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The Slow and Steady passive portfolio update: Q2 2014

The portfolio is up 3.06% on the year (to date).

The last few months have been as gentle as a lullaby for investors, with pretty much every asset class gently floating up.

Even emerging markets are back in favour, swelling by 6% last quarter – a gain that’s underlined by the lagging indicator of numerous media sites now banging on about BRICs.

Even so, the emerging markets remain uniquely in the red out of all the asset classes we’ve invested in since we started the portfolio some three years ago.

Overall our model portfolio has endured very little hardship over that time, aside from trailing the FTSE All-Share by some 2% a year. Every market we’ve owned bar the US and Europe has underperformed the UK equity market.

Diversification has seemingly cost us over this short period. But the point of an asset allocation strategy is that you stick with it through the years – and even the decades. We believe it will prove its worth when the weather changes.

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £850 is invested every quarter into a diversified set of index funds, heavily tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

Our little growth engine has made another £400 since our last portfolio update.

That means we’re up over 18% on purchase and have averaged a 8.28% annualised return.

Here’s the portfolio lowdown in spreadsheet-o-vision:

We're up again

This snapshot is a correction of the original piece. (Click to make bigger).

Dividends

Interest and dividends brought in £77 last quarter, as we accepted the tribute of entrepreneurs and the Government for the gracious favour of our capital.

We reinvest this income straight back into our portfolio via accumulation funds that automatically put that money back to work.

Here’s how the income totted up this time:

US equity tracker: £26.56
European equity tracker: £6.34
Japan equity tracker: £5.51 (It all counts!)
Pacific equity tracker: £9.98
Emerging markets equity tracker: £9.21
UK Government bond index: £19.64

Total dividends: £77.24

Leave it alone

A switched-on passive investor is rightly paranoid about cost – this being one of the few factors she can directly control that makes a material difference to the bottom line.

So I’ve been wondering whether the Slow & Steady portfolio should switch to the incredibly cheap family of index funds available from Fidelity after that firm’s most recent bout of price smashing.

Fidelity’s Ongoing Charge Figures (OCF) are now among the best in every category, and you get an extra discount when you hold them on the Fidelity platform:

Fund name OCF OCF at Fidelity
Fidelity Index UK fund 0.09 0.07
Fidelity Index US fund 0.1 0.08
Fidelity Index Japan fund 0.12 0.1
Fidelity Index Pacific ex Japan fund 0.15 0.13
Fidelity Index Europe ex UK fund 0.12 0.1
Fidelity Index Emerging Markets fund 0.25 0.23
Fidelity Index World fund 0.2 0.18

Note: OCFs are percentage figures.

The current annual cost of our portfolio’s funds is 0.18%. If we drafted in the Fidelity funds then this would fall to 0.13%. That’s a near 30% reduction in costs.

Sounds tasty!

But let’s keep some perspective – it only amounts to a £7.50 annual saving on our portfolio’s approximate £15,000 value.

That’s definitely not worth the bother. Moreover, it doesn’t take into account tracking error – the additional costs a fund spews like exhaust fumes, and which aren’t measured by the OCF.

Some of the Fidelity funds are very new, so they don’t have a track record that we can even probe.

But one we can look at is the Fidelity Index UK fund, and here the apparent advantage of this fund over our current UK holding is certainly not as wide as it first appears. The 0.08% OCF advantage is reduced to a miniscule 0.01% rounding error once tracking error is accounted for, according to Trustnet’s charting tool.

So for the moment, I’m not going to make any changes. But that isn’t to say you wouldn’t do perfectly well with these Fidelity funds.

New transactions

Every quarter we lay another £8501 at the feet of the money gods.

We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves. All’s quiet for now, so there isn’t any need to sell any outperforming funds.

