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Weekend reading: Is fund fee transparency really such a big deal?

Weekend reading

Good reads from around the Web.

Always nice to see the rich and the powerful do something good with their money. And so nice to see Neil Woodford, the famed fund manager, leading the way on fee transparency.

The Woodford Funds blog says:

From 1 April, investment research costs are being paid by Woodford, rather than by the fund with no increase to the existing annual management fee.

We also commit to greater transparency on the total cost of investing, with all transaction costs to be disclosed monthly on our website.


The cost of transacting is wrapped up in the cost of buying or selling assets within a fund – they are an inevitable part of investing. All stock market investors, whether fund managers or DIY investors, face these costs, which come in the form of commission and, when buying shares, Stamp Duty.

From 1 April, one element of the cost of transacting – that of research costs – are being paid by Woodford, rather than by the fund.

Importantly, we are not increasing our fees to cover this additional cost.

Investors are, in effect therefore, getting a price cut, which will immediately benefit the future performance of the fund.

Of course, some say this is all a big PR move. That Woodford is doing this because with his huge and loyal following he can get away with it.

Well if it’s a PR move then it’s probably an expensive one.

As for his huge and loyal following, Woodford achieved that through several decades of outperformance in various market conditions and now at two different companies, which personally I am happy to take as evidence of a unicorn-rare ability to beat the market through skill – at least in the past.

Perhaps he could have instead taken his huge and loyal following for a ride, and charged higher than average fees – just like all those famed hedge fund managers do, with their 2% charges and 20% performance fees?

Woodford went the other way. Good for him, I say.

Saint or scandal?

Robin Powell at The Evidence-Based Investor isn’t so easily impressed:

Neil Woodford can afford the smartest spin doctors, and it shows.

Hardly a day goes by without a Woodford story (almost invariably positive) in the media.

The latest success for his PR machine came this weekend, with the announcement that the Woodford Equity Income fund will now absorb its own research costs, rather than charging them to investors.

This is, of course, good news for investors, and let us hope that other fund managers will follow Woodford’s lead.

But it needs to be kept in context.

That Woodford Investment Management, along with almost every other UK fund management company, was asking investors to pay its research bill in the first place is a scandal.

Personally, I’m not that bothered about investors being charged for research. Scandal, for me, is far too strong a word.

The whole argument for paying for active fund management is so flawed in the majority of cases – for the simple fact that they fail to beat the market – that if you do find a fund manager who can consistently take the market behind the bike shed for a drubbing – to outperform, after all fees – then let them keep the lights on however they see fit, I say.

Complaining that an active fund manager who, for instance, trailed the index for a decade – and cost you 2% a year in fees and charges in doing so – partly reimbursed themselves through a 0.02% research bill seems to me a bit like being bothered that the alien walkers in War of the Worlds stood on your front lawn on their way to obliterating your village.

Moreover, charges in financial services are like Wac-A-Mole. If a fund manager wants to – and believes it can – take some particular annual tithe from its customers, it will find some combination of fees they will pay. At least research is (theoretically) useful to an investor.

Of course, I understand the other side of the argument – that investors are clueless about all these fees, and that by unbundling and revealing them they will become less happy to pay them, and so will pay less.

But will they? The experience from the unbundling that came with RDR was that for many (including some passive investors, due to higher platform charges) the cost of investing actually rose.

Anyone who does a day’s research will discover the cheapest and best way for most people to invest is through index funds on low-cost platforms.

If they are not already discovering that – or they don’t care – then is a long list of bullet points on the back of a factsheet detailing every last bill paid by a fund really going to change their mind?

Will the average consumer even read it?

I have my doubts.

What’s it worth?

Partly I am playing Devil’s Advocate here. Clearly everyone at Monevator Towers thinks such information is better out than in, for those who do want it.

But to be honest I find it hard to get overly worked up about it.

There are other issues to consider, too, such as the average consumers’ limited understanding of what fund charges actually describe.

As one industry commentator puts it in the FT (search result):

“[Mr Woodford] has launched a modern asset management business, performance has been excellent and I know he has a low turnover style,” said Mr McDermott.

“Some funds will trade more and have higher costs — but it’s not necessarily a worse fund. It’s important to look at the alpha generated.”

“It’s not as straightforward as ‘this one costs 84 basis points, this one costs 120 basis points and I’m going to buy the cheaper’,” he added.

One of the most consistent (and opaque) hedge fund managers in the world, Renaissance Technologies, has achieved annualized returns of over 35% a year for 20 years.

It is a quantitative trading house that uses vast warehouses of data to find patterns or inefficiencies in the market. I don’t have numbers on its annual portfolio turnover, but it’s routinely described as a pioneering high frequency trader. I imagine they’re huge.

If Renaissance’s edge is partly expressed through churning its portfolio, then investors who’ve made a fortune from it would have been ill-served by dumping it after receiving their first monthly investment letter that quoted a scarily high annual turnover.

High turnover is ruinous to most active funds. It is costly. Renaissance and most of the handful of other market-beating exceptions will never be accessible to you or me. And the average active fund’s cost is just a tax on your investments.

All true. But it requires a lot more understanding to discover this and to realize what it means for your future strategy than can be communicated by a lengthening list of fees in the small print – incomprehensible to most.

The end of an era, anyway

What I’m saying is that high fees are high fees, however they’re sliced and diced.

What will do for active fund managers is the realisation that they’re very rarely worth the price on the menu – and that cheap tracker funds can take their place – rather than a micro-investigation into how they charge for their ingredients.

