The Lemon Fool

Hi. For the past while I've been upping my pension contribution to a relatively high proportion of my income due to the tax implications. However, now I'm thinking that it's worthwhile taking a hit on the tax front and putting more in an isa to provide greater financial flexibility before 57. I'm still planning on putting the lions share in my pension but a decent proportion in an isa.

Anyway, the thing I'm debating is whether to go really simple and choose something like the Vanguard LifeStrategy 80% or whether to roll my own. I'd probably go with something like a combo of FTSE All-World UCITS ETF (VWRL) and Global Small-Cap Index Fund, together with some bond funds.

Fundamentally, I think the question I'm asking is there really any benefit to selecting ones own funds?

Any thoughts or comments welcome.

From memory (I'm sure I'll be called out if I'm wrong!)
LifeStrategy has a UK bias, VWRL doesn't
It's possible to roll your own VWRL with a lower OCF (with the temptation to fiddle with the weightings - which goes against the point of a global tracker)

This video might help u decide. Ramin is a very good educator https://www.youtube.com/watch?v=jrNyl5u93xI

AleisterCrowley wrote:From memory (I'm sure I'll be called out if I'm wrong!)
LifeStrategy has a UK bias, VWRL doesn't
It's possible to roll your own VWRL with a lower OCF (with the temptation to fiddle with the weightings - which goes against the point of a global tracker)

The arguments for a UK bias are that UK shares have lower taxes and the volatility of your portfolio will be lower (less risk). It also dilutes to large US holding and more particularly to heavy weighting in the big tech stocks, but you are becoming an active investor if you do that. The UK market has been a perennially bad performer, but that arguably priced in. A home bias has the disadvantage that your investments are likely to do badly when your country does badly.

The appropriate proportions of VEVE (about 90%) and VFEM are cheaper than VWRL. You can save about 0.1% p.a. Is that significant in your case?

LifeStrategy is the simplest option. It is an OEIC which attracts a hefty platform fee on most platforms, but there are some that do not charge extra for that.

Thanks all.

The UK bias is a good point. I'll need to think about that.

GeoffF100 wrote:LifeStrategy is the simplest option. It is an OEIC which attracts a hefty platform fee on most platforms, but there are some that do not charge extra for that.

That's interesting. On the Vanguard website it was that the ongoing fee was .22%. Is that misleading? I'd be setting up my ISA with Vanguard btw.

DelayedInvestor wrote:

GeoffF100 wrote:LifeStrategy is the simplest option. It is an OEIC which attracts a hefty platform fee on most platforms, but there are some that do not charge extra for that.

That's interesting. On the Vanguard website it was that the ongoing fee was .22%. Is that misleading? I'd be setting up my ISA with Vanguard btw.

The 0.22% is Vanguard's fee for managing the fund itself. Geoff is referring to platform fees (aka account fees) that your broker may charge you for the privilege of holding your investments with them. E.g.

Vanguard charge 0.15%pa of the value of your portfolio, subject to a max of £375
HL charge (for OEICs) 0.45%pa of the value of your portfolio up to £250,000, less after that
II charge £9.99 per month irrespective of the size of your portfolio
IWeb charge nothing, but there is a £100 account opening fee.

mc2fool wrote:The 0.22% is Vanguard's fee for managing the fund itself. Geoff is referring to platform fees (aka account fees) that your broker may charge you for the privilege of holding your investments with them. E.g.

Vanguard charge 0.15%pa of the value of your portfolio, subject to a max of £375

Ah I see. Thanks for clarifying. From looking at https://www.vanguardinvestor.co.uk/cont ... harges.pdf I think I'd be paying the 0.15% even if I went with my own funds right?

Yes the platform charges always apply in addition to internal fund charges. With Vanguard's platform you're restricted to only investing in Vanguard funds (and a narrower range of Vanguard funds than you can get with other platforms!). Monevator has a page which compares the costs of various brokers: https://monevator.com/compare-uk-cheape ... e-brokers/

DelayedInvestor wrote:

mc2fool wrote:The 0.22% is Vanguard's fee for managing the fund itself. Geoff is referring to platform fees (aka account fees) that your broker may charge you for the privilege of holding your investments with them. E.g.

Vanguard charge 0.15%pa of the value of your portfolio, subject to a max of £375

Ah I see. Thanks for clarifying. From looking at https://www.vanguardinvestor.co.uk/cont ... harges.pdf I think I'd be paying the 0.15% even if I went with my own funds right?

Not sure quite what you mean by your own funds. The Vanguard platform only allows you to hold Vanguard products in their ISA, etc.

So, if you want to put together your own variant of Life Strategy using only Vanguard funds/ETFs that's ok and, yes, you'll be paying the 0.15%pa account fee. If you want to include say, some iShares ETFs in it then you can't do that within the Vanguard ISA.

If you are holding only Vanguard funds, Vanguard's charges are favourable for small portfolios. For larger portfolios iWeb will be cheaper once you have paid the £100 account opening fee (which was £20 until recently, and may go down again). If you buy every month with iWeb, your annual cost will be £60. At 0.15%, the break even point is £40,000. You can transfer your account for nothing when you pass that.

Thanks. Yes, I was aware that I would only have Vanguard funds available. Not really a problem for me tbh as I'm only really interesting in the buy the market type funds anyway.

IWeb might be a good shout alright. I'll bear that in mind. Thanks for all the info.

DelayedInvestor wrote: I'd probably go with something like a combo of FTSE All-World UCITS ETF (VWRL) and Global Small-Cap Index Fund, together with some bond funds.

