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The Slow and Steady passive portfolio update: Q4 2012

We’re up 10% in 2012

In a flash, our Slow & Steady demo portfolio is two years old. Time flies when you’re lounging around.

The big news is that there are now cheaper alternatives to most of our funds, thanks to the continued de-clawing of Britain’s financial industry. As a result, we’ve decided it’s time to sell up and look for fresh boltholes.

But before we get into that, what of Mr Market? Has he smiled or frowned since last we checked in?

Mr Market – he happy. In fact our plucky little portfolio has grown every quarter this year to end up 10% in 2012 and 7.33% up since purchase. A new high!

In actual spondoolicks that means we’ve put on £200 since last quarter to take our spoils to £605.13. That’s despite a 2012 wracked by the double-dip, Euro Armageddon every second Tuesday, and onrushing fiscal cliffs.

We're up 7.33% since purchase

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 £750 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 here.

We’ve put in £9,000 so far and the two years has surely taught us two things:

  • The market can rise despite a perpetual pipeline of bad news.
  • We’re not going to get rich anytime soon.

Despite our mild success we’ve taken a beating against our overall benchmark. The FTSE All-Share climbed 14% in 2012. And even though some of our funds exceeded this performance, our drip-feeding strategy didn’t capture the entire year’s growth. Only a quarter of our new money was even in the market for a whole year.

All change – new funds

Enough of the short-term performance anxiety, it’s time for the main event. We’re selling six of our seven funds and replacing them with lower cost models.

Since our last update, online broker TD Direct has put together an astounding offering for passive investors.

It now offers the cheapest access to index funds in the UK, unencumbered by platform fees or dealing fees. You’ve just got to make sure your ISA is worth over £5,100 or it’s set up with a regular investment facility (in which case you can have pennies in there). You can read up on the charges for yourself here.

Here are our moves:

Old fund TER/OCF (%) New fund TER/OCF (%)
HSBC American Index 0.3 Vanguard U.S. Equity Index 0.2
HSBC European Index 0.35 Vanguard FTSE Developed Europe ex-UK Equity Index 0.25
HSBC FTSE All-Share Index 0.28 Vanguard FTSE U.K. Equity Index Fund 0.151
HSBC Japan Index 0.33 HSBC Japan Index C 0.23
HSBC Pacific Index 0.46 HSBC Pacific Index C 0.36
L&G All-Stocks Gilt Index 0.23 HSBC UK Gilt Index C 0.18

The total weighted TER / OCF of the new portfolio is 0.29% (plus the 0.075 weighted stamp duty charge incurred by the UK equity fund.)

That compares to 0.37% for the old version of the portfolio.

Tell my why

Where possible I’ve plumped for Vanguard index funds. These are generally the cheapest and though HSBC’s C Class funds can match them, Vanguard’s investor-friendly culture wins the tie-breakers.

I am also more confident that Vanguard will keep a tighter rein on tracking error and pass on future cost-savings to investors. History has shown that where Vanguard leads, HSBC follows.

Finally, I’m satisfied that the Vanguard funds hug the right indices and match up against my tracker selection criteria at least as well as the previous picks.

As for the new HSBC C Class funds, these are identical to the older HSBC index funds but with 0.1% of trail commission costs lopped out.

The only fund I couldn’t improve upon is the flabby L&G Global Emerging Markets fund. Vanguard does a much cheaper version, but it’s not available through TD Direct.

Word of warning!

I probably wouldn’t make this move with my own portfolio. The gain implied from switching makes less than £1,000 difference over 18 years, given the current rate of cash injection.

That could be cut if the market bucks against us while we’re sitting on the sidelines waiting for the various transactions to go through. Of course, the wind might blow in our favour or scarcely stir at all, but it doesn’t seem worth the hassle for such measly gains.

The difference with a demo portfolio is I’m not going to let that trouble my brain. What’s more, it is our sacred Monevator duty to present the best possible set-up for new investors.

What I would do in reality though is start investing new cash into the cheaper funds.

If that all sounds like a tremendous faff, then you can simplify the portfolio by ditching the separate US, Europe, Japan and Pacific funds in favour of the do-it-all Vanguard FTSE Developed World Ex-UK Equity index fund.

