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The Slow and Steady passive portfolio update: Q4 2011

The portfolio is down 1.7% on the year.

Last quarter I had the unfortunate duty of reporting the Slow and Steady portfolio’s first plunge into the red.

We were down 9.32%, as the sovereign debt crisis waded into our holdings like Godzilla chewing up Tokyo.

Since then I’ve filled an entire notepad with the near endless dirge of economic misery reported by the media:

  • The Bank of England announced QE2.
  • Global growth forecasts have been cut.
  • Many analysts think we’re already in recession.
  • The break up of the Eurozone is widely predicted.
  • The ECB is providing €500bn in life support to the European banks that no-one else will lend to.

And where does all this doom and gloom leave our passive portfolio? Down 1.70% on the year, but up 6.83% on last quarter.

Significantly, our benchmark – the FTSE All-Share index – is down 5.51% on the year, so we’ve at least beaten that, thanks to our diversification into gilts.

The Q4 results for the Slow and Steady portfolio

Reminder: The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £750 is invested every quarter into a diversified set of index funds, heavily tilted towards equities.

You can read the original story and catch up on all the previous passive portfolio posts here.

What 2011 has done to our portfolio

  • The US fund is the single equity bright spot over the year, gaining 3.11% as US economic indicators continue to defy the general expectation that we’re all going to hell in a shopping trolley. Happily, at 27.5% the portfolio allocates more to the US than any other fund.
  • Of course, Europe has been a basket case and we’ve lost 12.47% on that fund over the year. And it doesn’t look like things are going to improve any time soon.
  • Plainly the UK is in pretty poor shape too and our FTSE All-Share fund has lost 3.17% in 2011. The All-Share is dominated by multi-nationals, however, and their ability to scour the globe for opportunities has mitigated the impact of bad news on the home front.
  • Japan is still struggling to come to terms with the aftermath of the tsunami, not to mention the strong yen, so unsurprisingly we’re down 10.39% there.
  • Similarly the Pacific ex Japan fund has lost 10.36% as their major trading partners struggle in the economic headwinds.
  • The portfolio’s biggest percentage loss was the 14.64% vaporised from the Emerging Markets fund. Chinese equities fell as the government tightened lending while India’s markets and currency also plunged.
  • Our main bulwark against the negativity has been the UK gilt fund. It’s continued to appreciate throughout the year, gaining 14.65%. The movement of our gilt fund against the grain of our equity holdings has been a textbook illustration of the value of non-correlated assets. And a textbook dumbfounding of the forecasts that the only way for bonds was down.

So despite the abrupt end of the bull market and a year where I continually expected to find the Four Horsemen of the Apocalypse drinking in my local, we’ve ended up £89.65 down on our 2011 contribution of £5,250.

I think I can handle that, but if you can’t then increase the percentage allocated to bonds in your portfolio.

New purchases

Every quarter we add another £750 to the portfolio.

This time we’re also going to up our bond allocation by 2% to 22%, as we’re a year older.

The portfolio initially had a 20-year time horizon (now 19) and the slow shift from volatile to non-volatile assets acknowledges the fact that we’ve got less time to bounce back from major stock market declines as we edge towards retirement.

To keep things simple we’ll just knock 1% off each of our two biggest holdings: UK equity and US equity.

UK equity

HSBC FTSE All Share Index – TER 0.27%
Fund identifier: GB0000438233

New purchase: £77.50
Buy 23.5279 units @ 329.4p

Target allocation: 19%

Developed World ex UK equities

Split between four funds covering North America, Europe, the developed Pacific and Japan.

Target allocation (across the following four funds): 49%

North American equities

HSBC American Index – TER 0.28%
Fund identifier: GB0000470418

New purchase: £80.96
Buy 42.1253 units @ 192.2p

Target allocation: 26.5%

(Note: TER up from 0.25% to 0.28%)

European equities excluding UK

HSBC European Index – TER 0.31%
Fund identifier: GB0000469071

New purchase: £116.19
Buy 28.4989 units @ 407.7

Target allocation: 12.5%

Japanese equities

HSBC Japan Index – TER 0.29%
Fund identifier: GB0000150374

New purchase: £63.36
Buy 109.178 units @ 58.03p

Target allocation: 5%

Pacific equities excluding Japan

HSBC Pacific Index – TER 0.37%
Fund identifier: GB0000150713

New purchase: £40.44
Buy 19.182 units @ 210.8p

Target allocation: 5%

Emerging market equities

Legal & General Global Emerging Markets Index Fund – TER 0.99%
Fund identifier: GB00B4MBFN60

New purchase: £88.38
Buy 206.3554 units @ 42.83p

Target allocation: 10%

(Note: TER up from 0.98% to 0.99%).

UK Gilts

L&G All Stocks Gilt Index Trust: TER 0.25%
Fund identifier: GB0002051406

New purchase: £283.17
Buy 156.0167 units @ 181.5p

Target allocation: 22%

Total cost = £750

Total cash = 5p

Trading cost = £0

A reminder on rebalancing: This portfolio is rebalanced to target allocations every quarter, mostly using new contributions. It’s no problem to do as our vanilla index funds don’t incur trading costs.

