23M Newbie - Investment/Savings Portfolio Advice (GAC/FTSE 100/FTSE 250/ESG DWAC)

bogleboogle

Hi all, I'm a 23 yo about to start my first full-time job in the coming months. Started investing/saving December time last year (yep...) and currently have/use the following:
- Vanguard S&S ISA: FTSE Global All Cap Index (Acc.) (GAC) - 85%; FTSE 100 Index Unit Trust (Acc.) - 15%. 
- Cash LISA: used up the £4k allowance from last year and should use up this year's £4k allowance within the next few months too. 
- Cash savings: 3-4 months rent/bills buffer in my cash savings. My salary will pay for my rent/bills/expenses and I only intend to use this cash as a fail-safe for emergencies (e.g. if I suddenly get fired and still have to pay out the rest of my lease in the future). 
- Private workplace pension: will be automatically enrolled and will invest 4% of my salary p.a. with 6-8% employer contributions (there also exists the potential to invest this).

I invested into the GAC via lump sum in Dec 2019 but bought more during the dip in the past few months so I was able to bring my price per unit down a bit.
I plan to use the GAC as my main long-term investment (with a horizon of >20 years). I also invested in the FTSE 100 Index Unit Trust in the past few weeks as I thought it was good value for a time horizon of 2-5 years (current p/e ratio of 16 and low OCF of 0.06%). However, I'm now not sure it represents a better investment than the alternatives, namely FTSE 250 UCITS ETF and ESG Developed World All Cap Equity Index (Acc.) (ESG DWAC). 

AFAIK, the FTSE 100 is seen as better for capital growth vs the FTSE 250 UCITS ETF due to ability to reinvest dividends (FTSE 100 had a strong dividend yield of approx. 4-5%). However, dividends will be slashed for at the least the next few years so that advantage has potentially vanished for the short-term. In addition, the FTSE 100 has been a perennial under-performer heavily weighted to oil/gas whilst the FTSE 250 appears to have more scope for capital growth (although I'm not fully sure how that works as those companies would then move into the FTSE 100 anyway). What are the other factors I should be considering? NB. I'm seeking capital growth to benefit from compounding, not interested in income.

Also, the ESG DWAC seems like a great fund I'd love to hold. The only downside seems to be that it's virtually identical to the GAC in terms of regional exposure (the only material difference being that the GAC holds 10% in EM whilst the ESG DWAC has an extra 10% in the US instead). 

One option is to sell the FTSE 100 within the next 3-5 years if/when there is >10% growth and fully invest that into the GAC/ESG DWAC. I could alternatively use my private workplace pension (managed by L&G) as the sole second fund (alongside the GAC) and invest that into an ESG fund/FTSE 250. However, I'm not sure that the ESG DWAC is offered by L&G. 

Sorry for the long rambling post but I'm just seeking advice and guidance on all the issues above really. Thank you in advance!

george4064

I wouldn’t bother with the FTSE 100 tracker and stick it all in Vanguard’s GAC, also your understanding of the FTSE 100 vs FTSE 250 is misguided. If you want some extra UK equity exposure I’d rather hold a FTSE 250 tracker than FTSE 100.

The yield is also relatively high for the FTSE 250, some might argue that dividends are more under threat for FTSE 100 as a whole because its heavy reliance on banks and energy stocks whereas FTSE 250 is much more diversified and hence would expect the dividends to be more sustainable.

Edit: another option would be to hold a FTSE all share tracker or a general UK Equity tracker fund, there you would get exposure to FTSE 100, FTSE 250 and FTSE Small Cap Indices.

bogleboogle

george4064 said:

I wouldn’t bother with the FTSE 100 tracker and stick it all in Vanguard’s GAC, also your understanding of the FTSE 100 vs FTSE 250 is misguided. If you want some extra UK equity exposure I’d rather hold a FTSE 250 tracker than FTSE 100.