Bloomberg calls this the financial services industry’s “Napster Moment”:

Just as record companies in the early 2000s had to deal painfully with the digitization of music courtesy of Napster and Apple Inc.’s iTunes, many asset managers are now facing a similar situation as more investors make the switch from high-priced, actively managed mutual funds to passive, low-cost, exchange-traded funds (ETFs) and index funds.

When the dust settles in this sea change, the financial industry may be half of what it once was, simply because its revenues will be half of what they once were.

It is the low costs of passive funds and the huge underperformance of active funds that is driving this sea-change, not a detailed examination of how those high active costs come about.

Rhetorically speaking, if I found an active fund that I was certain would handily (and legally) beat the market – after all fees – for decades to come, it could bill me for strippers and Lamborghinis if it wanted to.

There’s nothing wrong with transparency – except perhaps its potential to confuse customers (which is a line that sounds awfully financial service-speaky, so I won’t push it further today!)

But for me it’s very much a skirmish on the sidelines in the wider war.

Reasonable minds can disagree, though.

My co-blogger I suspect thinks very differently. (He’s away at the moment so I can’t ask him). Robin Powell of the aforementioned Evidence-Based Investor does for sure.

In fact, Robin has even joined something called the Transparency Task Force. When it comes to its broader stated aim of exposing or publicizing the excess costs inherent in so much of the financial system, I can only wish it well.

The Transparency Task Force is holding an event in London on April 20th – the Transparency Symposium – if you’re keen to learn more.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: New entrant Atom Bank is a table-topper, reckons ThisIsMoney, thanks to its one-year fixed rate savings account that pays 2% and a two-year fix paying 2.2%. However it can only be managed via an Apple iPhone or iPad.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • The big mistake investors still make – WSJ

Active investing

  • Micro-caps have trounced the larger companies – Telegraph
  • Swedroe: Glamour can distract investors – ETF.com
  • The style (drift) police were right – Morningstar
  • Stockpicking backfired in Q1 – Bloomberg
  • Is a concentrated fund right for you? – Morningstar

A word from a broker

Other stuff worth reading

  • First signs of a house price downturn? – ThisIsMoney
  • [Flawed, IMHO] research says building boosts house prices2ThisIsMoney
  • Let your spare room pay the bills [Search result]FT
  • Cameron is innocent as a taxpayer, guilty as a lawmaker – Guardian
  • Good case study closes with unjustified call for active funds – Telegraph
  • Morgan Housel: What were they thinking? – Motley Fool (US)
  • Should the UK follow Norway into tax transparency? – BBC
  • AI, robots, and humanity [Text or podcast]Bloomberg

TV show of the week: It won’t be essential viewing in my house, but as an Amazon shareholder I’m intrigued to see what the company does with what it’s currently referring to as The Untitled Clarkson, Hammond, and May Show (or Top Gear 2.0 to the rest of us). If you’re a fan then follow the link for various ways to track the team’s progress.

Like these links? Subscribe to get them every week!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []
  2. I suspect what this research really reflects is that house building tends to happen when house prices and total lending are also trending higher, rather than that new supply *causes* higher prices, which is the spin. Correlation is not causation! []
{ 48 comments… add one }
  • 1 Gregory April 9, 2016, 4:04 pm

    As a value oriented investor and a Monevator fan I add an article to the reading list: http://www.telegraph.co.uk/investing/shares/where-are-the-worlds-cheapest-stock-markets/
    I hope TI won’t be angry 🙂

  • 2 John from UK Value Investor April 9, 2016, 6:36 pm

    I’m with you on this one TI. I don’t give a monkey’s what a fund charges, as long as it does whatever it said on the tin and/or whatever I wanted it to do when I bought it (which I guess should be the same thing).

    If long-term annualised returns after fees are say 15%, what do I care if those fees were 0.5%, 1% or 2%?

    Having said that, Robin Powel’s focus on fees is understandable because he’s focusing on the areas where passive is stronger than active, and of course low fees is one of those areas. But as you say that’s kind of missing the point.

  • 3 CisforV April 10, 2016, 12:30 am

    Other good reading for the weekend are Vanguard’s new target retirement funds, finally released in the UK:


    Their research paper makes for an interesting read.

  • 4 Pete April 10, 2016, 10:39 am

    Woodford is a step forward but I suggest …
    Investors only require the ‘net % return’ to enable make a decision.
    To produce ‘net % return’ you need
    a) the % return over a period eg 1 year
    b) total costs (a list of specific costs that must be included by the Manager – is this the key for investors?)
    This means pure costs are less important but returns are the key which is after all what we all want! I will pay 2% costs if my net return is 5% over net returns of 3% costing 0.7%

  • 5 Anon April 10, 2016, 12:06 pm

    What about a government returning net 3% growth a year. Do you care if their fee, that is the cost of the government, is 0.5, 1, or 2%? Seems all the attention is on a yes.

  • 6 Vanguardfan April 10, 2016, 12:30 pm

    @CisforV – thanks for the link, very interesting. A (very brief) skim through suggests similar/identical asset allocation to Lifestrategy, with a ‘glide path’ moving from 80% equity allocation to 30% allocation over a period of around 12 years, starting approx 5-6 years before ‘retirement’ date.
    I think these will be great for occupational pension schemes and hope employers will offer them as an option.
    I imagine most confirmed ‘DIYers’ will want to retain control over their asset allocation and can do this easily enough themselves, although I was interested to see the asset allocations.

  • 7 polpo April 10, 2016, 8:34 pm

    I believe the FCA regulations change in 2017 and all fund managers are going to be prohibited from passing on research costs anyway. Woodford looks like he is just front running and getting a bit of pr puff for something he’s going to have to do anyway.