Take it steady,

The Accumulator

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{ 28 comments… add one }
  • 1 Lemondy January 3, 2012, 9:37 am

    That 1.9% loss looks like an absolute return rather than the time-weighted rate of return, so it’s a little bit unfair to compare against the benchmark 😉

    Happy new year!

  • 2 gadgetmind January 3, 2012, 9:55 am

    Yeah, but the only way for gilts is down from … well, who knows, but it’ll happen! I’m working on the theory that there can possibly be *much* more upside, so I’m trimming gilts in favour of corporate bonds.

  • 3 Fox January 3, 2012, 8:35 pm

    I may betray my ignorance here: What program/webapp/other is that screenshot showing?

  • 4 Ben January 4, 2012, 2:45 pm

    prob a screenshot of the II web site I would have thought

  • 5 gadgetmind January 4, 2012, 2:50 pm

    Is interactive investor a good place to hold HSBC trackers and those bond funds? I’ve got some smaller pots to move for my wife, and the £120 pa for holding Vanguard trackers at Best Invest wouldn’t be cost effective, and Hargreaves Lansdown are no longer tracker friendly!

  • 6 i082327 January 4, 2012, 4:18 pm

    I have just signed up with iii and found them to be excellent, I was previously with HL and the platform charge drove me away as I have only been investing for a few months and the £2 / month on six or seven trackers not worth more than £500 total was totally out of the question.

    Hope iii continue to provide such an appealing platform.

  • 7 Ben January 4, 2012, 4:35 pm

    @gadget

    Yes, it is for an ISA as there aren’t any charges, note they don’t offer vanguard though. Not so good for a SIPP (think its about 110 or so)

    BestInvest is free provided you don’t hold Vanguard, so something like the Slow and Steady portfolio (HSBC and L&G) wouldn’t attract any AMC

  • 8 Ben January 4, 2012, 4:38 pm

    @gadget

    meant to add, I’m talking about the BestInvest SIPP in my comment above.

    PS how are you buying corporate bonds?

  • 9 gadgetmind January 4, 2012, 4:40 pm

    @ben – BestInvest also charge if you hold shares and ETFs, so I figured I might as well just go for it. I’ve got a large enough pot in my SIPP for the charge to be close to irrelevant.

    My wife’s SIPP is a different matter, so I’ll either go III or BestInvest and use HSBC, L&G, etc. I’d already worked out a portfolio with these when looking at using HL.

    I’m trying to consolidate stuff, but they don’t make it easy!

  • 10 gadgetmind January 4, 2012, 4:43 pm

    @ben – corporate bonds will probably by via the SLXX and ISXF trackers. Yes, some active funds beat them, but a whole load don’t. I’m also looking at commercial/residential property REITs such as UKCM and LSP, and infrastructure REITs such as HICL and JLIF.

  • 11 Ben January 4, 2012, 5:20 pm

    @gadget

    have just noticed that L&G gilt trackers do attract a custody fee through BestInvest, HSBC equivalents do not. L&G Equity trackers don’t attract the custody fee

    goes to show you have to be careful – like you say, they don’t make it easy…

    but if you’re already paying a custody fee for your shares and ETFs then I guess its irrelevant

  • 12 gadgetmind January 4, 2012, 5:24 pm

    @ben – Sadly, the fees are per account, so Best Invest (and Hargreaves Lansdown) will happily charge the fee in your SIPP and another fee in your ISA, and the same fees for your spouse’s accounts.

    Interactive Investor don’t seem to have ISAs fees for holding HSBC, L&G, shares or ETFs, unless I’m reading it wrong.

  • 13 The Accumulator January 4, 2012, 10:33 pm

    @ Fox – the screenshot is of Morningstar’s portfolio tracker. I found it better than Trustnet’s and free. What do you guys use to track your portfolios?

    @ Gadgetmind – You’re right no ISA fees with iii. I’ve steered clear of corporate bonds because of the correlation with equities. Going to stick with gilts to dampen volatility on the downswings. Sure, they have to fall sooner or later, but doesn’t everything? And there’s always the chance that we do a Japan.

    @ Ben – thanks for your rapid response research as always.

  • 14 Neil January 5, 2012, 3:20 pm

    I was wondering about this, and increasing the gilt component as you get older, but assuming you started with a Hale like portfolio the inital allocations didnt take into account your current age, so a 20year old and 50 year old could have the same starting point. Wonder what other people thought about it and then the increasing gilt component ?

  • 15 The Accumulator January 7, 2012, 11:58 am

    Hi Neil,

    The gilt component is really a function of your attitude to risk, your time horizon and your financial goals. If you can reach your goals by taking less risk then you’d be mad not to. If you’re 20 years old but are liable to panic at the first sign of trouble then you don’t want to be heavily tilted towards equities. So age is just a guideline, a rule of thumb that provides a starting point for thinking about questions of volatility and it can dictate your time horizon, but these components need to be moulded to your personal circumstances.

