund charge" is a measure of the % of your money used to pay the fund manager and recoup his expenses. You dont physically pay this amount, it is already deducted in the calculation of the return.

ColdIron

Vanguard LifeStrategy is not an ETF. The term 'fund' is usually used as a general catch all that covers unit trusts, OEICs, Sicavs etc. These may or may not be index trackers. The LifeStrategy range are OEICs (Open-ended investment companies). It is a 'fund of funds', that is a fund (or OEIC) that is comprised of several separate index tracker funds (or OEICs) provided by Vanguard. The proportion or allocation of these trackers is determined by Vanguard. There are also index tracker funds but these will track a single index where the allocation is determined by, for example, market capitalisation or some other weighting

The OCF and transaction charges are internal to the fund and not explicit charges to you. You will not receive a bill for them, they are continuously taken from within fund by the manager before any performance figures are produced. They will be the same regardless of whichever platform you choose so you can ignore them when making platform comparisons

As far as internal charges go, until recently you only had to worry about the OCF, the cost of running the fund. In an attempt to increase transparency transaction charges must now be disclosed but frankly it's a bit of a mess. It's a forward looking charge or perhaps even a guess and different fund houses choose to implement it in different ways. Personally I ignore them

The platform fee is an explicit charge and will differ depending on your platform

I don't know where you are getting 0.5% transaction fee from, Vanguard say it is 0.1%
https://www.vanguardinvestor.co.uk/content/documents/legal/vanguard-full-fund-costs-and-charges-2018.pdf

Your platform costs look about right on the face of it excepting that 1) As mentioned your 'fund charge' is considerably overstated because of that 0.5% transaction cost and therefore your total cost is too high. 2) you will only pay the iWeb opening charge in the first year

savingsguy

Thanks for the information:

I got the charges information for the Vanguard LifeStrategy from the iweb Fund Centre page (unfortunately I cannot post links as I'm a new user).

iweb could be wrong, although it's likely me not understanding the information.

Having looked at the Vanguard PDF linked above, it lists:

Ongoing costs: 0.22%
Transaction cost: 0.1%
Account fee: 0.15% (wouldn't this be a part of ongoing costs)

It states that the total cost of investing is 0.47%

Wow, it's just a minefield of confusion. Transparent perhaps, thoroughly confusing definitely (at least to a newbie like me)!

It's a challenge for me to understand the charges as I'm learning. Thanks so much for the information so far.

masonic

savingsguy wrote: »

Gold
I’ve also read Andrew Craig’s ‘Own the world’ which I thought was great and easy to understand. He overlaps a lot with Lars Kroijer on cheap, globally diverse ETF/Trackers. However his strong message is to keep 20-25% of investments in Commodities (predominantly gold). He mentions Harry Brown’s Permanent Portfolio and Yale and Harvard portfolios.

Lars Kroijer isn’t bothered about gold at all. I’d be interested to see if anyone has opinions on this? With the world feeling rather insecure at the moment and Brexit, perhaps gold is a good way to keep some stability and protect against inflation.

I'd tend to agree with Lars Kroijer. Over centuries gold can be said to hold its value, but over mere decades it is pure speculation. If you are keen to include it, then 5-10% is quite enough in a balanced portfolio. If you'd bought gold in the early 1980s, you'd still be down on your investment in real terms today, nearly 40 years later, and you'd be well down over a 20-25 year period thanks to relatively high inflation in the early years (which gold did nothing to hedge against).

Owning companies with most of their earnings coming from outside the UK will be more than enough protection from Brexit-derived inflation.

masonic

savingsguy wrote: »

Having looked at the Vanguard PDF linked above, it lists:

Ongoing costs: 0.22%
Transaction cost: 0.1%
Account fee: 0.15% (wouldn't this be a part of ongoing costs)

It states that the total cost of investing is 0.47%

Ongoing costs are the costs taken by the fund itself, the account fee is what you'd pay the Vanguard Investor platform to hold it with them. But if you held it with iWeb, then the 0.15% fee would not apply, because iWeb do not charge an account fee. Instead they charge a one-off £25 account opening fee and a flat £5 transaction cost (so the 0.1% also would not apply at iWeb).

to_jackie_too

IWeb Fund Centre unhelpfully mentions 0.5% "average" transaction costs for many, perhaps all, funds. Presumably because they've failed to collate the transaction costs reported by each fund, and they are supposed to say something about transaction costs. The 0.1% figure from Vanguard, for the actual fund, is a better figure to go on (though some people have doubts about the whole methodology used to calculate transaction costs).