The yield is also relatively high for the FTSE 250, some might argue that dividends are more under threat for FTSE 100 as a whole because its heavy reliance on banks and energy stocks whereas FTSE 250 is much more diversified and hence would expect the dividends to be more sustainable.

Edit: another option would be to hold a FTSE all share tracker or a general UK Equity tracker fund, there you would get exposure to FTSE 100, FTSE 250 and FTSE Small Cap Indices.

Thanks for your reply.

Why do you think the FTSE 100 won't offer better returns than GAC over the next 2-5 year period? 

I don't want extra UK exposure specifically, but I feel there's a good opportunity now to buy UK equities for the next 3-5 years (given low P/E ratios vs the US/EU and strong 2021 growth forecasts, and I also think the markets mostly already reflect Brexit concerns). 

As for exposure to banks, the FTSE 100 Index fund has 18% in financials whilst the FTSE 250 UCITS ETF has a 47% exposure to financials?

george4064

bogleboogle said:

george4064 said:

I wouldn’t bother with the FTSE 100 tracker and stick it all in Vanguard’s GAC, also your understanding of the FTSE 100 vs FTSE 250 is misguided. If you want some extra UK equity exposure I’d rather hold a FTSE 250 tracker than FTSE 100.

The yield is also relatively high for the FTSE 250, some might argue that dividends are more under threat for FTSE 100 as a whole because its heavy reliance on banks and energy stocks whereas FTSE 250 is much more diversified and hence would expect the dividends to be more sustainable.

Edit: another option would be to hold a FTSE all share tracker or a general UK Equity tracker fund, there you would get exposure to FTSE 100, FTSE 250 and FTSE Small Cap Indices.

Thanks for your reply.

Why do you think the FTSE 100 won't offer better returns than GAC over the next 2-5 year period? 

I don't want extra UK exposure specifically, but I feel there's a good opportunity now to buy UK equities for the next 3-5 years (given low P/E ratios vs the US/EU and strong 2021 growth forecasts, and I also think the markets mostly already reflect Brexit concerns). 

As for exposure to banks, the FTSE 100 Index fund has 18% in financials whilst the FTSE 250 UCITS ETF has a 47% exposure to financials?

You need to think more about risk/return than simply return.

I strongly believe that GAC will provide a better risk/return than a FTSE 100 will, UK stocks are cheap for a reason and I don’t see that changing anytime soon.

Financial stocks aren’t just banks, there are payment companies, insurers, and loads others. Have a look for yourself at the top 10 holdings, you’ll notice that the FTSE 100 is much more concentrated than the 250, also remember its a portfolio of 100 stocks (actually its 101 if you include Royal Dutch Shell A Shares) vs 250 stocks. In addition your argument that FTSE 100 tracker will deliver a high return because of their high dividends is flawed because companies that payout a high amount of their net income tend to be quite ‘stale’ and not have much growth opportunities ahead of them. 

Oil & gas stocks are a good example of this. Whereas FTSE 250 has generally ‘younger’ and (relatively speaking) smaller companies that have a lot more growth opportunities ahead for them. After taking that all in, would you still rather invest in FTSE 100 than 250?

bogleboogle

george4064 said:

You need to think more about risk/return than simply return.
I strongly believe that GAC will provide a better risk/return than a FTSE 100 will, UK stocks are cheap for a reason and I don’t see that changing anytime soon.
Financial stocks aren’t just banks, there are payment companies, insurers, and loads others. Have a look for yourself at the top 10 holdings, you’ll notice that the FTSE 100 is much more concentrated than the 250, also remember its a portfolio of 100 stocks (actually its 101 if you include Royal Dutch Shell A Shares) vs 250 stocks. In addition your argument that FTSE 100 tracker will deliver a high return because of their high dividends is flawed because companies that payout a high amount of their net income tend to be quite ‘stale’ and not have much growth opportunities ahead of them. 

