Some good reads from around the web.

I am sure there are some ordinary Greeks who are being taken to the brink by the crisis, but you wouldn’t know it from most of the news reports.

Invariably the street scenes in Athens look as prosperous as you can imagine, all BMWs and gushing fountains – more Rodeo Drive than road to hell. Interview after interview is conducted in a shiny cafe stuffed with prosperous clientele.

I saw one on CNBC yesterday held on the sunny apartment balcony with a chap who’d lost his job, who lamented that they were struggling to get by on his wife’s 35,000 euros a year (plus whatever benefits he was receiving, which were not cited by the program).

“Sometimes we run out of money,” he said. Maybe when he had to buy new filters for the chrome coffee machine or the other consumer treasure we saw dotted about his home.

Pay day looms

These people undoubtedly feel miserable, relative to where they were. But where they were was in the economic fun house – the equivalent of a kept mistress in pied-à-terre on borrowed time.

As one Greek businessman writes on Bloomberg:

For 30 years, these two [main Greek] parties competed in an orgy of jobs and entitlements for votes. In the span of a generation, the composition and ethos of Greek society were transformed.

Where there had been a mostly self-reliant and hard-working body of citizens, we got an army of state-supported employees with guaranteed job security and early pensions.

As the UK state’s own largesse is gradually withdrawn (despite all the debate about cuts, public spending is still at record levels) we will surely face more trouble here, especially as the deleveraged animal spirits of the private sector seem about as likely to pick up the slack as my mate Graham to pick up a bar tab.

And that’s bad news, because it’s a breeding ground for crackpot extremists, as we’re seeing in Greece:

The troika insists on structural reforms, such as less job protection, limiting trade union privileges, and opening monopolies and closed professions in the service sector.

In short, Greece’s creditors are asking the country to dismantle what was built during the last few decades and led Greece to bankruptcy.

The intent is to make the economy competitive, but those affected don’t see it that way, and they are many.

Close to one in four of the working population depends on the state for his or her salary. Add to them the unemployed at 23 percent, double among the young, plus all those whose salaries and pensions were reduced by the troika’s austerity measures, and you get a large pool of very unhappy and insecure people.

The interview with the jobless chap ended with him saying he might have to rent out his property and take his family back to live with his parents for a while, which he found intolerable at 40-years old.

I agree it sounds miserable (not least on the parents!)

And I’ve heard personal stories from people close to Greece that paint a much darker picture than those the TV news reporters are able to unearth within 20-feet of the lobby of the Athens Hilton.

Yet I’ve heard no reports of Greeks calling for measures like the six-point plan of privatisations and restructuring that Germany is apparently working on to try to save Greece.

Instead, I see people marching for free money to pay for unsustainable pensions, benefits, and tax perks – all to be paid for by foreigners.

Even the IMF’s Christine Lagarde this week called for Greeks to pay their taxes:

“I think more of the little kids from a school in a little village in Niger who get teaching two hours a day, sharing one chair for three of them, and who are very keen to get an education. I have them in my mind all the time.

Because I think they need even more help than the people in Athens.”

While anyone with a heart would feel sorry for Greek children and others who can’t be blamed for the country’s predicament, I’m with Lagarde in tiring of the sob stories from Greece, and also here at home.

I have never been in debt. I didn’t lie to buy a property early on in the housing boom. I refused to pay 10-times average earnings by the time I didn’t need to. I didn’t shop til I dropped and make millionaire footballers or Sex in the City‘s heroines my financial role models. I’ve saved and reinvested a big chunk of my disposable income like most people pay their taxes. I’ve bought some nice things along the way, but I never thought I was entitled to everything.

I’m nearly 40, too, like the unhappy Greek on CNBC. And I rent my home.

So no, we weren’t “all at it” as the journalists keep saying, no doubt because they were all at it themselves.

Some of us avoided getting into debt, worked, saved, and invested. And being held ransom by the millions who didn’t in Greece and here at home (whether as a nation or as individuals) is starting to grate.

There was always another way. Most people ignored it.

Cradle to grave in debt

So as we go into yet another weekend wondering whether European leaders will surprise us on Sunday night with a radical plan D, I am wondering again how this will play out in the UK, too.

Previously I’ve been relatively optimistic. But faced with the political delusion apparent on the continent, I wonder if I’ve been too focused on the narrow economics?

We’re not in the same precarious financial position as Greece – we can print our money, intervene to bolster our banks, devalue our currency, and do a few things the world wants to pay us for – but the ludicrously carefree attitude most people had until recently towards debt, from the former Prime Minister to the average Brit in the high street – is not so far removed.

Few people seem to want to face up to the bill for the party, anymore than they do in Greece.