  • 8 William III April 11, 2016, 10:03 am

    @CisforV & Vanguardfan: thanks for sharing this paper, I’ve really enjoyed it. The retirement cases they model are probably not so representative of the typical readership here. Retirement at 68, savings rate growing from ~12% to 18% from 30 onwards, and calculating sufficiency based on a fixed salary replacement rate goes against the principles taught by the FI gurus. But interesting analysis nonetheless. A new and useful insight for me was that younger professionals’ net worth is held for the vast majority in human capital and as such, the little bit of net worth held in pension should be invested towards the high risk-reward end. On that note, I do not like the reduced equity proportion of the UK TRF compared to the US TRF and therefore will probably build my own.

  • 9 Neverland April 11, 2016, 11:51 am

    Where the active management fees go in the US:


    Its funny that European investment banks seem to be unable to earn a sufficient return for their shareholders but employee compensation/revenue ratios don’t reduce

  • 10 magneto April 11, 2016, 12:01 pm

    “But for me it’s very much a skirmish on the sidelines in the wider war.”

    That hits the nail on the head!
    Whether the investor is going off piste using active, such as Investment Trusts or other funds, in place of trackers is the main issue that confronts us.

    Still remain agnostic on this issue. We run Tracker ETFs alongside Income Focused ITs. The latter provide welcome income in retirement. With a focus on income the ITs seem to behave better than the income focused ETFs. Someone is at the helm of the IT thinking about the sustainability of the dividends on an ongoing basis. The ETF selection critieria for income funds seem quite crude in comparison, and results mediocre.

    However no complaints about the pure wide market trackers which do a terrific job!

    The active funds which home-in on growth, which then in aggregate must underperform hold no attraction.

    So (for us) it’s all about balancing tracking with income. Fees while worth noting are as you say secondary.

    All Best

  • 11 Naeclue April 11, 2016, 5:59 pm

    John from UK Value Investor said “If long-term annualised returns after fees are say 15%, what do I care if those fees were 0.5%, 1% or 2%?”

    Well yes, if you know in advance that someone is going to make 15%, then it is entirely rational to pay them a large fee to do so. The point is that you do not know and all the evidence indicates that the chances of you picking someone who can do that are very small. As it turns out, evidence would suggest that the higher the fee, the lower the expected return so it is far more rational to pay as little as you possibly can!

  • 12 Naeclue April 11, 2016, 6:14 pm

    The new Vanguard TRFs look really interesting, thanks for pointing them out. Something to consider should I no longer be able to manage my investments myself, at least for the part of the portfolio I am regularly drawing from for income. A few drawbacks/things I don’t like:

    – the 0.24% fee seems too high, quite a bit higher then the sum of the parts. I pay substantially less than that on my mix of ETFs and directly held gilts. Could the daily rebalancing make up the difference? Dunno.
    – they should introduce “pension” versions of the funds that can take advantage of lower withholding taxes on investments held in pensions. That should slice off a few more bps.
    – I dislike the overweighting of UK shares. Why hold 25% when the world weighting is about 8%?
    – Not Vanguard’s fault, but my existing SIPP provider, Hargreaves Lansdown, would charge me an additional 0.45% to hold a TRF as they are OEICS. So ETF versions would be good.

    Otherwise the overall concept and proper evidence based research that went into the design of the TRFs looks excellent.

  • 13 magneto April 11, 2016, 7:35 pm

    “– I dislike the overweighting of UK shares. Why hold 25% when the world weighting is about 8%?”

    Yes that had me wondering too!

    There is however a school of thought that notes the rebalancing bonus between two assets over a market cycle is maximised with a holding of 50% in each asset. So living in a sterling area we could hold 50% UK and 50% rest of world to reach that optimum rebalancing bonus from currency swings?

    Continuing that line of thought, with more than two assets, then equal% of each holding would be sought regardless of market cap! Note this is not a recommendation, just musing.

    There are so many model UK portfolios out there with substantially higher UK weightings than 8%. Have sought in vain for a definitive answer to this question from this site and elsewhere. Finally conclude there is no single corrrect answer, just a variety of opinions from 8% to 50% plus.

    Our own stock, repeat stock, portfolio (in retirement) has 20% UK, 40% Global, which oddly enough, ends up on a look through basis quite close to the 25% used by Vanguard.

    Remain clueless as ever and very interested in all opinions.

  • 14 The Investor April 11, 2016, 9:21 pm

    *sulk* There was a link to the Vanguard news in *last* weekend’s Weekend Reading… *pout*

    (@CisforV — Cheers for posting the link, I’m only kidding around with my mock pouting…! 😉 Also it wasn’t a primary source/horse’s mouth link last week. I was hoping @TA might get onto these but he’s headed back to book duty…)

  • 15 Vanguardfan April 11, 2016, 9:32 pm

    @magneto, others re the UK allocation: the Lifestrategy allocation to UK equities was higher initially (about 33%), and a couple of years ago they reduced it to 25%. There was a research paper on their website that explained the rationale, I’m not sure if it’s still there. It had a nice graph showing modelled returns at different weightings of UK vs rest of world equities – essentially they changed the weighting because their research suggested returns would be better. It’s different in the US, I assume because the numbers work out differently. Although I also seem to remember there was an admission that part of the reason for overweighting UK was because UK investors prefer it 🙂

  • 16 The Investor April 11, 2016, 9:41 pm

    One reason to have a higher UK equity allocation in a retirement portfolio is currency risk.