  • 16 gadgetmind January 7, 2012, 12:17 pm

    I just can’t bring myself to buy gilts right now. I know it’s wrong, and I know I need an uncorrelated asset, but it feels far too much like “buy high”. I could go for short-dated gilts (IGLS?) but the yield is so low that I might as well just sit in cash.

  • 17 The Accumulator January 12, 2012, 7:32 pm

    Thanks for pointing that out Lemondy. You’re right. I should have taken that into account.

  • 18 Allan January 21, 2012, 2:32 pm

    Hi, really enjoying this website- great information explained in a simple, straight-forward manner!

    I’m new to investing & have recently read Tim Hale’s book & have come up with a portfolio not too far away from the one above.

    I’ve transferred my cash ISA to a stocks & shares ISA with iii. I have ~20k which (along with the 2012/13 ISA allowance) I want to average my way into the funds over the next 15 months or so.

    In the meantime (as I gradually convert my cash into funds), should I keep my cash as just that or is there a ‘cash ISA style fund’ that I can hold within my Stocks & shares ISA?

    Any suggestions welcome!

  • 19 The Accumulator January 22, 2012, 7:06 pm

    Hi Alan, I personally prefer to keep my cash in cash, you can get relatively decent interests if you shop around, here’s a good article though on the subject of holding money market funds (the cash style fund you’re thinking of) http://www.ft.com/cms/s/2/33996706-d87f-11df-8e05-00144feabdc0.html#axzz1kDALZB5F

  • 20 Allan January 25, 2012, 5:58 pm

    Thanks for the advice. I’m going to just keep my cash as cash.

  • 21 Harry January 30, 2012, 1:42 pm

    Sorry if it’s been answered somewhere else but… I understand there are no holding fees with iii but I assume there is a charge made each time you buy a fund (ie £1.50 per fund via portfolio builder)??

  • 22 The Accumulator January 30, 2012, 9:08 pm

    Shouldn’t be for a Unit Trust / OEIC – which all of the above are.

  • 23 peter March 5, 2012, 7:14 pm

    hi
    i notice HSBC have launched their “world” index funds similar to the vanguard lifestyle funds.
    wondering if you would comment in a seperate article about these funds. on a quick review i notice the TER are more expensive than if you put it together yourself but might appeal to some as a one stop shop fund. doesn’t give a small or value bias.

  • 24 The Accumulator March 5, 2012, 8:35 pm

    Hi Peter, yep am planning to do an article along the lines you suggest. Just a question of getting round to it. Agree that the TER is a bit toppy.

  • 25 john March 21, 2012, 3:21 pm

    Would it not be best to just get the components direct e.g from HSBC and L&G? That said if there is a custody fee for L&G wouldn’t it best to make it all HSBC? How do their tracking error fair v the competition?

  • 26 The Accumulator March 24, 2012, 12:52 pm

    @ John – I’m struggling to think of any advantage in going to HSBC or L&G direct. You’d need to do your own research on tracking error, here’s a piece to help you on your way:
    http://monevator.com/2012/02/21/how-to-use-tracking-error-to-uncover-the-true-cost-of-an-index-tracker/

  • 27 john March 24, 2012, 2:01 pm

    Thanks Accy,

    I’m looking at a Vanguard LifeStrategy 80/20 fund and looking to increase my gilt exposure every year or so with a L&G All stocks, like in your slow & steady portfolio, in order to decrease my relative equity exposure (I’m 20 years away from state retirement age).

    Alternatively I have a 15 yr timeframe for my daughter’s potential education fund and I was looking at iShares MSCI World, Emerging Markets and FTSE All Stocks Gilts.

    Basically I’m looking for the most flexibility and least cost (aren’t we all?). I would probably look at vesting £100 a month into the Vanguard/L&G option and £75 a month into the iShares option.
    I would hope to avoid selling to realign folios and instead appropriate contributions accordingly as I approach target marks.

    I think Alliance Trust might come out on top for the Vanguard/L&G and Selftrade for iShares. Although I haven’t looked against BestInvest yet or H-L.

    Where did you buy your Slow & Steady portfolio?

    It’s time to lock and load.

  • 28 The Accumulator March 24, 2012, 8:48 pm

    Interactive Investor offers the lowest cost and most flexibility for the Slow & Steady portfolio. Here’s the origin story: http://monevator.com/2011/01/06/passive-investing-model-portfolio/

    Another way to lifestyle the Vanguard Lifestrategy fund would be like this:
    http://monevator.com/2011/10/25/lifestyle-vanguard-lifestrategy-funds/

    I personally wouldn’t want to take the ETF dealing cost on £75 a month. I’d probably go for some cut down version of the Slow & Steady, replacing the World ETF with a FTSE index fund.

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