Shove it to the next generation is the order of the day, whether the choices be spending cuts for the undeserving, tax rises on the wealthier, or pensions curbed for everyone.

Years more of this (if we’re lucky)

For an investing perspective on the unfolding drama, you could do worse than read this interview with hedge fund manager Ray Dalio in Barron’s:

Deleveragings go on for about 15 years. The process of raising debt relative to incomes goes on for 30 or 40 years, typically. There’s a last big surge, which we had in the two years from 2005 to 2007 and from 1927 to 1929, and in Japan from 1988 to 1990, when the pace becomes manic. That’s the classic bubble.

And then it takes about 15 years to adjust.

Unlike the Athens we see on TV, there are many places in the UK where life is tough, shops are boarded up, and people have very low expectations – and that’s after over a decade of easy money from the State and banks alike. I dread to think how bad things could get if it continued for a decade.

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A year ago, I thought it would be a good idea to sink £5,000 of my own money into a high-yield portfolio (HYP).

I know, what was I thinking?

Almost as soon as I set-up this demo portfolio – by buying into 20 shares via a low-fee Halifax ShareBuilder account – the markets turned south. And despite a brief flirtation with north in early 2012, south is pretty much where they’ve stayed.

Buying an income portfolio is a long-term game, however, so I have no regrets about setting up this demo when I did.

Firstly, I don’t believe it was obvious a year ago that equities would do poorly. We could just as easily be up as down.

Sure, Europe already looked about as attractive as a busload of Greek pensioners dressed up as 1930s German showgirls, but things also looked grim in 2009. Valuation counts most, and they didn’t (and don’t) look too stretched to me.

Secondly, as I discussed in my follow-up article on benchmarking the demo HYP, the alternatives for income seekers didn’t look exactly attractive. Real yields on cash were negative in May 2011, even if you locked away your money.

True, with hindsight an investor would have done better sticking with cash for the past year, as we’ll see. But you can’t invest with hindsight!

A more sensible conclusion from the mediocre past year for shares is that you shouldn’t put all your eggs in one basket. A mix of cash, bonds, equities, and other asset classes will provide a smoother ride. This demo portfolio is meant to show how a pure HYP performs over time. I don’t mean to suggest you should put your worldly worth into 20 shares!

Still, a 7% fall isn’t a big deal compared to the spanking you’ll get in properly bad years. Also, none of the 20 shares I bought have cut their dividend payouts, as far as I’m aware. On the contrary, they’ve raised them. And that’s what counts most when buying an income.

Income streams can be expected to be far smoother than capital fluctuations, which is why I think targeting income is a better goal for many private investors.

The HYP valuation, one year on

So where do we stand after a year? Good question, and I wish I’d asked the same thing when the portfolio turned one a fortnight ago.

Regular readers may recall I bought the HYP with real money, partly to make it easier to track. However I didn’t have time to write this post on the HYP’s birthday – and I forgot to note down the valuation. I’ve therefore had to reconstruct it in a spreadsheet.

Here’s where the HYP stood at the end of trading on the 10^th May 2012, using prices from Yahoo:

Company	Price	Value	Gain/Loss
Aberdeen Asset Management	£2.57	£274.62	9.9%
Admiral	£11.48	£163.10	-34.8%
AstraZeneca	£26.78	£214.46	-14.2%
Aviva	£3.03	£170.71	-31.7%
BAE Systems	£2.78	£211.75	-15.3%
Balfour Beatty	£2.70	£204.13	-18.4%
BHP Billiton	£18.72	£195.16	-21.9%
British Land	£4.92	£205.82	-17.7%
Centrica	£3.10	£246.09	-1.6%
Diageo	£15.35	£308.10	23.2%
GlaxoSmithKline	£14.06	£266.63	6.7%
Halma	£3.91	£263.17	5.3%
HSBC	£5.57	£211.67	-15.3%
Pearson	£11.63	£255.66	2.3%
Royal Dutch Shell	£21.31	£239.57	-4.2%
Scottish & Southern Energy	£13.21	£249.17	-0.3%
Tate	£6.94	£283.24	13.3%
Tesco	£3.20	£193.90	-22.4%
Unilever	£20.64	£259.73	3.9%
Vodafone	£1.71	£253.33	1.3%
		£4,670.03	-6.6%

Note: The portfolio was purchased on the morning of 6^th May 2011, with £250 invested into each of 20 shares. All costs (stamp duty, spreads, and dealing fees) are included.

It’s never nice to see your shares down when you’re not going to be buying any more – my £5,000 investment is the lot for this experiment – but there we are.

