SIPP investments review

noclaf

My Fidelity SIPP is currently invested as follows:
VEVE 84%
VFEM 8%
LGAG 8%

LGAG was a 'misadventure' of sorts and I don't plan to hold it much longer, will sell out at some point soon.

My query relates mainly to VFEM, this was originally an intentional purchase to complement VEVE with EM exposure and whilst it does add some diversification (geography/country) when I compare VEVE and VFEM, they appear to track/correlate quite closely in terms of market movements albeit VEVE has performed better over the previous 3/5/10 year period.

So my question; is there any point holding VFEM or would it be easier to just invest solely on VEVE?
I have a 16-18 year timeframe minimum and am happy to be challenged on my point regarding correlation, it's just based on looking at a HL or Fidelity chart so I may not be seeing the 'full picture'

Thanks in advance!

JohnWinder

The theory is that you’ll reduce risk more than reduce returns by diversifying more broadly, so hold  EM stocks. I don’t see that it is significantly ‘easier’ to hold one rather than two equity funds, although a bit cheaper.
EM is about 14% of global total, so holding only 8% as EM is less expensive but less diversification. As to future returns, no one knows; but holding 8% or 0% as EM is probably not going to make much difference and could be lost in the ‘noise’ (of monthly variation of stock values) when it comes to the final reckoning. I don’t think you need to agonise about which choice is ‘right’.

gm0

Step 1

Your rationale to hold emerging markets alongside world developed i.e. to extend your list of equities is either something that fits your investment world view and personal investment statement.  Or it isn't.  Subjective.  Even if books have been written with backtesting data to support the view that this is a good thing.  It doesn't lock in a future long term correlation.

There is a school of thought that very long term this extension (added diversification within asset class = equities) makes sense. But sensitive to assumptions around backtesting - are we talking accumulation - buying through volatility etc.  A fixed holding, or drawdown (and if so how that works for when to sell/not sell the EM). 

And there is the size of any holding from 5% but how big should it be for materiality and doing a job of hedging a changing shape of world economy.

If yes - Step 2

Is VFEM a decent EM fund to hold to create said extension in equities holdings.

There is a school of thought which I have some sympathy with.  Which says that specific geographic emerging markets are a) smaller b) volatile c) a minefield.  So a place where getting active and specific with a knowledgeable fund manager focused on just that would make the most sense that it ever does.  Or you can extend your equities list with a big bag of the "main" emerging markets as per post - the usual developed market low cost tracker logic.

I chose to add the extension and tilt. 

Some of my EM is trackers (L&G and VAPX) which have been meh but we shall see over 5 years +.    And I have some specific country tilts in that such as iShares IKOR which has done very well recently. Whether any of that says anything about 5 years + remains to be seen.  No idea about VFEM.

But I don't think short term correlation swings during short term volatility and economic shocks tells you much in context of pension investing for the very long term.  I do think though that in major market turbulence where the US catches a cold and US markets overshoot down - the associated turbulence and global recession fears will create wild swings in some emerging markets - as has happened from time to time before.

noclaf

Thanks for the comments, the 8% EM weighting was set due to my concerns about potentially volatility but in the grand scheme of things with a long term view it should not really matter. There is also the political aspect of the US-China relationship...though if that ever did kick off I think we would see a big sell-off across all markets....just my assumption as war between the two global heavy hitters would certainly cause a lot of concern, knock-on impact etc.

I've seen similar comments previously re.using active funds for the EM tilts and specific countries/regions within EM. 
 Fidelity's charging structure isn't really setup to be able to hold OEIC active funds and keep costs sensible (hence why I use cheap ETF's) and I do wonder what is the minimum 'ballpark' portfolio value where it becomes worthwhile considering tilts to balance the trading and fund costs...e.g: £100k.....£250k....£300k + portfolio?

Prism

I do something similar and have different funds for developed equities and emerging markets. I also use VFEM for that. I try and keep it to about 10% of my equities overall.

Linton

noclaf said:

My Fidelity SIPP is currently invested as follows:
VEVE 84%
VFEM 8%
LGAG 8%

LGAG was a 'misadventure' of sorts and I don't plan to hold it much longer, will sell out at some point soon.

My query relates mainly to VFEM, this was originally an intentional purchase to complement VEVE with EM exposure and whilst it does add some diversification (geography/country) when I compare VEVE and VFEM, they appear to track/correlate quite closely in terms of market movements albeit VEVE has performed better over the previous 3/5/10 year period.

So my question; is there any point holding VFEM or would it be easier to just invest solely on VEVE?
I have a 16-18 year timeframe minimum and am happy to be challenged on my point regarding correlation, it's just based on looking at a HL or Fidelity chart so I may not be seeing the 'full picture'

Thanks in advance!

There is a point in holding EM as well as VEVE.  There are any number of possible futures. You do not know which one will actually happen.  If you choose not to hold investments based in a major global area you are restricting your access to possible future gains and hence increasing your risk of poorer than average performance.

VFEM and VEFE may have been highly correlated in the past - if they remain highly correlated you lose nothing by holding both, if not you gain diversity.  VEFE may have performed better over the past 10 years.   That says nothing about the next 10 years.

noclaf

Thanks Linton/Prism.