Instead we’ll divide our cash as normal between our seven chosen funds, as per our asset allocation strategy:

UK equity

Vanguard FTSE U.K. Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4893

New purchase: £127.50
Buy 0.646 units @ £197.48

Target allocation: 15%

Developed World ex UK equities

Split between four funds covering North America, Europe, the developed Pacific and Japan2.

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

North American equities

BlackRock US Equity Tracker Fund D – OCF 0.17%
Fund identifier: GB00B5VRGY09

New purchase: £212.50
Buy 154.66 units @ £1.37

Target allocation: 25%

European equities excluding UK

BlackRock Continental European Equity Tracker Fund D – OCF 0.18%
Fund identifier: GB00B83MH186

New purchase: £102
Buy 60.14 units @ £1.70

Target allocation: 12%

Japanese equities

BlackRock Japan Equity Tracker Fund D – OCF 0.17%
Fund identifier: GB00B6QQ9X96

New purchase: £51
Buy 39.41 units @ £1.29

Target allocation: 6%

Pacific equities excluding Japan

BlackRock Pacific ex Japan Equity Tracker Fund D – OCF 0.2%
Fund identifier: GB00B849FB47

New purchase: £51
Buy 23.79 units @ £2.14

Target allocation: 6%

Emerging market equities

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.28%
Fund identifier: GB00B84DY642

New purchase: £85
Buy 52.19 units @ £1.10

Target allocation: 10%

UK Gilts

Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374

New purchase: £221
Buy 1.70 units @ £130.04

Target allocation: 26%

New investment = £850

Trading cost = £0

Platform fee = 0.25% per annum

This model portfolio is notionally held with Charles Stanley Direct. You can use its monthly investment option to invest from £50 per fund. Just cancel the option after you’ve traded if you don’t want to make the same investment next month.

Take a look at our online broker table for other good platform options. Look at flat fee brokers if your portfolio is worth substantially more than £20,000.

Average portfolio OCF = 0.18%

If all this seems too much like hard work then you can always buy a diversified portfolio using an all-in-one fund like Vanguard’s LifeStrategy series.

Take it steady,

The Accumulator

  1. The Slow & Steady portfolio is virtual. It’s a model portfolio designed for discussion and to show how a passive portfolio might operate and perform on a small scale. []
  2. You can simplify the portfolio by choosing the do-it-all Vanguard FTSE Developed World Ex-UK Equity index fund instead of the four separates. []

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{ 19 comments… add one }
  • 1 Retirement Investing Today July 2, 2014, 11:54 am

    Switching funds to save fees… This is something I’m right in the middle of doing as I write this. I’m cleaning up in two areas:
    – switching some of my Vanguard OEIC’s (which were bought before the likes of low cost Fidelity funds, low cost iShares ETF’s and VG ETF’s) to Vanguard ETF’s within my SIPP and ISA
    – selling ‘high expense’ funds (eg EM’s) from my SIPP/ISA and ‘buying’ ‘high expense’ funds within my ‘expensive’ workplace insurance company based pension. At the same time I’m using the proceeds to buying ‘low expense’ funds (eg gilts) in my SIPP/ISA and ‘selling’ ‘high expense’ funds within the workplace pension.

    It’s taking the poise and dexterity of a ballerina to ensure I’m not out of the market for any length of time plus am not eaten alive by buy/sell spreads and trading costs but having done the months it will take my average portfolio annual expenses from 0.37% to 0.33%. Doesn’t sound like much but with me now having 76% of the wealth required for Early Retirement it’s worth hundred’s of pounds a year and so is certainly worth the few hours of time I’m investing into it.

  • 2 Mark Meldon July 2, 2014, 3:27 pm

    I don’t want to be a doomster, Retirement Investing Today, but what do you mean that you already have “76% of the wealth required for Early Retirement”? Not if it stays in the market you haven’t!

    Or do you mean you have “banked” your “at-risk” investments as liquid cash? If so, you are probably right; if not, there is always the distinct possibility of a sell-off permanently impairing your “76%”!