This is what I actually do in real life, and the few hundredths of a basis point in extra expense really aren’t worth fretting over.

You can be lazier still by buying Vanguard’s one-stop-shop LifeStrategy funds. Again, they’re a fraction more expensive than the Slow & Steady investments but a whole lot quicker to manage. Just add direct debit et voila – instant portfolio!

Rebalancing rule change

Still haven’t put you off, eh? Okay, well the switch to TD Direct also forces us to change the portfolio’s rebalancing rules.

Previously, we used our new cash to rebalance each fund every quarter. However, that brand of small-time top-up just isn’t gonna fly when TD Direct requires a minimum investment of £50 per fund.

So from now on our quarterly £750 investment dollop will be divided according to the portfolio’s stated asset allocation for the year. For example, the Emerging Market allocation is 10%, so that fund will receive £75 every quarter.

We’ll then rebalance the whole portfolio in one big shindig every year in the fourth quarter.

Just in case things go loopy in the meantime we’ll also invoke Larry Swedroe’s 5/25 rule. This is a threshold rebalancing technique that will put our asset allocation back on track if the portfolio drifts too much over the year. (See here for more on that).

Remember there is no perfect rebalancing strategy, so there’s no saying that rebalancing every year will be better – or worse – than our old tactic.

For the sake of consistency we’d rather we didn’t have to make a change. But again, plans are the first casualty on the battlefield of reality, and we want this paper portfolio to be nailed-on, reality-wise, in order to best demonstrate the power of passive investing.

Asset allocation rejig

Our original 20-year investment horizon has now ticked down to 18 years. Every year we lifestyle our portfolio by shifting 2% out of equities and into gilts.

This move will probably cost us growth but should also lower our exposure to risk the closer we come to cashing out. And while lower future growth from government bonds seems nailed on, they still have a role to play in protecting investors from volatility.

To that end, I took 1% from each of the portfolio’s big US and UK allocations to compensate for the shift to gilts.

The move to TD Direct also forces an uptick in the allocation to Japan and the Pacific from 5% to 7% each. This is done purely to hit the minimum fund investment figure of £50. That’s not the best reason to fiddle with your asset allocation, but it demonstrates how small investors have to deviate from the textbook in order to cope with the realities of the financial industry.

The 4% shift to the East came at the expense of the West. I shaved the odd 0.5% from Europe and America, and sliced a whole 3% off the UK. Essentially I’m happy to unwind the portfolio’s home bias, which is more of a psychological crutch than a necessity right now.

New transactions

Every quarter, we continue to cast another £750 into the money mincer. As discussed, this time we’re also selling off six of our old funds, buying replacement funds and rebalancing, too.

UK equity

HSBC FTSE All Share Index – OCF 0.28%
Fund identifier: GB0000438233

Sell: £1,706.49

Replaced by:

Vanguard FTSE U.K. Equity Index Fund – OCF 0.15% (Stamp duty 0.5%)
Fund identifier: GB00B59G4893

New purchase: £1,440.76
Buy 8.92 units @ 16152p

Target allocation: 15%

OCF has gone down from 0.28% to 0.15%

Developed World ex UK equities

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

Target allocation (across the following four funds): 51%

North American equities

HSBC American Index – OCF 0.3%
Fund identifier: GB0000470418

Sell: £2,264.23

Replaced by:

Vanguard U.S. Equity Index Fund – OCF 0.2%
Fund identifier: GB00B5B71Q71

New purchase: £2,401.27
Buy 14.05 units @ 17095p

Target allocation: 25%

OCF has gone down from 0.3% to 0.2%

European equities excluding UK

HSBC European Index – OCF 0.35%
Fund identifier: GB0000469071

Sell: £1,164.87

Replaced by:

Vanguard FTSE Developed Europe ex-UK Equity Index fund– OCF 0.25%
Fund identifier: GB00B5B71H80

New purchase: £1,152.61
Buy 8.35 units @ 13796p

Target allocation: 12%

OCF has gone down from 0.35% to 0.25%

Japanese equities

HSBC Japan Index – OCF 0.33%
Fund identifier: GB0000150374

Sell: £460.09

Replaced by:

