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The Slow and Steady passive portfolio update: Q2 2014

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 [1] 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 [2] 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 [3] and catch up on all the previous passive portfolio posts [4].

Our little growth engine has made another £400 since our last portfolio update [5].

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 [6]

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


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 [7] 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 [2] 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 [8] available from Fidelity [9] after that firm’s most recent bout of price smashing.

Fidelity’s Ongoing Charge Figures (OCF) [10] 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 [11] 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 [12] – 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 [13] at the feet of the money gods.

We use Larry Swedroe’s 5/25 rule [14] 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 [1] strategy:

UK equity

Vanguard FTSE U.K. Equity Index Fund – OCF [10] 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 [15].

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 [16]. 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 [17] 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 [18].

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. [ [21]]
  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. [ [22]]