    I have nothing against being invested in equities and bonds, per se, but am very curious as to how your arrive at your 76% figure with any degree of certainty going forward.

    I’d be interested to learn of your techniques.

  • 3 Neverland July 2, 2014, 4:19 pm

    @ mark

    RIT has a very good blog which is probably the best uk personal finance blog for someone looking at early retirement seriously but not as instantly accessible to those who havent drunk the kool aid of the early retirement cult – nevertheless you should check it out

    (In summary RIT doesn’t spend very much)

    @ accumulator

    I find the 6.5% annual really spooky – isn’t that nearly precisely the annual return that this portfolio mix should generate in line with long term averages with CPI averaging about 3% over the period?

  • 4 Retirement Investing Today July 2, 2014, 5:01 pm

    @Mark
    It’s difficult to explain in a brief comment without diverting away from TA’s post but here goes. The 76% is arrived at by dividing 2 numbers. The first is the amount of salary I want in retirement which includes compulsory and discretionary spending. The second is the current value of my assets. As soon as the result is <=2.5% I believe work can become optional for me (maybe not for others) as I can manage whatever the market then throws at me providing it reflects no worse than history.

    A black swan event that is worse than anything ever seen previously in the UK and I'll be back peddling on that discretionary spending and/or hustling for money pretty quickly which is what I think your "Not if it stays in the market you haven’t!" is alluding to. The problem is that any normal person has to call stop sometime if they don't want to work until they drop and they also have to stay in the market meaning some risk to achieve it. Cash is certainly not going to help unless you have a "lot of it" as its just continually being devalued by inflation.

    @Neverland
    Thanks for the hat tip. …although I like to think I'm a bit more than "In summary RIT doesn’t spend very much." 🙂

  • 5 dearieme July 2, 2014, 7:15 pm

    “paranoid …. she can directly”: ooh, naughty disguised as nice.

  • 6 Mark Meldon July 3, 2014, 9:10 am

    Thanks for the clarification, RIT. I think my point was is that everything seems very expensive at the moment, what with Spanish and Italian bonds having a lower yield than gilts, fund managers I know anecdotally saying “please don’t give me any more money as what can I do with it” (not just the “active” mob, either), discounts narrowing hugely on investment trust shares, certain sectors of the property market, ever increasing personal taxation, blah, blah.

    As an IFA, I’m finding it increasingly hard to be confident in recommending what might be called “at risk” investments to novices and have been communicating with certain long-standing clients about considering taking a few profits in their SIPP portfolios. Although that goes rather against the grain, as I don’t believe in market timing, as such, I feel it must be done (with a wary eye on the FCA and our PI insurers!

    Excellent blog, by-the-way, and thank you for your courtesy.

  • 7 Matt July 4, 2014, 7:50 am

    Only partially relevant, but I had to share thsi article on the front page of Hargreaves Lansdown this morning:

    http://www.hl.co.uk/news/articles/three-simple-portfolios-of-famous-investors

    I have the strangest feeling I’ve read thsi article somewhere before…

  • 8 Lorenzo July 4, 2014, 11:11 am

    I think HL are losing clients to cheaper brokers and therefore have to push for cheaper alternatives to active mutual funds or, at least, convince people that they’re cheaper. It’s quite annoying though how they push for funds they get more money from, e.g. Neil Woodford Fund, where they mentioned the incredible negotiated OCF of 0.6% but forget to mention the charge of 0.45% on top of it. The same applies to all the articles (especially Mark Dampiers’, head of research) where they advertise incredible funds that will beat the market without mentioning the total cost of owning it at HL. The customer service is really good but it doesn’t justify the costs. But a beginner doesn’t know it and goes for the most expensive solution, they know this. Thanks God, Monevator exists!