Here is the Vanguard Global Small-Cap Index Fund:

https://www.vanguardinvestor.co.uk/inve ... c/overview

The median market cap is said to be 2.9 BN (It is not clear whether that is £ or $.) The median market cap of the FTSE 250 is £1.051 billion:

https://www.londonstockexchange.com/ind ... 50?lang=en

The smallest market cap in the FTSE 100 has a market cap of £3.11 billion:

https://fknol.com/uk/market-cap-ftse-10 ... php?go=b75

The Vanguard Global Small-Cap Index Fund is not what we would call small cap, and it is expensive (OCF 0.29%). Vanguard does not use it in their LifeStrategy or Target Retirement funds. For comparison, the median market cap of Vanguard Developed World ex UK ("large and medium cap") has a median market cap of 68.5 BN:

https://www.vanguardinvestor.co.uk/inve ... c/overview

I do not know whether there is any duplication between these two funds.

The largest holding in the small cap fund is Caesars Entertainment Inc, which has a market cap of £15.76 billion:

https://www.stockopedia.com/share-price ... c-NSQ:CZR/

This fund does not look very convincing to me.

Thanks for that Geoff. You're right, that isn't what I was thinking off for small cap either. I'll clearly need to do more hunting to find something closer to what I had in mind.

GeoffF100 wrote:This fund does not look very convincing to me.

Not convincing is what respect? Not really 'small-cap'?

It is what it is:

The Fund employs a passive management – or indexing – investment approach and seeks to provide long-term capital growth by tracking the performance of the MSCI World Small Cap Index (the “Index”).
The Index is comprised of small-sized company stocks in developed markets.
The Fund attempts to: 1. Track the performance of the Index by investing in all constituent securities of the Index in the same proportion as the Index.

It just tracks the MSCI Index, lagging it by pretty well exactly the OCF of 0.29%.

NotSure wrote:

GeoffF100 wrote:This fund does not look very convincing to me.

Not convincing is what respect? Not really 'small-cap'?

It is what it is:

The Fund employs a passive management – or indexing – investment approach and seeks to provide long-term capital growth by tracking the performance of the MSCI World Small Cap Index (the “Index”).
The Index is comprised of small-sized company stocks in developed markets.
The Fund attempts to: 1. Track the performance of the Index by investing in all constituent securities of the Index in the same proportion as the Index.

It just tracks the MSCI Index, lagging it by pretty well exactly the OCF of 0.29%.

Yes, perhaps I should explain. I have large holdings of Vanguard Developed World ex UK and VEVE. They track the FTSE large/medium cap indices, which include many more stocks than the MSCI indices. Having market weight in a small cap tracker that starts at a market cap where my existing holdings end would make sense for me. The MSCI small cap index does not do that. It duplicates a lot of what I already have. An OCF of 0.29% is also more than I want to pay. As I have said, Vanguard seems to agree with my assessment. They are not eating their own cooking here.

AleisterCrowley wrote:From memory (I'm sure I'll be called out if I'm wrong!)
LifeStrategy has a UK bias, VWRL doesn't
It's possible to roll your own VWRL with a lower OCF (with the temptation to fiddle with the weightings - which goes against the point of a global tracker)

The UK being a global hub tends to somewhat reflect world exc. US
US is around half of global market cap, so 50/50 US/UK could be a lower cost alternative

Using Berkshire Hathaway conglomerate as a US stock fund proxy instead, and no withholding taxes, and with a 0.06% expense for a FT100/FT All Share = 0.03% for a 50/50 UK/US

Tracking drift rises, but might broadly wash, and a 0.26% lower expense on a £1M stock portfolio is a non trivial £2600/year saving.

MSCI small cap covers IIRC 85th - 99th percentile of the investable universe whereas FTSE small cap starts from something like 90-95%.

Or to put it another way, the FTSE large and mid cap indices (FTSE All World) go further down into the investable universe in terms of size than MSCI ACWI.

So combining FTSE large and mid cap with MSCI small cap results in an overlap in the 85% - 90/95% area.

To OP: have you considered the Vanguard FTSE Global All Cap fund? If you’re going with Vanguard Investor initially anyway then it’ll be easier to operate and maybe a bit cheaper than VWRL + Global small cap (where like I say there’s overlap)?

Vanguard FTSE Global All Cap fund is an OEIC, however, so you’ll need to move to the right broker as holdings grow, perhaps iWeb / ii?

Also note the Vanguard small cap fund in an OEIC and Ireland based. Ireland based OEICs (unlike ETFs) suffer 30% US withholding tax. US companies make up majority of index. So in this regard, cheaper to go with the global all cap fund (UK based OEICs only suffer 15% US WHT).

Or just ignore the small cap element and go Developed + Emerging as already mentioned for a much cheaper price?

Genghis wrote:Also note the Vanguard small cap fund in an OEIC and Ireland based. Ireland based OEICs (unlike ETFs) suffer 30% US withholding tax. US companies make up majority of index. So in this regard, cheaper to go with the global all cap fund (UK based OEICs only suffer 15% US WHT).

I did not know that. Have you got a link? That would be a further reason for avoiding the fund. The Accumulator uses this fund in his Slow and Steady Portfolio:

https://monevator.com/the-slow-and-stea ... e-q1-2021/

He too holds Vanguard Developed World ex UK. His Blackrock Emerging markets ETF tracks the same index as VFEM. It has a lower OCF, but the tracking error appears to be larger. The iShares Global Property Securities Equity Index Fund just overweights stocks that he already has, and is not cheap. The Royal London Short Duration Global Index Linked Bond fund is interesting, but it is also expensive and does not track the UK cost of living.

As an aside, the Vanguard Emerging Markets Stock Index Fund, which is an OEIC tracks the MSCI Emerging markets Index, whereas Vanguard Developed World ex UK, wich is also an OIEC tracks the FTSE Developed World ex UK Index. VWRL, VEVE and VFEM all track the corresponding FTSE indexes.