Starter investor fund critique

csgohan4

Timeframe: 35-40 years
Capital input: 48K a year
Tax wrapper: Sipp/Lisa

Assets: 
Cash: 1 year Real life emergency fund, not for investing
Equities 70%
Bonds 30%
property/commodities will be part of the index funds

Platform:
Halifax due to low annual fixed fee, £12.5, Schedule payments seems a no brainer, at £2 a trade per month, same price as pumping the money in twice a year for 2 trades, might as well do it regularly to take advantage of the pound-cost averaging

Funds:
Equities:
-50 %Global: Vanguard FTSE Developed World ex-U.K. Equity Index Fund (Good all rounder, track record and reputable company)
- 10% Emerging markets:  iShares Emerging Markets (Exposure to china specifically and part of Asia Ex Japan and cheaper than the Vanguard version, however EM is riskier)
-5% Global All Caps:  Vanguard FTSE Global All Cap Index Fund (Again good rounder and and track record)
-5% Global Start up growth: SCOTTISH MORTGAGE INV TRUST (SMT) (riskier but gives more Tech coverage but is more Tesla which maybe a negative)- On the fence with this however, with a lower premium % and lower OCF compared to Monks  and high China coverage for better diversity. (Swapped out for SSON which is too expensive tbh, high OCF, premium % at this time)

Bonds: 
-30% Vanguard U.K. Government Bond Index Fund

Future plan:
Rebalance every 6-12months
Reduce equities by 5% every 5 years to a floor of 30% by retirement
Potential to invest in property, either indirectly via funds or REIT but at the moment there is current negative outlook, especially in the UK

Alternative active funds:
Vanguards Target retirement funds looks enticing but I am not comfortable with the 15% of the UK exposure when it only makes up a tiny pro proportion of the word economy and therefore more risk

Alternative defensive funds:
70% in Vanguard FTSE Developed World ex-U.K. Equity Index Fund and 30% in Bonds would be a viable alternative, less risk but less potential gains

I am open to alternatives, either cheaper and still good diversity of each asset allocation

AlanP_2

Before any comments on the fund choices a few general questions to provide more context:

Is this all for retirement or is the LISA for a house purchase?

Do you have the relevant income to cover £40k SIPP contributions?

Why a SIPP and not employer's pension scheme?

What about Lifetime Allowance implications?

Is there a partner and / or dependents who's financial situation needs to be considered to get a "household" view? It looks like you have £8k going in to LISA which implies there is.

csgohan4

AlanP_2 said:

Before any comments on the fund choices a few general questions to provide more context:

Is this all for retirement or is the LISA for a house purchase?
- Retirement only
Do you have the relevant income to cover £40k SIPP contributions?
-Have relevant income to cover 40k Sipp cover

Why a SIPP and not employer's pension scheme?
- Mr is Already maxed out on employer pension, now using Mrs Gohan's Sipp allowance via salary sacrifice, for which has no pension contributions at present, only standard State pension being contributed to

What about Lifetime Allowance implications?
- Unlikely to reach so soon with no pension contributing for Mrs, but once that limit does come, stop contributing would be reasonable

Is there a partner and / or dependents who's financial situation needs to be considered to get a "household" view? It looks like you have £8k going in to LISA which implies there is.
-You are correct, in order to take advantage of the extra 25% for both mr and Mrs

As abve

bowlhead99

-50 %Global: Vanguard FTSE Developed World ex-U.K. Equity Index Fund (
-10% Emerging Markets: iShares Emerging Markets
-5%:  Vanguard FTSE Global All Cap Index Fund
-5% Global Start up growth: SCOTTISH MORTGAGE INV TRUST (SMT)

10% EM within 70% total equities seems a reasonable share of the equities being in developing markets for a three to four decade timeframe, I wouldn't really worry that 'EM is riskier' or more volatile on that sort of timescale. Personally I use active funds for EM but each to their own.

Presumably you live in the UK, inferred from you having LISAs and pensions. You mentioned that you thought the UK allocation of some of the Vanguard target retirement products was too high. However, by doing your global equity investing mostly through a developed world ex-UK fund, and adding EM fund and only 5% in global all-cap, you are only getting general UK exposure through the 5% that's in the global all-cap, which would only offer about 5-6% UK allocation, and 5% of 5% is only a quarter of a percent.  A quarter of a percent to UK equity is way lower than anyone looking to retire in the UK would normally use, and it would be reasonable to add a UK FTSE 250 tracker (if preferring an index approach) or dedicated UK smaller companies fund,  However, perhaps you have things to offset the lack of UK exposure that you're not telling us, e.g. your workplace pension will be a massive pounds sterling annual defined benefit  in retirement.  But it would seem optimistic to rely on that if you still have 20+ years to go before you can access it (inferred from your being of LISA age).

SMT is not really 'start up growth'; it does have some smaller or pre-IPO companies but it is a £10-15bn fund and so allocations to companies that are small or in 'start up' phase of their lifecycle would not really fill it out.  It is a general global growth fund following particular themes liked by the manager. For a long term view you could supplement your holdings with separate smaller companies funds or private equities investment trusts if that's what you are seeking.

AnotherJoe

I would suggest the following tweaks:
Replace some of the global fund with a small companies global fund, a managed not an index. (Since indexed small cos don't seem to do that well)
Reconsider the move to reducing equities before retirement. If you will be investEd for say 30 years after retirement, that's too early. Maybe move 3-5 years worth of spending into cash or cash equivalents. 

