Always read the fund documents

bowlhead99

newbinvestor wrote: »

I agree with most of that however I don't think most investors look at the prospectus. They will probably only look at the factsheet and KIID.

A lot of investors don't. As I alluded above, the investor is more concerned with what a fund does (makes diversified investments, receives capital and income) rather than the detailed mechanics of how it does it (articulated in a prospectus among layers of legalese). If you want to make good investment decisions you have to inform your process with more than just a snapshot from a factsheet at a point in time.

Your capital is competing with others' to earn long term returns and so if you want to get good results you should give yourself a fighting chance by looking closely to see what the fund might do, how and, ideally, why. The fact that mainstream popular investment websites don't give much granular info is both a blessing (if trying to get a big list of investment opportunities down to a shortlist) and a curse (if trying to do a good job of it).

[Deleted User]

Even the Vanguard Global All Cap fund has tens of forward currency derivatives in the balance sheet of the latest annual report. I assumed this a pure global equity fund. I don't want derivatives.

bowlhead99

newbinvestor wrote: »

Even the Vanguard Global All Cap fund has tens of forward currency derivatives in the balance sheet of the latest annual report. I assumed this a pure global equity fund. I don't want derivatives.

It's a completely different type of fund though.

The HSBC one is managing a portfolio of global assets with the aim of ending up in a certain band of volatility, and in doing so, as a cautious fund, they deliberately hedge out a lot of currency risk as a major part of the strategy.

Whereas the Vanguard All Cap is aiming to track the result of investing in a portfolio of almost 9000 stocks in that global index, by holding a representative sample of over 6000 of them, supplemented by a few index futures contracts. Looking in the last report (over a year ago) they had a £90m portfolio, after net inflows of £50m during the year, though these days per the factsheet they're up to over £200m of NAV.

From the portfolio info in the accounts, you can see they genuinely did have thousands of stocks - from £2m in Apple down to £500 in Pets At Home, and it doesn't seem unreasonable for it to have £1m+ of cash within its £90m+ NAV at a point in time, as a consequence of needing to handle subscriptions and redemptions and dividend receipts and payments.

The overall cash balance that will be sitting there at a point in time is destined to be deployed in (or has been sourced from) a variety of currencies - from tens or hundreds of thousands of dollars and euro and yen, to a few hundred dollars worth of Philippine Peso and other bits and bobs here and there. Even if the investors have contributed it in pounds (or are going to redeem in pounds), the fund doesn't really want to have a chunk of its value sitting in pounds sterling cash, because ultimately its success or failure will be judged on the tracking error of the whole NAV measured against the global equity index.

So it seems entirely reasonable that at a point in time there will be some outstanding FX forward contracts due for settlement in the coming quarter, whether as (a) a practical consequence of moving money or (b) just as a hedge so that a million or two of cash doesn't achieve the return of GBP cash, but instead achieves the return of a basket of currencies more in line with the target allocation of the index.

If you pore through the annual report and see that (e.g.) there's a currency contract maturing on 28/12/2018 to buy USD 800k with EUR, and then there's also another couple of contacts maturing on the same day to buy EUR with USD 500k and USD300k, you don't actually have a net exposure anyway, other than the relative rates in the contract. The net NAV of the FX forward contracts is c 0.1% of NAV and the net forward contract exposure is not huge in the context of a large fund.

So, hedging a bit of cash to better track an index or using forward contracted rates to shuffle money between currencies as a consequence of subscriptions/ redemptions, acquisitions/disposals is really nothing like the strategy on the HSBC Global Strategy Cautious fund you looked at - which was holding half its portfolio in global bonds and hedging the currency exposure of all those international bonds and a portion of its international equities.

There's nothing that would significantly shock or disappoint me in the Vanguard Global All Cap annual report - no major deal-breakers if my goal was to effectively track that index relatively cheaply. You will be able to see whether it does a good job or not by looking at its returns against the actual index because tracking the index is its whole raison d'etre.