    If you’re 30 you can legitimately assume that currencies will likely all even out over your lifetime (which doesn’t mean they will all be back to where they started, but also that in the main strong currencies will be balanced by stronger economic growth, stronger stock markets and returns and so forth — for equities, currency has some in-built natural hedging like this…)

    If you’re 65, you have a much shorter time horizon ahead of you for these things to balance out (and cold comfort if they do but only as you head into your 80th year).

    In addition you are now in most cases spending (/de-accumulating) and you will be doing so in your home currency.

    Just think how the cratering of annuity rates permanently impaired the incomes of a generation of retirees who planned for decades with what they thought were prudent assumptions. A similar thing could easily happen if the pound were to go through a particularly strong 5-10 years as a retiree who had 92% of his/her assets effectively overseas, via world index weightings.

    In fact, personally I’d question whether even 25% in the UK is enough in retirement, though in most cases (currently) we can assume other sterling income/assets such as a State pension and a UK home.

  • 17 Vanguardfan April 11, 2016, 9:48 pm

    @TI, I wonder why the Vanguard retirement funds don’t alter the home bias with age? I don’t think the issue was mentioned in the TRF research paper.
    I have no firm evidence or rationale for deciding how much to overweight UK, so I have gone for 50/50 reflecting this indecision. I suspect however that Vanguard may be more likely to be right than me 🙂

  • 18 The Investor April 11, 2016, 11:28 pm

    @VF – Hmm, I haven’t studied the new funds nor read the research so I’d be speculating. (More TA’s bag than mine!) However previous comments up the thread suggest there’s back testing/history in their findings. If I was thinking about my retirement income I’d be most interested in approaching (never reaching of course!) certainty rather than optimal by history. For most non oligarchs, spending in retirement is always done overwhelmingly in a home currency. So I’d definitely be looking to damp that risk down I think.

    Of course this might be done by having other assets in sterling (bonds, cash, property..) If the Vanguard funds say have only a small percentage in retirement in equities (30% say, from memory) and the rest in sterling (or hedged) fixed income and cash, it probably won’t matter much whether you’ve 8% or 20% of that 30% at home. 🙂

  • 19 Neverland April 12, 2016, 8:43 am

    I just don’t see how investing in UK listed equities eliminates currency risk

    The FTSE 100 is mainly multinational companies and several even report in USD

    Even companies in the FTSE 250 or smaller that mainly operate in the UK can be hugely effected by currency strength if they export or their raw materials are priced in USD for instance

    The greater return from equities comes from volatility and risk; might as well accept it

  • 20 oldie April 12, 2016, 9:50 am

    Thanks Neverland. Agree on UK currency risk and equities.

    The real decision is the level of equities to hold v cash/bonds/property, etc.

    For equities you want to get the best returns and therefore you have to consider all markets and their potential to grow. While the decision to invest in particular markets could be based on a country economic size (eg GDP), or market capitalisation, or a “home” bias,……you still having to make a judgment over the timescales relevant to you

  • 21 The Investor April 12, 2016, 10:02 am

    @neverland — It doesn’t “eliminate” it, it reduces it. (As an aside I do get frustrated with people so often talking in terms of absolutes, about all asset classes, alternatives like P2P, various strategies and so forth. Nobody said investing in UK equities “eliminates” currency risk, so why talk as if it does? Nobody suggested 100% in UK equities, so even to your point you’d still have a stack of assets exposed to it. And so on.)

    Currency risk is one of those areas where even academics crunching 115 years of data disagree. Broadly it’s correct that equities superior returns overwhelm currency risk over the long term. But a retiree no longer can take much comfort from the long term. (Arguably very little, depending on how far down the “modified duration” rabbit hole you want to go.)

    Personally given my spending in my home currency would be critical, I’d want to dial down a risk to that spending power. (And yes, dial down potential upside too — currencies can swing both ways. 🙂 )

    Besides overweight home markets, as a retiree I’d probably hedge a decent chunk of overseas equities too, via a hedged ETF (again accepting a modest cost to do so) as I approached retirement and beyond.

    For fixed income the situation is a tad clearer. Currency risk looms large at best of times, and academic research suggests hedging overseas bonds etc may be best strategy even if young.

  • 22 Neverland April 12, 2016, 11:31 am


    The costs of hedging equity returns are certain but the benefits of reducing currency volatility are nebulous

    If you assume a safe withdrawal rate of 2.5% to 4.0% per annum paying an extra 0.25% per annum for hedging will cost you between 6 to 9% of your gross income (this is assuming across a whole portfolio)

    A better solution would be to simply buy a higher proportion of gilts and buy them directly eliminating any fund management fees

    In a low return world costs are key; extra 0.25% per annum costs across a big chunk of your assets matter

  • 23 The Investor April 12, 2016, 12:56 pm

    @neverland — As you like. I didn’t say to hedge whole portfolio so your income comparison is spurious. You are repeating my own fixed income point back to me but putting the word “better” in for no reason. Look at some hedged versus unhedged ETF costs, hedging may be cheaper than you think.

    Finally the benefits are not “nebulous”, it is increased probability of meeting your income goals. You’re willfully ignoring the entire point of reduced time horizons.

  • 24 Neverland April 12, 2016, 2:35 pm

    @ Investor

    Well lets use a real number based on a fund at retirement of £2m and a 50:50 bond: equity mix

    You could be basic rate tax payers in retirement assuming its split relatively equally between a couple (or you could not be)

    0.25% is my illustrative additional annual cost of hedging or a progressive dividend global investment trust like FCIT over a vanilla set of trackers, which no doubt you will argue with

    Your lost income from this additional cost after basic rate tax of say 20% is about £160 a month

    If you are looking at a safe withdrawal rate of 2.5% that £2m will get you maybe £3,700 per month net and at 4% maybe £5,500 per month net (the net depends hugely on how much is in ISAs etc, ignoring lump sum withdrawal’s or one person being a higher rate income tax payer etc)

    Over a 30 year retirement you have paid maybe £100k for that hedging insurance (I’m including inflation in my calculation). Wouldn’t that £100k have provided an ample buffer to smooth currency returns?