Consider long term futures and what industry sectors will do well and invest a small amount in them instead of EM. Geographic diversification is overdone IMO, plus it's too random, better is sector diversification. The two I have are "alternative" energy (which will be mainstream in 10 years let alone 30), and healthcare. As people get richer and older they will spend more on healthcare. There may be others you might place your bets on. 

Albermarle

Vanguards Target retirement funds looks enticing but I am not comfortable with the 15% of the UK exposure when it only makes up a tiny pro proportion of the word economy and therefore more risk

Not everyone would agree with that view . Some would even say the UK portion should be higher, assuming you would want to take the retirement income in Sterling.

My own simplistic view is that Vanguard understand these things better than me, and if they think a certain medium level of UK exposure is good, then it would seem to be  a good guideline at least .

dunroving

Albermarle said:

Vanguards Target retirement funds looks enticing but I am not comfortable with the 15% of the UK exposure when it only makes up a tiny pro proportion of the word economy and therefore more risk

Not everyone would agree with that view . Some would even say the UK portion should be higher, assuming you would want to take the retirement income in Sterling.

My own simplistic view is that Vanguard understand these things better than me, and if they think a certain medium level of UK exposure is good, then it would seem to be  a good guideline at least .

Hi, would you mind spelling out what you see as the pros and cons? I especially am interested in your point about wanting to take retirement income in sterling ... I've read several times about the notion of home bias (I believe most US investors are primarily invested in the US, for example, from having lived there).

Is it to do with currency issues? My simplistic understand is, for example, that if you purchase an overseas investment/fund, you purchase at today's exchange rate, roughly speaking. If, between now and when you retire, the pound weakens, your income is eroded by the change in exchange rate. Or is that too simplistic? Especially re: US investments, the USD is currently at a historically strong point, which I interpret to mean that investing in the US is currently "expensive".

Thrugelmir

csgohan4 said:

Alternative active funds:
Vanguards Target retirement funds looks enticing but I am not comfortable with the 15% of the UK exposure when it only makes up a tiny pro proportion of the word economy and therefore more risk

The FTSE Developed World ex-U.K. Equity Index Fund has a 69.5% exposure to North America. Yet the US economy only accounts for 15% of global GDP.  Longer term the other risk is that the US $ no longer holds it's value. 

You'd obtain a far broader and balanced core to the portfolio by grouping the Vanguard funds together and using one of the Target retirement funds. 

Albermarle

Hi, would you mind spelling out what you see as the pros and cons? I especially am interested in your point about wanting to take retirement income in sterling ... I've read several times about the notion of home bias (I believe most US investors are primarily invested in the US, for example, from having lived there).

I am not an expert but have watched a few recent 'debates ' on this forum between the 'globalists' and 'home bias' advocates.

Also if you google suggested portfolios for UK citizens , most seem to favour a home bias in both equities and fixed income , although the FTSE 100 itself is largely out of favour . 

The argument is that you should have a good % in the country/currency where your expenditure will be. Another poster suggested to read this article.

https://personal.vanguard.com/pdf/icrrhb.pdf

dunroving

Albermarle said:

Hi, would you mind spelling out what you see as the pros and cons? I especially am interested in your point about wanting to take retirement income in sterling ... I've read several times about the notion of home bias (I believe most US investors are primarily invested in the US, for example, from having lived there).

I am not an expert but have watched a few recent 'debates ' on this forum between the 'globalists' and 'home bias' advocates.

Also if you google suggested portfolios for UK citizens , most seem to favour a home bias in both equities and fixed income , although the FTSE 100 itself is largely out of favour . 

The argument is that you should have a good % in the country/currency where your expenditure will be. Another poster suggested to read this article.

https://personal.vanguard.com/pdf/icrrhb.pdf

Thanks, that's a very helpful booklet. I've downloaded a few Vanguard booklets and they've all been very interesting.
There was some coverage of currency fluctuations as a factor influencing home bias, but I don't often see this mentioned in discussions such as those on the MSE forum. There's lots of discussion of sectors, and even countries/regions, but currency effects don't seem to merit a mention. For example, discussion of tech funds rarely mentions that they are very US-heavy, and if they do, it's rarely in the context of the currency issue.

Looking at the £/$ exchange, for example, it's fluctuated between $1.55 and $1.70 for a long time, but in early 2016, fell to more of a $1.25-$1.40 range. So, currently, US funds are historically "expensive" - and unless someone is drip-feeding, there's every likelihood that when they withdraw, the pound will have reverted to the mean, so to speak.

I'm currently invested quite heavily in the US (44%), and not in the UK (12%) - mainly because I believe more in the US market (I lived there for 20+ years). I'm hoping that the upside - better returns - will outweigh a potential downside (£/$ reverting to the $1.55-$1.70 territory). I currently receive a small-ish US Social Security pension and a small ($800) annuity from TIAA Traditional, so I'm already exposed to potential currency downside issues. As you can imagine, then, the currency issue is large on my mind.

To the OP: I hope it doesn't feel like I have hijacked your thread, but I figured the overseas/home bias/currency issue is something you might want to think about.

kinger101

I'm not sure a UK bias in equities is a good way of mitigating against currency fluctuations given most of the UK holdings would be multinationals anyway.  Top three in FTSE 100 are Shell, AstraZeneca and Unilever.  Oil is priced in dollars.  US is the biggest Pharma market.  And Unilever is truly global.  

It would be better IMO to buy hedged funds if one was concerned about currency risk.  Might add to the management costs, but it seems less arbitrary than the VLS approach.