Generally, passive funds will have lower transaction costs than active funds. So you'd expect something like Lifestrategy (a fund of passive funds) to have lower transaction costs than the industry average. This is another advantage of passive over active funds (in addition to the on-going costs usually being lower).

masonic wrote: »

the 0.1% also would not apply at iWeb

I think that is Vanguard's estimate of the transaction costs incurred internally by the fund. So it would apply wherever you hold the fund. But it's not something you pay directly, it's just reflected in the price of the fund units (i.e. if it had had 0 transaction costs, the price would have risen more / fallen less).

masonic

to_jackie_too wrote: »

I think that is Vanguard's estimate of the transaction costs incurred internally by the fund. So it would apply wherever you hold the fund. But it's not something you pay directly, it's just reflected in the price of the fund units (i.e. if it had had 0 transaction costs, the price would have risen more / fallen less).

Taking as an example Vanguard LifeStrategy 80% Acc, if you go to the fund annual report, you'll see that in the year to 31st March 2017, actual transaction costs were only 0.04% and in the year to 31st March 2018 they were just 0.01%. So the 0.1% is either a terrible estimate or it does not represent the fund's transaction costs.

Edit: as Vanguard Investor doesn't charge a fee for fund switches, it must be the former, but clearly isn't representative of the actual cost to the fund, which will shrink further as a percentage as the fund continues to grow in size.

to_jackie_too

masonic wrote: »

Taking as an example Vanguard LifeStrategy 80% Acc, if you go to the fund annual report, you'll see that in the year to 31st March 2017, actual transaction costs were only 0.04% and in the year to 31st March 2018 they were just 0.01%. So the 0.1% is either a terrible estimate or it does not represent the fund's transaction costs.

The 0.1% figure is in the Vanguard costs document which ColdIron linked to. Perhaps it is higher because the annual report only includes transaction costs which the fund paid directly, but the costs document also includes an estimate for "market impact" costs? That's the part of the methodology for calculating transaction costs that has been questioned, so I don't really know which figure I'd prefer to rely on.

But the bigger picture is that all these figures are pretty low, and it's dealt with internally by the fund, so I wouldn't worry about it.

masonic

to_jackie_too wrote: »

The 0.1% figure is in the Vanguard costs document which ColdIron linked to. Perhaps it is higher because the annual report only includes transaction costs which the fund paid directly, but the costs document also includes an estimate for "market impact" costs? That's the part of the methodology for calculating transaction costs that has been questioned, so I don't really know which figure I'd prefer to rely on.

The annual report gives an overall profit and loss style breakdown of all of the contributors to the change in Net Assets per share, so anything that has been deducted from the underlying returns would be included (page 30 of this pdf if you are interested). The figures would appear to me to balance, such that the 2017-2018 opening NAV of £180.59 minus operating charges of £0.41 per share (0.22% OCF) minus direct transaction costs of £0.02 (0.01%) per share plus returns of £4.27 per share = closing NAV per share. This will not include transaction costs borne by the underlying investments (this is a fund of funds, but scanning the largest constituents, their costs are of the same order as those directly incurred by VLS, so perhaps 0.01% should really be 0.02% or 0.03% after those are factored in). Perhaps "market impact" costs have been added to arrive at a figure of 0.1%, but the price of the underlying assets at the next valuation point will depend on such a myriad of factors it is almost impossible to deconvolute how the transaction affected the price at the point of purchase.

But the bigger picture is that all these figures are pretty low, and it's dealt with internally by the fund, so I wouldn't worry about it.

Agreed, though it does make sense to treat the figures you are provided with some scepticism because they could lead to someone thinking a fund is costing them almost a third more than it actually is. This could have relevance when comparing rival trackers with low charges (I suspect Vanguard has much lower transaction costs than other providers with fewer assets under management).

I remain totally unconvinced that someone holding long term should look beyond the OCF (and perhaps the portfolio turnover ratio if it is available).

badger09

masonic wrote: »

I remain totally unconvinced that someone holding long term should look beyond the OCF (and perhaps the portfolio turnover ratio if it is available).

THIS ^^^^^^^

For newbie investors, the publishing of transaction charges is a (largely unnecessary) distraction.

Whether OP holds his Vanguard Life Strategy with the Vanguard platform or with IWEB, the fund cost will be the same, and he won't see a separate charge because it is done withing the fund.

However, for a £40k ISA investment - which assumes either self & partner, or £20k in 2019/20 & another £20k in 2020/21, the platform costs will be

for one ISA
Vanguard £30 in year 1.
£60 in year 2

IWEB £25 + £5 in year 1.
£5 in year 2

for self & partner ISAs
Vanguard £30 self + £30 partner in year 1.
£30 + £30 in year 2.

IWEB £25 + £5 in year 1 self + £25 + £5 in year 1.
£5 + £5 year 2

Whichever scenario, IWEB will be cheaper in year 2 and from then on.