The last word in passive investing has to be an index tracking fund of funds. Prise the lid off one of these la-Z-Boys and you’ll find a portfolio of index trackers nestling inside like a Russian doll.
This means you can buy just one low-cost fund and – hey presto – instant diversification across all the major asset classes. Meanwhile, all those bothersome asset allocation and rebalancing decisions are automatically taken care of by someone else.
It’s a complete meal solution delivered by intravenous drip. Once you’ve set up the direct debit you barely need to remain conscious to manage it.
If that sounds like your thing, then we’ve previously recommended Vanguard’s excellent LifeStrategy fund of funds range. But since then HSBC has waded in with its rival World Index Portfolio offering.
Choices? Sounds like the kind of work a lazy investor can do without. So let Monevator do the hard yards for you…
HSBC offer three excitingly passive fund of fund varieties:
|Fund name||Equity/Bonds & Cash||TER|
|World Index Cautious Portfolio C||25:75||0.57%|
|World Index Balanced Portfolio C||60:40||0.59%|
|World Index Dynamic Portfolio C||80:20||0.64%|
As you’d expect, the sliding scale of equity to fixed income and cash aims to hitch investors up with a fund to match their risk tolerance and growth expectations.
For example, if the violent bucking of the stockmarket makes you feel sick like a rollercoaster ride, then the Cautious fund is most likely to be your bag.
To be frank, this kind generic approach will probably fit you about as well as shoes that come in small, medium, or large, but it is standard practice.
More eye-catching are those bloated Total Expense Ratios (TER). They’re far higher than Vanguard’s. Even the fact that there are no upfront charges or dealing fees for the World Index Portfolios doesn’t seal the deal for HSBC, unless your contributions are very small and your time horizon is very short.
Coma coma coma chameleon
So does the HSBC fund of funds work harder for its higher TER?
Well, it certainly offers more elaborate asset allocation. Unlike Vanguard, the World Index has fingers in the property and commodity pies, not to mention foreign and high-yield bonds.
The fixed income allocation for the World Index Balanced Portfolio breaks down like this:
|UK Inflation Linked Bond||1%|
|US Bond (hedged)||6.4%|
|Global Corporate Bond (hedged)||4.4%|
|Global High Yield Bond||3.1%|
|Emerging Market Debt||3.3%|
Personally, I prefer much more inflation protection in my fixed income allocation. The 1% in UK inflation linked bonds is a token at best.
I also expect my bonds to provide my portfolio with stability, so I’m happy to live without the risk of corporate bonds, emerging market debt, and high-yield junk – even if that means lower overall returns.
The equity, property and commodity divvy-up looks like this:
|Global Equity (hedged)||1.1%|
|US Equity (hedged)||12.3%|
|Europe Equity (hedged)||10.9%|
|Japan Equity (hedged)||6.3%|
|Asia Pacific ex Japan Equity (hedged)||3.4%|
|Emerging Market Equity||9%|
I’d think twice about bearing the extra expense of the World Index Portfolio funds just to get the sliver of property and commodities on offer here. The extra diversification isn’t going to make much difference when each asset class is worth less than 5% of the overall portfolio.
US equity holdings are also pretty low in comparison to a global total market portfolio that would devote more like 50% to the American economy. By contrast, the Emerging Market tilt is fashionably high.
Of course, I’m the kind of investor that wants control over my own asset allocation, whereas a fund of funds is designed for people who keel over at the very thought.
But I don’t think the ornamentation of the World Index Portfolios is worth the expense, unless brochure talk about “in-house quant-based optimisation processes” helps you sleep at night.
It’s also interesting to note that even HSBC confesses: “The finessing of a multi-asset allocation model is as much an art as it is a science.”
The contents of a World Index Portfolio are mostly the regular HSBC index funds and ETFs that you can buy as separates, if you’re more active than a Koala who’s given up Eucalyptus leaves for Lent.
HSBC will also use other firms’ products to cover certain asset classes – e.g. there’s a Lyxor commodities ETF in the mix.
Other noteworthy features include:
- The portfolio is rebalanced every quarter.
- Asset allocations are reviewed annually, so watch out for any changes you’re not comfortable with.
- The cruder risk tolerance choice makes the World Index funds harder to lifestyle than Vanguard’s LifeStrategy funds.
- The Balanced Portfolio fund size has nearly halved from an opening £5 million to £2.67 million in five months. Not a great sign. Vanguard’s equivalent LifeStrategy 60% Equity fund sits around £8 million.
- The funds are not UCITS products, they are Non-UCITS Retail Schemes (NURS). This enables them to invest in property and commodities and unapproved securities (up to 20% of the fund’s value) among other things.
- HSBC mentions that the fund’s can invest in private equity although it won’t dabble in hedge funds.
- Income and accumulation versions are available. Look out for the ‘retail X’ share class.
- Check out the factsheets.
Time for bed
The big problem I have with the World Index Portfolios is the lack of a published index to benchmark them against.
The whole point of passive investing is to gain the market’s return by using low-cost index funds. If you don’t know what index your fund is meant to track, then you have no sound way of judging its performance.
For my money, HSBC’s World Index fund of funds is over-elaborate, expensive and, too opaque in comparison to its Vanguard rival. Fail.
Take it steady,