    My point is small % annual fees add up to large amounts when applied to large values over long periods

  • 25 Naeclue April 12, 2016, 2:37 pm

    UK equities do not provide a significant advantage over foreign equities when it comes to currency movements. If the pound rises this reduces the pound value of foreign earnings and makes it harder for exporters to compete. If the reason for the appreciating pound is higher sterling borrowing costs, this again is not good for UK companies. If anything I would suggest that equities, including UK equities, were a hedge against a falling pound, not a rising one. Better hedges against a rising pound are index linked gilts and short duration sterling (or sterling hedged) bonds.

    In the case of the new Vanguard funds, they trend towards 30% equity, 70% bonds and a good proportion of the bonds are sterling or sterling hedged.

    Years ago it was not easy to invest cheaply in foreign companies. That problem has largely disappeared now and I can see no good reason to overweight UK shares any longer.

  • 26 magneto April 12, 2016, 5:06 pm

    Off topic but relating to earlier NS&I IL Certs discussions.

    Have just noticed that while CPI published today at 0.5% for March 2016, RPI came in at 1.6%! YES 1.6%!
    Is UK inflation starting to make a come-back?

    OBR RPI estimates of 2.1% for 2016, and 2.8% for 2017, maybe not so fanciful after all?

    Think TI is currently preparing an article on the subject of this boring investment, which will now certainly be of added interest (no pun intended).

  • 27 The Investor April 12, 2016, 7:11 pm

    Currency risk is real. The risk is risk in terms of volatility and uncertainty, and also potentially as we’ll see in permanent loss of capital.

    In general, currency risk is uncompensated risk. That is, you cannot expect to get a greater return for taking it on. (However it may diversify — dampen — your overall volatility and returns).

    As I’ve said, for overseas bonds currency risk is significant enough to overwhelm the returns you’re getting from the asset itself. Hence many pension funds etc choose not to own overseas bonds — or to hedge them — especially given the main point of bonds is to reduce risk.

    Currency risk is as real for UK equities as any other country.

    The UK market does not get a free pass because it has a lot of foreign exposure. It just means the impact of currency changes is different to if it had not very much foreign earnings exposure. The swings and roundabouts still exist.

    I repeat, currency risk is uncertainty and volatility. The UK market isn’t one in which currency risk only adds to your return.

    The simple mechanic of a weaker pound potentially boosting company earnings and vice versa is just one of the various inter-plays (which I alluded to earlier in the thread).

    Interest rates, inward investment, inflation and more may all also affected, with consequences for different parts of your portfolio (not to mention your taxes, State pension, and so on). Over the short-term and indeed the long-term all kinds of outcomes are possible. Currencies are notoriously unpredictable, as are their consequences.

    I only joined this conversation because a previous poster asked why you might (/Vanguard might) want to overweight domestic equities in a portfolio in retirement.

    That is the *crucial* point.

    It’s a retirement portfolio, not the portfolio of a 20-something investor with 45 years ahead who is bringing in fresh funds every month.

    The fact it’s a retirement portfolio means, to repeat myself:

    (a) There is a much shorter time horizon, which means you have less time for the superior expected returns from equities to overwhelm the impact of currency risk.

    (b) There’s less time for the different countries / markets / economies to interact as a result of the natural hedges we’ve discussed.

    (c) Your portfolio is going into de-accumulation mode, and will be spent in domestic currency. This is crucial. Designing a portfolio for maximum *potential* returns (at the greater risk of worse outcomes) won’t be the point for most getting on with being retired and spending their money.

    As a generalization volatility is no longer your friend in de-accumulation, as it can be for the accumulation phase.

    And you are spending pounds.

    Nobody said at any point “there’s no reason to own overseas shares because they are expensive” so that is another new straw man brought into the discussion.

    The question was, from memory, why 30% UK equities. That means 70% is still overseas.

    I’ve sat through multi-hour lectures on currency risk from leading academics which have reached no firm conclusion. Some say don’t hedge equities, some say hedge above 25% overseas exposure, and so forth — and they are talking about whole life portfolios, not retirement portfolios approaching or in drawdown where the risks are much more acute!

    Beware what you read from confident sounding commentators at the bottom of blog articles.

    The reason I keep coming back to answer them is not least because commentators keep writing in certainties.

    Ironically, I’m the one talking about generalizations, mights and maybes!

    A few further things for readers to note:

    Life expectancy retiring in the UK at 65 is around 20 years, not @Neverland’s sensational 30 years (though 30 years sure helps make his compounded cost figures sound more impressive…)

    Of that 20 year figure, the average retiree doesn’t want to be spending the last years of their life paying care/medical bills with a portfolio where 50% is gyrating about, with equity risk *and* currency risk.

    So in reality even that 20 years is far too long a time horizon — in reality their modified duration is I’d reckon much less than a decade. Uncertainty and volatility is their enemy.

    We all agree fixed income in UK assets has a big role to play in dampening down uncertainty in volatility. (Thankfully!)