My SIPP represents 60% of my total equity investments ..I don't have EM in any other wrapper...mainly a cost/fees decision rather than any issue investing in EM so in that scenario would it make sense to weight the EM component according to % of total portfolio...e.g: 10% VFEM of the total value of all my investments or 10% of SIPP total value?

Linton

noclaf said:

Thanks Linton/Prism.

My SIPP represents 60% of my total equity investments ..I don't have EM in any other wrapper...mainly a cost/fees decision rather than any issue investing in EM so in that scenario would it make sense to weight the EM component according to % of total portfolio...e.g: 10% VFEM of the total value of all my investments or 10% of SIPP total value?

Do you regard your total portfolio as a single entity with specific objective(s) and timeframe(s) or do your pension investments have a different purpose to those in other wrappers?  That will determine the answer to your question.

In my Growth portfolio, EM is set at 20-25%. The rationale is based on China which represents about 30% of EM. I find having 3% investments allocated to China with US at around 60% difficult to justify.

dunstonh

.I don't have EM in any other wrapper...mainly a cost/fees decision rather than any issue investing in EM so in that scenario would it make sense to weight the EM component according to % of total portfolio...e.g: 10% VFEM of the total value of all my investments or 10% of SIPP total value?

Your portfolio is all of your wrappers.  Not each one in isolation but there are other considerations.
e.g. many people have a different ratio in their GIA to their ISA (for tax reasons) but the two combined equal their target weightings
Others may have a different portfolio for their pension reflecting the ultra long nature of the timescale compared to other parts of their investments which may have a shorter timescale.
Others may have just one tax wrapper but run different portfolios within it to match differing objectives (e.g. in drawdown, money out in the short term, vs medium term vs long term)

You should never make a decision to avoid an area of costs.  Costs are a secondary concern.  GEMs are a bit more expensive but nowhere near enough to wipe out the additional potential they may offer.

Timescale can impact on how much you allocate to GEMs.    GEMS are volatile and can need longer periods to be viable.  So, you often see no allocation in short  term portfolios and little to nothing in medium term portfolios but often significant amounts in longer term (subject to risk profile)

noclaf

Linton / Dunstonh - I will attempt to address your questions:

My SIPP and whatever other pensions end up being amalgamated during the rest of my working life (assuming all will be DC) will be my primary source of retirements funds from 57/58. I have a LISA which can be accessed at 60, don't expect to add any more contributions as this was originally earmarked for a property, if I end up with a decent pension pot I may not need to use this but its a big if.....

So both pensions and LISA are 100% Equities and with the EM component captured via VFEM in the SIPP, I am happy to keep these as they are given the need to focus on growth and using the work pension I can get employer contributions and offset some 40% income tax so all good there. 

I also have S&SISA that I am building up to act as a bridge to 57/58 but it's possible that I may need to dip into this in the next 15 odd years if needed....it's currently invested 100% Equities and I've been pondering if the risk should be dialled down here.....if it took a 40% hit today....I'd be unhappy! but not impacted as I am covered with accessible cash etc it's currently invested in Vanguard Dev World ex UK....it's cheap at 0.14% hence why I went for this....notice the theme here. I've previously held FTSE Global All CAP and VLS 100....all much of a muchness, I would be happy to hold either but not sure if there much material difference in holding one over the other etc. 

The S&SISA can be thought of as separate given slightly shorter timelines.

So overall portfolio now appears as follows with EM representing 8.5% of total value based on my VFEM exposure:

SIPP - VEVE/VFEM 58%
LISA- HMWO 12%
Work pension- L&G global Equities 10%
S&SISA - Dev world ex UK global equities 20% 

JohnWinder

school of thought….which says that specific geographic emerging markets are a) smaller b) volatile c) a minefield.  So a place where getting active and specific with a knowledgeable fund manager focused on just that would make the most sense that it ever does.

It’s a school of thought without much basis. SPIVA 2022 shows that over the last 3, 5 and 10 years active EM funds denominated in GBP (presumably the ones we’d buy) underperformed the EM market commonly. Never did more than a quarter of the funds beat the market return. And half of those funds closed within 10 years. But we all knew that.

my concerns about potentially volatility but in the grand scheme of things with a long term view it should not really matter.

 I think volatility always matters whatever the term if the asset is going to be sold.
The way you’re investing you could have plenty of money in 25 years time. If volatility means that asset falls 20% during year 26, that’s a lot of money lost, and it could really matter.  https://www.bogleheads.org/forum/viewtopic.php?f=10&t=384785&newpost=6848235

If you choose not to hold investments based in a major global area you are restricting your access to possible future gains and hence increasing your risk of poorer than average performance.’

Assuming, as we must, that we don’t know if EM will outperform developed markets, one could equally say that omitting EM is ‘restricting expose to possible future poorer returns and hence decreasing your risk of poorer than average performance’. Saying either doesn’t seem to advance the cause.
What we could say is (to quote the Nobel prize winner): ‘the more securities you have in a portfolio, the less important is the risk that's specific to a given stock, whether it be from the company's activities or from the industry it's in. So, as you put more and more securities in a portfolio, what we call idiosyncratic risk, the risk that's attributable to the fact it's General Motors or the fact that it's in the auto industry, that risk tends to be diversified away.
And as you diversify more, the risk in your portfolio becomes predominantly due to what's going on in the broader market.’ https://boglecenter.net/bogleheads-on-investing-with-william-f-sharpe-episode-59/