  • 9 AJ May July 4, 2014, 1:12 pm

    @accumulator

    Long time follower, first time poster! Started investing my long ball money broadly in line with your Slow & Steady model portfolio around 18 months ago as an alternative to the pitiful savings rates doing the rounds at the time. It really is testament to the wealth of info on Monevator that I’ve made it this long without feeling the need to pipe up with a question but here goes…

    I have a range of HSBC and BlackRock index trackers sheltered in a TD Direct ‘Regular Investment’ ISA with new purchases made monthly. Each is of the accumulative variety yet I have yet to see signs of any dividend action (I track the folio with a spreadsheet so I know they’ve not simply been reinvested automatically). Any ideas what might be happening?

    Thanks in advance!

    Allan

  • 10 Cowboy July 4, 2014, 1:27 pm

    @Lorenzo
    If you think the customer service is good at HL try leaving them, it’s a very different experience.

    In regards to the article I am one of those too lazy to manage this and so use lifestrategy, I know I could do it cheaper but I barely ever have to even look at it

  • 11 Lorenzo July 4, 2014, 1:37 pm

    @Cowboy: this is going to be my next step. What is your experience?

  • 12 Andy j July 5, 2014, 8:20 am

    @ajmay

    I’d like to know this too. I also have acc units and would love to know what proportion of any increase is from dividends.

  • 13 The Accumulator July 5, 2014, 10:39 am

    @ AJ and Andy J – thanks for your kind words about the blog. Here’s a piece that provides two methods for tracking down acc fund dividends: http://monevator.com/accumulation-funds-dividends/

  • 14 Andy J July 5, 2014, 1:54 pm

    Thanks, that’s really useful, keep up the good work.

    I guess if you have a platform that doesn’t charge for dividend reinvestment then INC units would make it much easier to see the level of income you get. Just looking at my statement from one of my investment trust plans and it is very rewarding to see the dividends received to show you’re on the right track.

    Are there any disadvantages with INC units – other than more admin to keep track of what you hold?

  • 15 The Accumulator July 5, 2014, 2:19 pm

    Yes, agreed, it is very rewarding to see the divis trickle in. I just use the method outlined in the article to track my accumulation funds and record the ‘wins’ on a spreadsheet.

    No disadvantages with inc units other than charges to reinvest and the temptation to not reinvest at all!

  • 16 hv July 12, 2014, 12:27 am

    Hey,

    I just looked up Charles Stanley for the Blackrock Emerging Markets D Fund, the OCF is 0.96% instead of 0.28% as shown above. Am I looking at the wrong fund?

    https://www.charles-stanley-direct.co.uk/ViewFund?Sedol=B4R9F68&Isin=GB00B4R9F681

  • 17 hv July 12, 2014, 12:31 am

    Oops I am sorry. I found the wrong fund. This would be the right one: https://www.charles-stanley-direct.co.uk/ViewFund?Sedol=B84DY64&Isin=GB00B84DY642 at OCF of 0.26%

  • 18 Rachelle August 9, 2014, 5:11 pm

    Hello, I’ve just found your website – thank you! I am hoping to invest a lump sum of £5000 and then top it up throughout the year. I think I have decided on my investment strategy etc so I am now deciding how much I can afford to contribute each year. How did you come up with the initial £750 and then decide when/how to increase it to £850? Realistically, I won’t be able to contribute as much as I would like in the short term due to a significant upcoming bill which needs cash savings, but I would aim to increase the investment amounts over time. I have defined benefit pension schemes and OH has a private pension so this is not our only retirement savings.

  • 19 The Accumulator August 10, 2014, 9:05 pm

    Hi Rachelle,

    The rise to £850 was based on upweighting the £750 by the last few year’s worth of inflation rises. I should have been upweighting the contribution by inflation every year.

    The original £750 was a notional quarterly figure that really breaks down to £250 per month. The idea was to show what’s possible with a relatively low contribution.

    Here are a couple of articles which may help you decide how much is appropriate for your individual situation:

    http://monevator.com/how-much-do-i-need-when-i-retire/
    http://monevator.com/financial-independence-plan/

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