    I’m not going to argue with the 0.25% hedging figure. The cost is coming down and there are mainstream ETFs that are hedged for only 10 basis points TER more than the unhedged. But then they are probably not the very cheapest in the class. I think 0.25% is as good an approximation as any. (https://www.justetf.com/uk/news/etf/the-effect-of-currencies-on-etfs.html)

    Do I think 0.25% a year would be a decent price to pay for remove currency risk from an equity heavy retirement portfolio in drawdown? Very possibly.

    As I keep saying, currency risk is a different situation in retirement to a portfolio under accumulation.

    Volatility now means potentially not being able to pay your care fees!

    To give a similarly “figurative” example as @Neverland’s, let’s say you have that £2m 50/50 portfolio. This means you have around 90% of your equity money in non-Sterling assets.

    Let’s say for simplicity that markets are flat but the pound strengthens 30% against overseas currencies over a couple of years and doesn’t weaken for a decade. This means your £1m has just become around £700,000, all because of currency risk.

    Using @Neverland’s 2.5% withdrawal rate, in practical terms the annual income from that original £1m in equities has now fallen from £25,000 a year to £17,500 for the next 10 years (ceteris paribus).

    Alternatively, you could decide to sell more of your equities because you *need* that retirement income you’ve planned for all your life. Which is far from ideal, as you’re now withdrawing, say 4% a year when you think 2.5% is safe.

    This example is just an illustration, and of a particularly unfortunate outcome, obviously anything could happen.

    What it shows the potential fast and immediate impact that currency risk can have, for no extra return, on a retirement portfolio in draw down.

    You’re only going to be retired and spending your retirement pot once. You’re not running a Monte Carlo simulation and getting an average — you’re getting what you’re given. Hence in my view reducing risk is crucial, especially uncompensated risk.

    To what degree is up to the individual.

    The general point about the sure and known cost of hedging is perfectly legitimate and worth making. It’s all the certainty and plain wrongness that has surrounded it here that could mislead people.

    Anyone still reading this thread can make up their own minds. The end!

    (p.s. Update: Oops, in my haste/frustration I’ve realized I’ve done 90% on £1m, not on £920,000 for overseas assets. It doesn’t change the point).

  • 28 oldie April 12, 2016, 8:05 pm

    Thanks for your comprehensive response.

  • 29 The Investor April 12, 2016, 8:20 pm

    @oldie — You’re welcome. 🙂 Apologies if my frustrations at a certain poster (that extend back through the years of debates like this on this website) made any of it sound less easygoing than we’d all like.

  • 30 Neverland April 12, 2016, 9:32 pm

    @ investor

    i expect you meant to write:

    “Let’s say for simplicity that markets are flat but the pound *strengthens* 30% against overseas currencies over a couple of years and doesn’t *weaken* for a decade.”

    If the pound weakened 30%, the overseas equities would increase in sterling terms…

  • 31 Naeclue April 12, 2016, 10:47 pm

    I agree that the interaction between exchange rates and share prices is complicated and there is no certainty that UK share prices will go up if the pound drops or down if the pound goes up, but I do maintain that there this is a negative correlation between the two and if someone thinks they can avoid currency risk by loading up on UK equities at the expense of foreign equities, I would say go and look again before accepting that.

    I also agree that low volatility is very important in drawdown. The higher the drawdown rate, the more damaging volatility can be. So the question is, is the FTSE 100 or FTSE allshare more or less volatile than a world tracker when converted to sterling? I am pretty certain the world tracker is less volatile, in fact I believe the S&P 500, priced in sterling, is less volatile than the FTSE all share, but would not swear to it.

    What would the volatility of a daily rebalanced 25% UK / 75% non-UK portfolio be? I have changed my mind on this being a bad thing to do as I suspect that volatility will be very similar to that of a world tracker. The reason is that even if the UK portion is more volatile, it is not perfectly correlated with the non-UK part and that imperfect correlation will help dampen the overall volatility.

  • 32 Naeclue April 12, 2016, 11:56 pm

    TI, on second thoughts, I understand what you are saying about the time delay problem between a precipitous rise in the pound, hence rapid £ depreciation in foreign equity prices. I still say that is likely to be detrimental to UK companies as well, but from a drawdown investor’s point of view I strongly suspect that you are right about the non-UK shares being a bigger problem. Overweight UK shares are likely to be a better proposition in that scenario.

    My initial thoughts are that we do have to plan for multiple scenarios and not just one. So yes, in the particular scenario of a sharp rise in the pound, there is likely to be a problem with foreign equities, but we need to consider other cases such as a rapid fall in the pound or the risk of a prolonged period of poor returns from the UK stockmarket compared with non-UK markets, etc.

    I am fairly certain our own portfolios have benefited from not being overweight UK shares up until now, but now we are in drawdown this aspect may be worthwhile reconsidering. Thanks for pointing this out.

    I thought I knew what I was doing, but now I have to go and ponder our asset allocation again!

  • 33 The Investor April 13, 2016, 7:59 am

    @Neverland — Doh. Cheers. Can you tell I wrote that quickly and I really wanted to be doing something else?

    I sometimes wish I could come to terms with the reality of publishing in the Internet era, and just let comments ‘be’ at the bottom of posts, without feeling the need to correct (what I see from my point of view as) inaccuracies or more often here on Monevator over-simplification. Not to the extent of allowing a sort of newspaper-style free-for-all, but allowing articulate and polite comments to just stand, even if I believe they’re wrong or misleading.

    Unfortunately there’s something in my psyche that sees them as an extension of my work ‘up above’ on the site, which is I guess why they wind me up so much. The solution is to close comments, but the site would be immeasurably poorer for it.