Turning to the performance of individual companies, “what was I smoking?” comes to mind most when I look at the two insurers, Admiral and Aviva. They are in slightly different sectors (and Admiral was also hit by company-specific worries) but both do suffer a lot when capital markets are unnerved. I probably went a bit overboard here.

The big surprise for me was Tesco, which I thought of as a stalwart addition. I would never have guessed it’d be the third-worst performer in capital terms.

Alternative 1: The iShares FTSE 100 tracker

As outlined in my benchmarking article, I’m going to compare this HYP against two alternatives – a cheap ETF, and a trio of investment trusts.

For the ETF, I’ve selected the iShares FTSE 100 ETF (Ticker: ISF), which is safe1, popular, and liquid. I’ve assumed I bought it for the same low dealing fees as the HYP, and that there’s no stamp duty to pay.

However due to the uncertainty over when exactly a Halifax Sharebuilder deal would have gone through on the day of purchase, I can’t be sure exactly what price I’d have paid.

I’ve therefore averaged the opening and closing price of the ETF, which seems the fairest solution. (I’ve ignored the tiny spread, too).

A hypothetical £5,000 was invested on 6^th May 2011. Here’s where it would have stood at close of 10^th May 2012.

Company	Price	Value	Gain/Loss
iShares FTSE 100 ETF	£5.60	£4,678.36	-6.4%

Note: Prices from Yahoo.

I’m pretty surprised by how similarly the HYP and this tracker have performed in year one, given all the turbulence and the higher fees of buying the HYP (20 lots of dealing fees plus stamp duty and higher spreads). It shows the power of horizontal diversification.

Still, it’s very early days.

Alternative 2: A trio of income trusts

As further discussed in the benchmarking article, I’ve chosen three income investment trusts to track as an alternative to the HYP.

Once again, I assumed they were bought via Halifax Sharebuilder, and again I averaged the opening and closing prices on 6^th May 2011. Stamp duty and a penny spread on each trust’s share price were also factored in.

Here’s where a hypothetical £5,000 split between the three trusts stood on 10^th May 2012.

Trust	Price	Value	Gain/Loss
City of London IT	£2.86	£1,567.02	-6.0%
Edinburgh IT	£4.79	£1,688.03	1.3%
Merchants Trust	£3.65	£1,430.84	-14.2%
		£4,685.89	-6.3%

Note: Historical prices were not available from Yahoo for Merchants, so were taken from Google.

A similar capital performance here to the HYP and the iShares ETF. Clearly my choice of trusts has been a big factor in the short-term though, so it’s even more important to wait a few years before we overstate any findings.

I personally think investment trusts are a good halfway house between being an enthusiast who fancies managing a portfolio of shares (and perhaps daydreaming of outperformance) and a passive investor who invests via an ETF or fund.

So far, so good.

Income comparison

So much for capital, what about the all-important income?

One snag is that the timing of payments (and of ex-dividend dates) means none of the three alternatives received all the income you’d expect them to get in a normal calendar year. This is a first-year problem, and it won’t happen again.

For the hypothetical ETF and trust holdings, I went through the dividend records (via the Digital Look and iShares websites) and manually totaled the payments due, taking into account ex-dividend and payment dates.

For the HYP, I simply added up all the dividends I received over the period.

Here’s what each system earned between 6^th May 2011 and 10^th May 2012.

	Income	Yield on £5,000
HYP	£181.95	3.6%
ETF	£155.05	3.1%
Trusts	£183.56	3.7%

Note: Yields are rounded to one decimal place.

As you might expect, the FTSE 100 ETF is lagging the two more specialist income vehicles. But these are very early days.

The next 12 months will provide our first full-year run of capturing all payments due to each strategy. And in the long-term, we’ll see whether biasing for income at the start is still generating a higher income versus the market in 5-10 years time.

First year total returns

Adding the capital valuations to the dividends received gives us the total return earned (or the lack of it) over the year.

Here’s where total returns stood as of close of play on 10^th May 2012.

	Total return	Gain/Loss
HYP	£4,851.58	-3.0%
ETF	£4,833.42	-3.3%
Trusts	£4,869.44	-2.6%

Note: Gain/loss is rounded to one decimal place.

Did I hear someone at the back shout “Efficient Market Hypothesis?” The results from our first year of following the strategy do suggest a lot of faff to generate much of a muchness.

But you know what I’m going to say, don’t you?

Early days!

Given all the short-term factors I’ve mentioned above, I wouldn’t draw any conclusions from these total return figures yet.

In theory, the fact we’re targeting income from the HYP and income trusts will eventually be reflected in slightly lower capital gains versus the market (the ETF). The total returns should be roughly equivalent.

In practice, I’ve seen high-yield strategies beat the large-cap market even on a capital-only basis, perhaps because they avoid a lot of temporarily overpriced companies that don’t care much about their shareholders. (*cough* Facebook. *cough*).