HSBC Japan Index C – OCF 0.23%
Fund identifier: GB00B80QGN87

New purchase: £672.36
Buy 1111.51 units @ 60.5p

Target allocation: 7%

OCF has gone down from 0.33% to 0.23%

Pacific equities excluding Japan

HSBC Pacific Index – OCF 0.46%
Fund identifier: GB0000150713

Sell: £458.22

Replaced by:

HSBC Pacific Index C – OCF 0.36%
Fund identifier: GB00B80QGT40

New purchase: £672.36
Buy 269.91 units @ 249.1p

Target allocation: 7%

OCF has gone down from 0.46% to 0.36%

Emerging market equities

Legal & General Global Emerging Markets Index Fund – OCF 1.06%
Fund identifier: GB00B4MBFN60

New purchase: £50.27
Buy 105.56 units @ 47.62p

Target allocation: 10%

Note: I threw an extra £1 into this purchase to hit the minimum £50 investment figure.

UK Gilts

L&G All Stocks Gilt Index Trust – OCF 0.23%
Fund identifier: GB0002051406

Sell: £1,889.95

Replaced by:

HSBC UK Gilt Index C – OCF 0.18%
Fund identifier: GB00B80QG383

New purchase: £2,305.22
Buy 1940.42 units @ 118.8p

Target allocation: 24%

OCF has gone down from 0.23% to 0.18%

New investment = £751

Trading cost = £0

Platform fees = £0

Average portfolio OCF = 0.29% down from 0.37%

Phew!

Take it steady,

The Accumulator

  1. Plus a 0.5 stamp duty fee. []

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{ 64 comments… add one }
  • 51 Dan January 24, 2013, 10:36 am

    I forgot to add that you can also research funds and compare TER’s on this site, see model portfolios and compare platform charges across all the major supermarkets, brokerages etc. Of course, we have a passive mindset but you can still view trackers and other indexed funds. You can even invest via them although I only plan on using it as a tool. All free too

  • 52 The Accumulator January 24, 2013, 9:41 pm

    Hey Dan,

    Thanks for spotlighting the virtual portfolio tool – it is very simple and clear to use. Here’s a direct link: https://www.rplan.co.uk/virtualpots/new#overview

    You’re right it won’t have enough detail for some and doesn’t cover every index tracker out there, but it is very approachable.

    I wouldn’t use rplan’s comparison tool to compare brokers if you’re a passive investor. The comparison is based on the costs of the top 10 selling Cofunds funds – which will be mostly active funds – so the comparison will be way off for passive investors.

  • 53 Becky January 27, 2013, 11:45 pm

    I’m new to investing and have found your passive portfolio incredibly useful, so thank you very much!

    Am I right in thinking there’s a minimum initial investment of at least £500 for both the HSBC Japan & Pacific Ex-Japan C-Class funds? And it also seems that any additional purchases need to be for at least £1000… or have I misunderstood something? (I’m using TD Direct.) If that is the case, I’m assuming it would be best to stick with something like the Vanguard FTSE Developed World Ex-UK fund you suggest.

  • 54 The Accumulator January 28, 2013, 10:43 pm

    Becky, I think you’re right about the minimum initial investment. That’s a relatively recent development. After that you can invest for £50 a time. I have a feeling the minimum may not apply if you set up a regular investment, though. It’s worth a quick phone call to TD to check.

  • 55 David January 28, 2013, 11:42 pm

    @Accumulator “It’s worth a quick phone call to TD to check” … I’m not so sure such a thing exists anymore. My last few attempts have resulted in interminable delays in their call queuing system. Perhaps this is different for opening new accounts, but enquiries and general account maintenance seem to take forever … Perhaps they can subliminally tell I’m calling to cancel ISA transfers because of the 0.35% fees hike.

    I realise it’s restricted to Hargreaves Lansdown but I’m surprised the SWIP FTSE All Share Index at a rock bottom 0.10% plus £2/month doesn’t get mentioned more often. For a single holding of a reasonable sum this – by my calculations – is the best value I can find for a FTSE All Share tracker.