    @Naeclue — If there is just one takeaway I can offer, it’s to think (as we’ve agreed) about the differences of a portfolio in drawdown, spending sterling, without the prospects of decades to correct matters. I see what you’re saying about UK equities not doing away with this issue entirely (as I keep saying, nobody is talking about entirely, but let’s leave that be! 😉 ) and I would say it will be down to individual investors to make their mind up. I wouldn’t trust historical data to be more than a rough guide on this.

    Currencies can move far and fast, particularly when least helpful (e.g. in a recession, when markets are falling). For me that’s a big issue in retirement/drawdown.

  • 34 Neverland April 13, 2016, 8:26 am


    I would agree with you there is a value in having cashflows from overseas equities hedged in sterling, I am just very leery of signing up to any fees based on the % value of an equity portfolio as it becomes a very big sum of money once the portfolio is substantial compounded over a number of years

    An article from Bloomberg on the topic looking at the effect of a 1% annual management fee versus a 0.5% fee (over 40 years), a topic much discussed but always worth laser like focus:


    I note that several platforms have raised their fees noticeably recently

  • 35 Vanguardfan April 13, 2016, 9:09 am

    @TI, @all, very interesting and thought provoking discussion, I think we all appreciate it’s possible to come to different conclusions particularly where there are acknowledged uncertainties.
    For myself, I admit I don’t understand how currency hedging is done, so my instinct (those emotions again!) is to avoid any currency hedged assets. Reflecting on TIs comments above about the need to reduce volatility in retirement, my current thinking on this is to dial down equity exposure and have my ‘floor income’ covered by cash and/or pensions and annuities. Your remark that ‘at 30% equity it doesn’t really matter if you are 8% or 20% UK’ also struck a chord, and once again I conclude that my rough and ready ‘do it imperfectly rather than procrastinate over perfection’ approach is probably helpful. I’m still left with a feeling that I should reduce UK overweighting, but is this just an emotional recency bias as I look at my FTSE tracker showing a large loss and my international tracker nice green gains? Almost all my thoughts about changing asset allocation seem to be emotionally provoked, leading me to largely sit on my hands.

    My other thoughts about the Vanguard target retirement funds is how you would apply them to early retirement. Their published research is clearly and understandably aimed at the mass market with a retirement age of 68ish. I don’t know whether the most important driving factor behind the 30% equity allocation from age 75 is the estimated remaining duration of retirement, or simply the need to reduce volatility due to reduction in human capital/earning potential. pertinent to my situation as I am just about to start a transition to early retirement at age 50 – I anticipate some reduced earnings for the next 5-10 years before I start living fully off investments (and pension). My current life expectancy is 89 giving a 40 year ‘retirement’ (and a one in 6 chance of a 50 year retirement). I’ve decided on 50% equity allocation (always my default when faced with a hard decision!) Too high? Or too low? I’ll only know after the event….

  • 36 The Investor April 13, 2016, 9:46 am

    @neverland — Well as you know you’re commenting on a site whose raison d’être is to watch and where possible/sensible reduce fees as much as possible, so clearly the important impact of fees is a given.

    But reducing costs is never the only game in town. (To the point of absurdity, why then not have all your money in cash, with no fees at all? Because…)

    For a moment I thought we’d reached a point of agreement / agree to differ with your first line.

    However we’re again going around in circles:

    1) After I’ve agreed to accept your 0.25% cost-of-hedging figure, you’re now citing research quoting the impact of 0.5% costs?!

    2) After I’ve already pointed out that your 30 years is a misleading timeframe to use to consider the impact of costs given that life expectancy at 65 is at best 20 years (and you don’t want to be spending the last of them impoverished more than you need to be because you tried to save 0.25% a year on a portion of your assets), you’re now quoting research that looks at costs over 40 years! Irrelevant.

    3) I didn’t even go into this before, but for the great majority of investors a portfolio in drawdown is shrinking, thus these compounded cost figures on a growing portfolio are comparing apples to oranges IMHO.

    4) You’re citing research / making your point with costs applied to whole portfolios, despite my suggestion that only a portion of the equity portfolio would be hedged anyway (perhaps because you want to magnify the impact of costs when compounded?)

    5) The original poster was asking about domestic exposure / home bias. There is no additional cost to holding UK equities versus a world tracker (in fact it’s cheaper). The risk/danger is of underperformance/volatility versus the global market.

    What I’m suggesting, for the sake of other readers still reading, is that to dampen the impact of currency risk, at 65 you might have a portfolio (assuming you’re not so rich as not to care) that would be something like 50% cash and fixed income (all Sterling), and the rest equities.

    Of those equities, I’m suggesting you might have 25-50% of the 100% total equities “pot” in UK equities, 25-50% in hedged overseas equities, and 25-50% in un-hedged overseas equities. (Obviously to add up to 100%).

    Like this, your exposure to immediate currency shocks (i.e. not the interplay / impact on UK equities discussed with @naeclue above) could be limited to as little as 12.5% of your total retirement portfolio.

    I’m making this suggestion on-the-fly (not proposing it as a rigorously proven portfolio etc) in response to the original line of “why overweight the UK in retirement versus the 8% share of global markets represented by the UK?”

    The reason is I believe currency risk and the impact on your retirement lifestyle, with your portfolio in drawdown, over an expected 20 years (maybe more, maybe less).

    For those commentators who are still bizarrely quoting research based on 40 years of compounding portfolios in a discussion about *retirement* portfolios in drawdown, I’d suggest a sober look at a graph like this one:


    I hate to break it to you, but in the long run we’re all dead, and an additional 0.25% a year on a sub-section of your portfolio is neither here nor there at 75 with ill-health beckoning.

