Selecting a global index fund

aroominyork

I'm increasing the % of my equities in index funds and, since I want around 15% in the UK, plan to split between VLS100 and a more representative (ie 5% UK) fund. I am not too fussed whether it is an OEIC or ETF but other things being equal I prefer OEICs. I'm looking at three options:
i) HSBC FTSE All-World Index. Fully global, Mid and large caps (and a few small), 3088 holdings.
ii) Vanguard FTSE Global All Cap. Fully global, All caps, 6421 holdings.
iii) Fidelity Index World. Developed countries, Mid and large caps, 1661 holdings.

I'm veering towards Fidelity as I see small caps and emerging markets as areas best suited to actively managed funds, though should I be concerned by its significantly lower number of holdings or that does accurately reflect the absence of small caps and emerging markets? And are there any other factors (fees apart) that I should consider?

Edit: I assume one answer is to research tracking errors?

bowlsguru

I've been in on Fidelity for the last twelve months. I chose it partly because it has a very low ongoing fee.

All three funds mirror the FTSE World Index reasonably well, and although all three lag the index over the long term, Fidelity gets closest.

You can use TrustNet's Charting tool to compare the ups and downs at a glance. I tried to post an image here for you, but the forum software wouldn't allow me to.

aroominyork

markbarnes wrote: »

I've been in on Fidelity for the last twelve months. I chose it partly because it has a very low ongoing fee.

All three funds mirror the FTSE World Index reasonably well, and although all three lag the index over the long term, Fidelity gets closest.

You can use TrustNet's Charting tool to compare the ups and downs at a glance. I tried to post an image here for you, but the forum software wouldn't allow me to.

Presumably Fidelity's success is because developed world large caps have had a good run. Even in passive investing there can be active choices to make... for 'purity', Vanguard would be the choice.

Zero_Sum

Why not just share your investments across the 3 if you are unsure

NedS

Legal & General also provide a Global Equity Index tracker that tracks the FTSE World Index (2452 holdings) with performance very similar to the HSBC fund above. They also do L&G International Index Trust which tracks FTSE World (ex UK) (2322 holdings) which would also be suitable for diluting your UK holdings.

As they should all do a reasonable job of tracking their respective indices (although the Vanguard fund showed some variance on my charting tool), I'd go for whichever has the lowest fees on your platform. For example, L&G International Index Trust (ex UK) is 0.08% on HL so that would be my choice as it's cheapest on my platform.

chockydavid1983

I hold the Vanguard one and nothing else for equities as it's the most diversified and without any home bias. Why do you want 15% UK? It seems odd to me to agonise over which additional fund to buy just to make a minor change to home bias.

Malthusian

Plot the performance of the three on a graph (using the longest available timeframe), using Trustnet or the research tool of your choice, then ask yourself if this is a problem that deserves any more of your mental energy.

A_T

Don't sweat too much over it - they're all going to perform pretty much the same over time

bowlhead99

aroominyork wrote: »

I'm looking at three options:
i) HSBC FTSE All-World Index. Fully global, Mid and large caps (and a few small), 3088 holdings.
ii) Vanguard FTSE Global All Cap. Fully global, All caps, 6421 holdings.
iii) Fidelity Index World. Developed countries, Mid and large caps, 1661 holdings.

I'm veering towards Fidelity as I see small caps and emerging markets as areas best suited to actively managed funds

On the face of it it seems a simple job to change the investment profile of the VLS100 from 25% UK to about 15% UK by diluting it with a second fund that has 5-6% UK.

However if that second fund has a significantly different allocation in other areas - e.g. 0% emerging markets instead of 8% emerging markets - you will also dilute those other areas down (e.g. to 4%)

If you already have a plan to buy a dedicated and actively managed emerging market fund on the side - to 'plug the gap' in your EM allocation as a result of moving from 8% to 4% in your main global investment product - then I suppose no harm done.

One obvious question to ask is that if you don't like the UK allocation of the VLS100 (and feel you would need to buy something on the side to 'fix' that)... and you don't like the 8% emerging allocation being by index rather than active (so you are veering towards diluting it down and then buying something active on the side to 'fix' that)... why are you even using VLS100 as a start point and then trying to hammer it into something you want by diluting it and buying other stuff around the side?

You could forget VLS100 altogether and simply use the Fidelity index world product in conjunction with (a) the dedicated EM fund which you would have wanted to buy anyway and (b) a FTSE 250 fund (or active mid/smallcap fund) to create the ratio of 'UK bias' that you want.

Or if you don't mind a bit of EM and smallcap exposure being by index, use the global all-cap as the start point and then when you add EM or smallcap on the side you won't need to add so much of it. EM and smallcap are probably each about ~5 trillion on the side of ~40-45 trillion global mega/large/mid cap, in the global all-cap index.

, though should I be concerned by its significantly lower number of holdings or that does accurately reflect the absence of small caps and emerging markets?

Certainly the shortfall in number of holdings against the global all-cap is due to the fact that there are a lot of smaller companies (by quantity more than by value) in the global all-cap. The raw index has 9000+ companies, even though the vanguard product that tracks it doesn't use nearly that amount because it will get much the same without it. You can do a reasonable job of tracking a global index by grabbing the biggest companies in each territory.

Personally if costs are more or less the same (e.g. within 10 or so basis points) I suppose I would prefer to have a more 'comprehensive' product which had more underlying holdings. But actually I am more likely to build my own allocations and rebalance them rather than have a single product in which everything freely floats.

Edit: I assume one answer is to research tracking errors?

Tracking error is the main measure of how well a tracker does its job.

However, you are only choosing to follow 'the index' for cheap global access to markets because you believe an actively managed fund would do no better after charges. The specific company allocations do not have to be 'bang on' - they just need to be broadly in line with the intended allocation and not be charging you half a percent more in management fee each year for the privilege of making huge departures from the index (which is what the active approach might bring).

So, a rudimentary tracker which was not very accurate and sometimes +1% and sometimes -1% from the index it was tracking from year to year would not necessarily be any worse of an investment, as long as the ups and downs generally cancel out over time - you will still get roughly 'the index' result, over time, without suffering any unnecessary extra fees. It is only a problem if the tracking error is consistently 'down' rather than 'up' and ends up being to your detriment.

TheShape

aroominyork wrote: »

I'm increasing the % of my equities in index funds and, since I want around 15% in the UK

BlackRock Consensus 100 has a UK allocation very close to what you're after.

https://www.trustnet.com/factsheets/o/gfze/blackrock-nurs-ii-consensus-100

Does have a far lower EM component though.

aroominyork

Zero_Sum wrote: »

Why not just share your investments across the 3 if you are unsure

TheShape wrote: »

BlackRock Consensus 100 has a UK allocation very close to what you're after.

So that's a four way split, or I could hold out for another few suggestions and become the world's most egalitarian investor!

A_T wrote: »

Don't sweat too much over it - they're all going to perform pretty much the same over time

Very true, but if I get clear in my head on what I'm trying to achieve I'm less likely to mess around with it later.

Bowlhead - thanks. I won't use space to quote your full post but, not for the first time, you've helped me straighten out my thinking. It makes sense to hold one global index fund with the 'correct' c.5% UK allocation and then supplement it with a UK-specific index fund. I'll probably use an All-share index since I already have small caps covered by Liontrust UK Smaller Cos; this whole exercise is to do what I discussed in this earlier thread of a partial shift from growth to index funds.

Since I have small and mid caps, and emerging markets, covered by existing active funds it makes sense to go with Fidelity Index World; Morningstar gives it 5 stars + Silver so it should be sound.