  • 56 The Accumulator January 29, 2013, 2:22 pm

    @ David – I like your idea that TD are detecting your negative gamma rays. I think it’s probably taken me about 20 minutes to get through the last couple of times too, so pretty poor.

    I haven’t mentioned the SWIP fund because I don’t like the idea of a single fund portfolio focussed entirely on the FTSE. A highly concentrated 100% equity portfolio like that isn’t one I’d recommend. I also don’t like the way HL have bagged it as an ‘exclusive’.

    I did look to include it in my recent tracking error review of FTSE All Share trackers but it doesn’t have a long enough performance record.

  • 57 David February 2, 2013, 2:22 pm

    @Accumulator – I’m not sure I understand your comments re. SWIP. Is it simply a “not all your eggs in one basket” concern and you’d feel the same about having everything in Vanguard FTSE UK Equity Income Index, or something I’ve missed?

    I can live with the exclusive HL tag for the lower fees which I reckon work out at £56 less on a £20k holding per year (from next August, assuming Vanguard are 0.15+0.35% with TD and HL SWIP are 0.1%+£2/month).

    Also disappointing to report that the TD call centre is equally busy morning, afternoon and evening as my experience this week shows (minimum wait 19 minutes); at least when you get through they are very helpful and knowledgeable.

  • 58 The Accumulator February 2, 2013, 3:01 pm

    @ David – it’s because, as a passive investor, you’d likely be paying £2 per fund, so if you own a diversified portfolio with several funds, there are generally cheaper ways to do it than HL even with the SWIP fund. Depending, of course, on multiple caveats like how skewed you are to the FTSE All-Share, how much trading you do, which account etc. The recent news from TD Direct makes HL more competitive too.

  • 59 Becky February 2, 2013, 8:43 pm

    Thanks, Accumulator. I took your advice and gave TD a call. They confirmed that the £500 minimum purchase applies to all funds, not just the HSBC C Class funds.

    They also said that additional purchases on the HSBC C Classes could be as little as £25, and that’s without having regular investments set up. That surprised me, as it doesn’t seem to match up with what’s on their website… I’ve bought a couple of the funds now, so it will be interesting to see if that holds true.

  • 60 Mika February 13, 2013, 2:43 pm

    I am a little confused about the platform fee in TD.
    According to TD’s web page. From August it will charge 0.35% platform fee for ‘clean funds’. So for example, HSBC Japan C will cost 0.23% + 0.35 % =0.58% from August? But if we stay in HSBC Japan which cost 0.33% and trial commission =0.5% will be charged 0.35% platform fee) . And all the Vanguard funds will been charged another 0.35% platform fee after August. But stay in the old funds will not been charged platform fee (I think commission are all < 0.5%) according to the structure now. Am I right or the old funds will been charged platform fee as well?

  • 61 Ben February 19, 2013, 8:06 pm

    I have a simple (possibly stupid) question, I would greatly appreciate advice for! If you already hold a less ideal index tracker outside an ISA, does it ever make any sense for you to trade for a lower cost alternative with lower tracking error? In my case, I have thought about trading a £40K holding in the Fidelity Moneybuilder UK Index Fund for the Vanguard equivalent given my 40 year horizon. But I might well incur capital gains tax, as well as possible losses if the market moves.

    So, should I trade or is it generally more cost-effective/sensible to stop adding to the less ideal index tracker and start adding its better Vanguard equivalent as suggested in the Accumulator’s Word of Warning? With the latter “keep the so-so fund but add the better fund” approach I can foresee a rather complicated portfolio as more economical Vanguard funds hopefully become available.

  • 62 Jon Williams April 15, 2013, 11:53 pm

    Only problem is TD Direct’s platform appears to be b0rked!

    Adding Vanguard funds to the regular investment portfolio seems to break the site 🙁

  • 63 Allan April 25, 2013, 1:04 pm

    Excellent reading as always. Just a quick query if anyone can offer help- can someone help me to understand how the stamp duty is applied with the Vanguard UK Equity Index? Cheers.

  • 64 john November 27, 2013, 5:48 pm

    Do you part sell or transfer from fund to fund to rebalance and is there a cost implication to that?

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