Fee raising broker Hargreaves Lansdown is offering Vanguard index funds through its online trading platform for the first time.

Vanguard offers the UK’s cheapest index funds, and if the testimony of Monevator readers is anything to go by then Hargreaves Lansdown spared itself a lot of ranting phone calls over its new platform fees by suggesting that the cost hikes could enable it to sell Vanguard.

And that’s what’s transpired. Here’s the skinny:

• All the Vanguard trackers listed by Hargreaves Lansdown so far incur a platform fee of £2 a month per fund. Bad news for investors with small holdings, who suffer disproportionately from flat-rate fees.

• Crucially though, the broker is offering Vanguard’s LifeStrategy funds – the passive investor’s equivalent of a matryoshka Russian doll, enabling you to nest a diversified portfolio inside a single fund for only £2 a month in platform fees.

• You’ll need to be able to invest a minimum of £1,000 per fund, or £50 a month (per fund) with the broker’s regular investment scheme.

• The full Vanguard range isn’t available through Hargreaves Lansdown yet. The Irish-domiciled funds are missing, which includes a couple of tasty treats like emerging markets and global small cap. The word is that they will follow in due course.

Check out Hargreaves Lansdown‘s Vanguard range (scroll down after clicking) and compare that with Vanguard UK’s complete line-up to see if any of your faves are missing.

Those platform fees still hurt

The arrival of Vanguard’s dirt cheap trackers will certainly draw some of the sting of the new platform fees for investors wedded to Hargreaves Lansdown’s platform. The broker’s trump card is that it doesn’t charge dealing fees on Vanguard funds.

But if you’re a new investor tempted by Vanguard funds – or you’re happy to consider a switcheroo away from Hargreaves Lansdown – then take the time to explore your alternatives:

• Bestinvest: High-ish flat-rate management charge, no dealing fees.

• Sippdeal: Low-ish flat-rate management charge, dealing fees.

• Alliance Trust: Lowest flat-rate management charge (except SIPP), dealing fees.

Which is the cheapest route to Vanguard? It depends on how many funds you need, how often you trade and what kind of account you want. I’ll run through some of the scenarios in next week’s post.

Stop the press! In another development, Hargreaves Lansdown has just bagged an exclusive on a FTSE All-Share index fund that’s even cheaper than Vanguard’s.

The ‘SWIP FTSE All Share Index (SWIP Foundation Growth) B class fund’ is from Scottish Widows, has a name longer than a python, and sports a TER of 0.11%. That compares to 0.15% for Vanguard’s equivalent and 0.27% for HSBC’s.

The platform fee is £2 per month so again, it’s not so cheap for small investors in comparison to offerings from rival platforms.

Curiously, there comes attached a mysterious message from Hargreaves Lansdown that implies this offer is available for a limited time only:

If you would like to invest in this fund at the fixed offer price we need to receive your order by close of business on 12 December 2011 (midnight for orders placed online).

Exclusives and limited offers? The term fund supermarket is being taken more literally than ever.

Take it steady,

The Accumulator

I don’t usually go in for apocalyptic visions, but if one was looking for intelligent company in the fallout shelter then you could do a lot worse than economist Steve Keen.

Worryingly, Mr Keen and me seem to have a similar opinion of bankers, and of the usefulness of their activities over the past 40 years.

But Keen is also, well, keen on a debt jubilee to avert a financial catastrophe.

From The Guardian:

Keen shows how, from the late 1960s onwards, private sector debt in the US began to exceed GDP. It built up to wildly unstable levels from the late 1990s, peaking in 2008. The inevitable collapse in this rate of lending pulled down aggregate demand by 14%, triggering recession.

This should be easy enough to see with the benefit of hindsight, but what lends weight to Keen’s analysis is that he saw it with the benefit of foresight. In December 2005, while drafting an expert witness report for a court case, he looked up the ratio of private debt to GDP in his native Australia, to see how it had changed since the 1960s. He was astonished to discover that it had risen exponentially. He then did the same for the United States, with similar results. He immediately raised the alarm: here, he warned, were the conditions for an economic crisis far greater than those of the mid-1970s and early 1990s. A massive speculative bubble was close to bursting point. Needless to say, he was ignored by policymakers.

Now, he tells us, a failure to address these problems will ensure that this crisis will run and run. The “debt-deflationary forces” unleashed today “are far larger than those that caused the Great Depression”. In the 1920s, private debt rose by 50%. Between 1999 and 2009, it rose by 140%. The debt-to-GDP ratio in the US is still much higher than it was when the Great Depression began.

Do I believe – like Keen – that the solution is to write off all debts and start again?

Not yet. I still think we’re very different to Japan (let alone Keen’s Ancient Rome) though I’m not quite so confident as I was a year ago.

If we’re going to write off the debt of companies and citizenry alike, then at least Keen’s version of a debt jubilee has the potential benefit of not utterly punishing savers – since they are allocated the same portion of the free money that Keen would like to print, and they have no debts to pay off with it.

It would still be a nightmare scenario though, financially-speaking – and surely on the streets, too.

I wasn’t even able to enjoy George Osborne’s miserable 2011 Autumn Statement with a dash of schadenfreude.

The forecast for UK GDP growth has been lowered to less than 1% for both 2011 and the 2012. I can’t pretend I foresaw such a dramatic downgrade.

True, it’s been nearly two years since I correctly called Britain’s exit from recession, in stark contrast to invariably gloomy pundits elsewhere.

Yet even then I concluded…

Growing public and private debt will constrain consumption and tame future expansion. We’re richer now than we expected to be 12 months ago, but we’ll be poorer in five years than you might imagine.

… which sounds about right today.