That’s heresy of course, but we’ve plenty of passive articles to offset the balance! Also, I don’t think the market was at all frothy when the HYP was set-up, so I think there’s less chance of a value-based strategy outperforming, anyway.

We’ll see what the next year holds.

Note: Apologies in advance for any typos. Copying from spreadsheets and then working manually with WordPress’ clumsy table formatting means it’s all too easy to slip up. Please let me know if you spot anything.

1. In terms of how it is constructed. As an equity investment it can go up and down as wildly as any other. [↩]

The financial cage-rattlers at Vanguard have announced the launch of their first London-listed Exchange Traded Funds (ETFs), in a move that should bring significant long-term benefits to Brit-based passive investors.

The initial line-up of five funds will immediately go to the top of the ETF best buy rankings (by TER), either beating or matching their rival offerings straight off the bat.

Vanguard has confirmed the following five ETFs are ready for launch:

Vanguard ETF	TER (%)	LSE Ticker (GBP)
FTSE 100 ETF	0.1	VUKE
S&P 500 ETF	0.09	VUSA
FTSE All-World ETF	0.25	VWRL
FTSE Emerging Markets ETF	0.45	VFEM
UK Government Bond ETF	0.12	VGOV

Reports suggest the new ETFs will go live on Wednesday, 23rd May.

The new Vanguard ETFs benefit from a number of key features, namely:

• Physical replication of indices. These are not synthetic ETFs.

• The new ETFs follow broad-based indices, so all are suitable pillars of a diversified portfolio. None of your leveraged Albanian Pilchard Farmers rubbish here.

• They’re Irish domiciled, so you skip stamp duty.

Previously, Vanguard’s UK index fund range has been restricted to a handful of platforms. And because of the different fee menus, working out your best option has been a special kind of torture.

The new Vanguard trackers should be available on pretty much every platform that deals in ETFs, so UK investors won’t be forced into the hands of a measly few providers.

Vanguard ETF or index fund?

Some may be disappointed that the new ETFs are largely clones of existing index funds, but the cheap TERs are worth the entry price alone.

Bear in mind though that in order to buy ETFs you must pay:

• Brokerage commissions – roughly £10 per trade, although you can cut this to £1.50 by using a regular investment scheme (the same price you’d pay for Vanguard index funds through Alliance Trust).

• The bid-offer spread – should be pennies, but spreads can take a while to settle down as a new product finds its level. Ideally holster your trigger finger for a few months to enable the spreads to tighten.

In my view, bearing in mind the above there’s no reason not to switch to the Vanguard ETFs in place of its index funds. If lower TERs are available, you might as well scoop them up.

If you usually buy, say, HSBC or L&G index funds to avoid brokerage commissions, the calculation is more finely balanced. Try a fund cost comparison calculator to weigh up your options.

Depending on how much you invest, it may not take very long for a cheap ETF to pay off. The Vanguard Emerging Markets ETF will edge the L&G Global Emerging Markets index fund after just four years, for example, even if you pay upfront trading costs of 1%.

The best versus the rest

As for ETFs, here’s how Vanguard compares to its rivals in a straight ETF vs ETF TER tear-up:

Vanguard ETF	TER (%) Vs	TER (%)	Rival ETF
FTSE 100	0.1	0.2	Source FTSE 100
S&P 500	0.09	0.09	HSBC S&P 500
FTSE All-World	0.25	0.5	SPDR MSCI ACWI
FTSE Emerging Markets	0.45	0.45	Amundi MSCI Emerging Markets
UK Government Bond	0.12	0.15	SPDR Barclays Capital UK Gilt

Note: The Source and Amundi ETFs involve synthetic replication.

Clearly, Vanguard has found plenty of room for price-cuts. It will be interesting to see how their rivals respond.

A new option for global investors?

Just to get away from TERs for a second, it’s also worth mentioning that the Vanguard FTSE All-World ETF looks to be an entirely new beast from the Vanguard stable.

The FTSE All-World index tracks 90-95% of the world’s investible equities across both developed and emerging markets. So this is pretty much a one-stop-shop ETF for anyone who wants to run a global portfolio.

Team it up with a broad-based gilt fund and you’ve got a diversified portfolio in just two steps.

Price war

When Vanguard first stormed the UK index fund market, it forced major price slashery from rivals who’d been using bloated TERs to leech investors for years.

Vanguard’s strategy from birth has been to screw down prices, and now it is one of the largest asset management firms in the world.

No doubt it will make more of its range available as ETFs, and continue to up the price pressure on its rivals. UK investors will be the ones who benefit.

Take it steady,

The Accumulator