If you want to find a more 'pure' index fund that holds all 8900 stocks in the index rather than a representative sample and doesn't use derivatives in any way, shape or form, good luck with it. But there are practical considerations when building a cheap index tracker which probably get 'brushed under the carpet' when discussing the topic in passing, because such minutiae is quite boring for some. Of course, fund managers do use different techniques when optimising their funds' construction, and it's up to the individual investor to decide to what extent he can get comfortable with it.

danm

newbinvestor wrote: »

Even the Vanguard Global All Cap fund has tens of forward currency derivatives in the balance sheet of the latest annual report. I assumed this a pure global equity fund. I don't want derivatives.

Why?


If they are hedging currency risk then unless you have a specific view on fx markets why do you want to be impacted by this?


Derivatives are first and foremost a hedging product. Granted they can be abused but inherently they are not bad tools.


If you think they are going to be misued by the fund, then change your fund selection as you must distrust the manager

[Deleted User]

danm wrote: »

Why?


If they are hedging currency risk then unless you have a specific view on fx markets why do you want to be impacted by this?


Derivatives are first and foremost a hedging product. Granted they can be abused but inherently they are not bad tools.


If you think they are going to be misued by the fund, then change your fund selection as you must distrust the manager

Because if the UK experiences hyperinflation, then the foreign currency of my foreign assets would very likely rise against the £. If it was locked/hedged, I would not get these gains.

bowlhead99

newbinvestor wrote: »

Because if the UK experiences hyperinflation, then the foreign currency of my foreign assets would very likely rise against the £. If it was locked/hedged, I would not get these gains.

So you would be fine with that global all cap fund then, as they're not really hedging out the currency gains on the equity portfolio.

Even without looking at the annual report to find the derivatives, you can tell they aren't doing that - because if they were, they wouldn't have only a 0.25% tracking error when tracking the performance of the global equities. The return from delivering a GBP hedged version of the returns would be quite different. Instead, tracking the (unhedged) index is their whole remit so you don't need to worry that they are secretly hedging away your gains.

By contrast, the Global Strategy Cautious does hedge the FX effects on its overseas fixed income investments and on some of its equity investments, because its goal isn't to deliver the raw returns of a particular index - it's a mixed asset fund with a cautious outlook, which includes a goal of not losing lots of value just because sterling appreciated or depreciated.

[Deleted User]

bowlhead99 wrote: »

So you would be fine with that global all cap fund then, as they're not really hedging out the currency gains on the equity portfolio.

Even without looking at the annual report to find the derivatives, you can tell they aren't doing that - because if they were, they wouldn't have only a 0.25% tracking error when tracking the performance of the global equities. The return from delivering a GBP hedged version of the returns would be quite different. Instead, tracking the (unhedged) index is their whole remit so you don't need to worry that they are secretly hedging away your gains.

By contrast, the Global Strategy Cautious does hedge the FX effects on its overseas fixed income investments and on some of its equity investments, because its goal isn't to deliver the raw returns of a particular index - it's a mixed asset fund with a cautious outlook, which includes a goal of not losing lots of value just because sterling appreciated or depreciated.

I never thought of the tracking error, good thinking.

I accept they are completely different kind of funds.

Thrugelmir

newbinvestor wrote: »

Because if the UK experiences hyperinflation,

And the possibility of this occurring is?

Greatly possibility that the Chinese will start dumping US Treasury Stock. The US has been undertaking realistic modelling of the impact of a currency war for some time.

redpete

bowlhead99 wrote: »

Those materials are generally more comprehensive than what they release to direct retail customers because 'a little knowledge is dangerous' and they try not to give the more complex materials to direct retail customers who may not really comprehend the concepts in the absence of a guiding hand to explain what is going on.

One of my pension fund managers (Fidelity) doesn't consider I can be trusted with the details of how a multi-asset fund is invested - not even the proportions invested in different types of asset.