I also thought markets would rise – which they did for a while – and predicted higher inflation. It’s over 5%, so I’ll take that as a win, too.

My big miss was on UK government bonds, where I expected gilt yields to rise and that – together with inflation – to send interest rates higher.

Not so far! As it’s turned out, UK government bonds have been a superb investment as yields have steadily fallen. And they’ve been much less choppy than shares.

You can bank on bankers

The truth is I was looking for a return to sustainable growth to drive the key variables I just cited, whereas what we’ve had is more like gentle stagflation.

Partly that’s down to the bludgeoning of embattled animal spirits by a succession of further shocks. In particular, I thought Europe would sort itself out sooner than it has.

I believe Europe has what’s required to deal with its problems. Don’t believe the hype! Italy, as a nation, is loaded. Germany is the sovereign equivalent of Rich Uncle Monty from Withnail and I.

But while its members tussle to discover if that’s true, Euro zone fear has hit all the banks hard (even the UK ones) and confidence has seeped away, which has compounded my bigger error – I underestimated the impact of financial deleveraging.

It’s ironic that having bemoaned the UK credit bubble for many years and predicted its messy end (though I certainly didn’t foresee the US epicenter, nor the exotic machinations), I’ve been too optimistic about how quickly we can return to ‘normal’ (whatever that means).

I partly blame the bankers. It turns out bankers, in aggregate, are even more valueless than I’d previously given them (very little) credit for.

For most of the past decade, they’d lend millions to anyone with an Irish accent and a building site. They geared their banks up to a level that would make a card shark wince.

Now, though, they’re hoarding money like Ebenezer Scrooge caught short at a misers’ convention. Financing for everything from houses to investment to factories has vanished, even for those who look a good credit risk. Today you have to be a great one.

I suspect most of the old-fashioned bankers who actually knew how to assess a loan were long ago put out to pasture. Instead, today’s rocket scientist bankers spend their days trying to figure out how to game capital ratios, and not making very much money for their employers. Meanwhile their prop trading desks have been unmasked as directional punts on the herd (or simply fantasists, in light of fraud at UBS and Societe Generale).

Why we as a society (and as shareholders) still pay these bozos billions more than they deserve for the measly value they add (in aggregate) is for another day.

The point here is that their excessive profits puffed up UK GDP even higher than we previously thought in the boom.

Now the tide has gone out, we’re even more pasty and skimpily-clad than we’d feared.

Unemployment benefits nobody

Bankers would say deleveraging is a problem for society as a whole. Some might even add that excessive debt got us into this mess.

Which is pretty rich, but true.

While I think bank lending is more subdued than it needs to be – I’d happily borrow £1 million today at 4% if I could get it – there’s no doubt many households need to pay off what they’ve already wracked up. With falling house prices outside of London cutting off the other main supply of fantasy money, consumer spending will be stifled for years to come.

While some will lose out more than others, clearly it’s not going to be a great time to be a worker in Britain. Hundreds of thousands more public sector workers are going to be dropped now we’ve belatedly realised we can’t afford them, and their pay is falling fast in real terms, which may be good news for the UK in the long term, but is terrible for the individuals concerned, as well as for GDP and the job market.

Blogger and Monevator reader ermine has posted some comprehensive stuff on dealing with these dark times, writing:

It’s time to get a personal finance tin hat – you need to electively choose to start living on less that your income even if it means doing without things, so you have space to deal with this loss of purchasing power. There’s no point in burying your head in the sand – deal with reality, otherwise reality will deal with you in its own way.

You might also read The Accumulator’s thoughts on cutting spending where it matters least to you.

Whether the government should also be quite so obsessed with its timetable for austerity, given the tiny interest rates it currently pays, is another matter.

I’m not suggesting we don’t need to hack down our debt over a reasonable timeframe and get away from the previous culture of higher taxes and higher public sector spending.

But surely now is the best time to invest in high impact infrastructure, like new railway connections and energy supply, as well as more social housing? Bold and targeted government action could create far more jobs now, when they’re needed, and many of the assets, especially housing, could be sold off in better times.

I’d far rather my taxes went on that than on higher unemployment benefit bills – let alone the other nonsense we still spend too much on.

Don’t bet on GDP

From the standpoint of a private investor, too, I also maintain that panicky action would be a mistake.

While things look dark for Blighty PLC, some of the measures being taken – such as the modestly higher infrastructure announced by Osborne – might help certain UK companies.

I wrote the other day about why housebuilders might make attractive investments, for example. Admittedly it’s already harder to see house price inflation taking off anytime soon, but interest rates also look even less likely to go up. And my main point was housebuilders are already making profits on today’s much lower volumes and prices.

More importantly for investors, though, national GDP growth has been shown to be a very poor predictor of that country’s stock market returns. The lowered outlook for the UK therefore doesn’t say diddly about what to expect from the FTSE.

I plan to write more about GDP growth and equity returns, but here’s a taster of the reasons behind the lack of correlation:

• GDP estimates national output, whereas listed company output comprises just a subset of output
• UK listed companies get most of their sales overseas, anyway
• Slow growth usually means interest low rates (good for shares) and little pressure on wages (good for margins)
• Companies may also be more careful with their cash, reducing wastefulness and empire building
• In contrast, investors get over-enthusiastic in the good times, bidding up multiples to earnings

The last point, valuation, is the critical one. Buying when shares look cheap to fairly-valued (like now, in my view) is much more important than buying when higher GDP growth – or smiling UK politicians – makes it feel good to do so.

UK companies are doing fine, on the whole. They have low debt, and the amount they pay out as dividends is already back above crisis levels. And on a P/E rating of around about 10, they’re still good value.