Oil & gas stocks are a good example of this. Whereas FTSE 250 has generally ‘younger’ and (relatively speaking) smaller companies that have a lot more growth opportunities ahead for them. After taking that, would you still rather invest in FTSE 100 than 250?

Fair points.
However, I would still argue there is a difference between (i) opportunities for indices to return to pre-shock event prices and (ii) opportunities for indices to grow from previous peaks. I believe I am referring to (i) whilst you are referring to (ii). As I mentioned, my time horizon for the FTSE 100 is quite short (2-5 years), so (ii) is less relevant for my purposes. 
As to (i), I think the FTSE 100 is trading at a bigger discount to pre-COVID levels than the FTSE 250. I also think the larger companies should have stronger balance sheets and be less likely to fall into administration/liquidation than companies in the FTSE 250 on average (though I have no empirical evidence for this). 
Also, my argument was not that the FTSE 100 offers better prospects for capital growth because of higher dividend yields, just that this previous advantage for the FTSE 100 over the FTSE 250 is no longer likely to be true in the short-term as companies are less likely to pay out dividends for the next few years.
However, you have made some interesting points in favour of the FTSE 250 that I will have to look into some more - thank you.

dunstonh

The FTSE100 has been one of the worst performing indexes for the last 25 years.    What do you think has changed compared to all the previous years?   The UK economy is driven by companies in the mid and small cap range.  If you want UK representation in your portfolio, it makes sense to bias it towards small and medium cap.

AnotherJoe

Stay out of any FTSE fund that's UK based. FTSE100, 250 350 etc. Go global. Sell what you've bought,

bogleboogle

dunstonh said:

The FTSE100 has been one of the worst performing indexes for the last 25 years.    What do you think has changed compared to all the previous years?   The UK economy is driven by companies in the mid and small cap range.  If you want UK representation in your portfolio, it makes sense to bias it towards small and medium cap.

As I wrote above, I think there is a difference between (i) opportunities for indices to return to pre-shock event prices and (ii) opportunities for indices to grow from previous peaks. As my time horizon for the FTSE 100 is quite short (2-5 years), my rationale is based on (i).
The FTSE 100 delivered an annualised total return of 7.75% from 1984-2019 (but 4% from 1999-2019). [The FTSE 250 delivered 9% from 1999-2019.] So it does indeed seem that the FTSE 250 has offered better capital growth prospects over the past 20-25 years.
However, my decision is based on: assuming they both return to within 10% of their peaks at some point in the next 2-5 years, which one will have grown the most to get there (and thus deliver me the greater return)? That's the FTSE 100 (20% below 2019 peak vs 14% for FTSE 250). Obviously that begs the question of which one is more likely to return to that level within that time period - that's the gamble that I'm taking (but with a 6% buffer + lower OCF of 0.06% for FTSE 100 vs 0.1% for FTSE 250). 

bogleboogle

AnotherJoe said:

Stay out of any FTSE fund that's UK based. FTSE100, 250 350 etc. Go global. Sell what you've bought,

Why? 

2unlimited91

bogleboogle said:

However, my decision is based on: assuming they both return to within 10% of their peaks at some point in the next 2-5 years

Indexes don't return to their peaks on a timetable (even on a flexible timetable). That is not a good way to decide what index fund to invest in.

bogleboogle

2unlimited91 said:

bogleboogle said:

However, my decision is based on: assuming they both return to within 10% of their peaks at some point in the next 2-5 years

Indexes don't return to their peaks on a timetable (even on a flexible timetable). That is not a good way to decide what index fund to invest in.

Sure, perhaps I could have phrased it as 'assuming it goes up'. But with a V (or even U) shaped recovery, seems reasonable to believe that both indices are likely to grow in the next few years. So then the Q becomes which one has more room for growth? But again, I accept it's ultimately a gamble in favour of the FTSE 100. It's not something I'm committed to though, I'm very much open to arguments to the contrary (i.e. in favour of the FTSE 250) and that's why I'm here!