Fees 'n' Funds

fiisch wrote: »

One key point I hadn't grasped was that there is a fundamental difference between Tracker and Passive. I'd assumed they were largely the same, whereas passive funds such as VG LS seem to sit almost in between a Tracker and an Actively-Managed fund.

People throw the terminology around in different ways.

Passive investing is about sitting back and obtaining the general result of the market by not making active management decisions as you go along which would cost money to implement and rely on the decision maker making a good decision instead of a bad one (shall I buy Tesco and sell Morrisons, shall I sell healthcare companies and buy oil and gas companies, do the FAANGS look relatively more expensive than their Chinese or Korean equivalents?).

Being passive means letting your investments be led by a recognised index that someone else produced, and effectively getting the result of that market of financial instruments. The theory goes that if the stock market is efficient and allocates a greater amount of its $50 trillion investor capital to Tesco than it does to Morrisons, you should allocate more of your money to Tesco than you do to Morrisons, but even more than that to Walmart in the US, and even more than that to Amazon. If you are being passive, you shouldn't pay someone to micromanage your holdings and decide that actually they prefer Walmart to Amazon this month and charge you for the privilege of taking those decisions.

But terminology wise, being passive is an approach, rather than the name of a product type.

A fund that tracks a specific index is called a tracker. There are trackers for equities of individual countries, regions, or industries, or the world at large, including or excluding emerging markets or developed markets or frontier markets. And likewise there are trackers for different bond types (government, corporate, investment grade, high yield, individual countries or regions, the whole world (including or excluding emerging) etc etc. Each of those 'tracker' funds will do its best to return the result of the index it's tracking, either by buying a little bit of everything in exactly the right proportions, or by buying a sample of all the holdings and getting a good approximation.

The VLS range is not a tracker, as there is no published index called "the VLS80" which their VLS 80 product is trying to track. Instead the VLS80 product is a fund that holds a bunch of other specialist trackers and periodically rebalances to ensure it meets certain published criteria (eg 80% will be equities; 25% of the equities will be UK) while certain exposures can float a bit more if they haven't made specific promises.

Ignoring for a moment that VLS or HSBC LS exists and just looking at the concept of passive investing using trackers:

If you know you just want 'equities' or just want 'bonds' you could buy a world index tracker fund for equities or for bonds. Or you could buy a bunch of index tracker funds in different areas and hold them at the same time. The latter allows you to cap your exposure to individual countries or industries, or bond types, rather than just investing proportionally in everything that exists in the global market. It also allows you to periodically rebalance back to your target allocations even if the 'global' market changes. For example you might always want 25% in the UK, or no more than 50% in the US, or no less than 15% in emerging markets.

If you are using tracker funds for your exposure, whether one big world index tracker or lots of little country trackers, you could describe it as a passive approach - you're not paying a manager to decide if Walmart or Amazon is better or if Tesco or Morrison is better, and it will be relatively inexpensive to build your portfolio using passive building blocks. However, if you are using lots of little trackers for individual asset types, someone is going to have to decide how to use them in what proportions.

For example, if there was a tracker fund for 'all the investments that exist in the world' (equities, bonds, property, derivatives etc) you wouldn't personally want it, because by market value there is more fixed interest/ bond investments out there than equities and you decided you barely want any bonds. So you will make an asset allocation decision for yourself and say you will only have 20% bonds.

Then you wonder what type of bonds, and again you can choose to use a very broad tracker and go with the ratio of all the easily investible bonds that exist, or be specific and say ok half the bonds should be corporate bonds and half government bonds, and within the corporate ones, two thirds of them should be investment grade and one third higher yield, and for the government bonds you want a quarter of them to be index linked and a quarter long dated and half short dated. And perhaps overlaid on that you want half to be UK and half international, with some proportion of the international ones being in emerging markets but most mainstream governments with good credit ratings. So again it's about do you want to take the result of a basic index or do you want to make an asset allocation decision and use more specialist indexes.

The more asset allocation decisions you make, the further you get away from being a pure 'passive' investor because presumably you should keep such decisions under review if you want to try to control the risk of your portfolio throughout the economic cycle or at least have it ending up looking similar to how it started, despite individual components having good years and bad years along the way. Deciding how to structure it and star asset classes will serve you best is a management decision. But you can still construct most or all of the portfolio from passive products and keep the cost down, assuming a passive product exists for each area in which you want to invest and is cheaper and better than the active alternatives. Which may not always be the case.

But to make a long story short, users of VL S (x% equity variant) or HSBC GS (whatever they call the variant) would still think of themselves as primarily passive investors using a cheap fund and avoiding active decisions for detailed investment selection (Tesco equity Vs Morrisons equity, French government bonds Vs German). However, they would be recognising that they don't want to take responsibility for asset allocation and rebalancing, and instead allow HSBC or Vanguard to do that using the strategy described in their marketing docs.

I'm going to study the VG LS and HSBC Global Strategy funds this evening - appreciate this is quite a crowded marketplace, but are there any other funds in this sector that I should be considering?

If you are at the top of the risk scale and not using a true mixed asset fund where there are other types of assets beyond equities such as bonds and property, your holdings are really just going to be global large equities, weighted to large cap companies. So the products might seem similar to just following a global index tracker like FTSE all world or FTSE global all cap, for a similar price. But there will be differences, for better or worse, in how they weight different countries as company valuations ebb and flow.

You could look at some of the other mixed asset funds in the space that primarily use passives for the underlying exposure. But if you are using the really high equity content ones, it is really just about domestic/overseas exposure or country allocation; there is less for them to differentiate themselves in their allocation techniques than at the lower risk end of the scale with a broader mix of asset types such as various bond types and property etc

For example BlackRock have their 'Consensus' fund range which at some levels has an asset allocation equivalent to the general consensus of how certain pension fund managers might allocate among asset classes while employing different levels of equity... but at the top end of the scale 'Consensus 100: up to 100% equity' it ceases to be a balanced multi asset class product, being pretty much all equity and a bigger overseas weighting than their more midrange products; they know it is only going to be bought by people who really want high equities and are aggressively seeking performance without minding volatility.

I only mention BlackRock as an example as it was mentioned upthread (HL have a discount on it which goes some way towards offsetting HL's high fund platform fees). There are a number of other mixed asset fund ranges built on passives which you might find if you do a forum search for VLS or lifestrategy rivals or alternatives. And of course, there are other mixed asset funds which *aren't* built exclusively on passives, too!

The fund fees (OCF) don't include dealing costs. Bear in mind if a fund buys a share on the FTSE All Share they have to pay 0.5% stamp duty straight away. On top of that they have to pay the actual dealing cost plus the spread on the shares.