  • 37 Tim G April 13, 2016, 10:49 am

    @TI “I sometimes wish I could come to terms with the reality of publishing in the Internet era, and just let comments ‘be’ at the bottom of posts”

    I really appreciate the extra value you add in these comments. In the thread above, there are some interesting points raised (together with a bit of willful boneheadedness!) but it is your interventions that make the thread worth reading. Otherwise I would just switch my comment blocker on. (Something that I routinely do to preserve my sanity when reading other sites.)

  • 38 The Investor April 13, 2016, 12:00 pm

    @Tim G — Cheers, glad some people find it all worth it! 😉

  • 39 magneto April 13, 2016, 4:17 pm

    “In general, currency risk is uncompensated risk. That is, you cannot expect to get a greater return for taking it on.” TI

    Thanks TI. This is a key point worth reflecting on!

    We cannot assume currencies mean revert.
    Take the so called Cable (US$/£ Sterling).
    In 1900 the Pound Sterling could buy US$4.87.
    I remember my grandfather who plied the transatlantic sea routes, always used to refer to the 2s 6d coin (12.5p) as half a dollar.
    In 2016 the Pound Sterling now buys US$1.40!

    On the other hand companies tend to maintain a true real worth in spite of currency variations. Think Siegel and others have discussed this.

    Interesting discussion!

  • 40 Tim G April 13, 2016, 4:36 pm

    @magneto “We cannot assume currencies mean revert.”

    I like your personal examples of this. As a child in the mid-1970s, I used to get American comics from distant cousins in New Jersey. I was always drawn by the adverts at the back for toys, novelty items and the like and generally worked on the basis of an exchange rate of about $2.40 to the pound to understand the prices (even though I had no way of buying anything!). Compare that with today’s rate of $1.42.

  • 41 Jeff April 13, 2016, 11:13 pm

    If I had the opportunity to invest in George Soros’s fund, my tolerance for fee paying would increase considerably.
    Particularly if he structured it as a percentage of the outperformance.

  • 42 Marked April 14, 2016, 9:26 am

    So the dollar is one currency I look at closely given I have stock options as stock in my American company. This, perversely in the context of above, I like seeing nearer pound dollar parity as I get more.pounds from the exercise. However, I’d say for the past 20 years it’s mostly been between 1.65 to 1.40 with a few trips to near 2. The 4.62 dollars to the pound was in the empire days before America made us float the pound for Marshall plan money. It crashed the week after.

    @TI I was horrified with your assertion that we’ve got 20 years after retirement and were you inferring the last 10 I would be in adult nappies? Gee that’s an incentive to retire at 55 if there ever was one.

  • 43 hariseldon April 16, 2016, 11:11 am

    If a retiree is in an equity heavy portfolio, then it is likely that currency issues may a fairly small part of the volatility that an investor might suffer.

    Out of interest my parents 92 and 90 have received US and UK state pensions for many years, the US pension translated to £’s has fluctuated but the effect of nearly 30 years has been fairly minor and does not seem to have caused any great concerns to a fairly risk averse couple.( the mix is roughly 1:1 ).

  • 44 IanH April 18, 2016, 10:59 am

    Apologies for picking at this scab, but the effect of currency exhange discussed above has been a bit of an eye opener for me, especially the need to consider this in the context of shorter term investment horizons post-retirement. I was aware that there were currency exchange effects but did not appreciate how large these can be until recently when my emerging market and developed world funds increased abruptly in the last couple of months (20% / 11% respectively). Then I picked up a remark on simple-living-in-suffolk that the recent rises in world equities for UK investors reflected the ‘suckout’ of currency caused by a recent fall in GBP, not a result of our our amazing investment skills. Looking a bit wider for info on this topic I found a very useful article on justETF [https://www.justetf.com/uk/news/etf/the-effect-of-currencies-on-etfs.html] which includes a table listing links to the hedged and non-hedged alternatives for a range of foreign markets and their relative performance over the past year – and the differences are, to my eye, astonishing. To pick out an extreme the MSCI Australia choices have returned +5.28/-3.84 % in 2016 in the unhedged / hedged alternatives. An initial browse also shows that hedging is available with a low cost premium as TI suggests – the iShares MSCI Europe-ex UK funds are *the same* TER with and without currency hedging (though admittedly fairly pricey to start with at 0.4%). I have not found an EM hedged fund so far – If there is indeed none presumably this is because it would be prohibitively expensive to implement. With the Brexit referendum looming it seems likely that there will be currency effects whatever the outcome, though I’ve no idea which way the pendulum will swing, so it seems to me moderating potential currency fluctuations in the short term (<10 years?) by hedging a greater proportion of foreign equity than I have at present may be a wise move, as TI suggests.

  • 45 The Investor April 18, 2016, 11:16 am

    @IanH — Yes, currency moves can be very meaningful over the short-term! Over the long-term, in equities, it’s more debatable, but in this discussion as you’ve read we’re discussing retirement portfolios in drawdown where the time horizons are *very* different to accumulation portfolios of younger workers adding new money, which is why as you say I’ve suggested some mitigating factors.

    You’re right about the costs of hedged ETFs (the Japanese one I linked to above are similar).

    I would say though that you rarely get something for nothing, and most of these ETFs are quite young. I suspect hedged ETFs may eventually prove to have a ‘cost’ that shows up somewhere else — basically reflected in a greater tracking error over time. But unlikely enough to change their utility for our purposes here.

    The other argument used against them — that choosing a hedged ETF is effectively speculating on currency — is a bit silly in my view. The same is ‘effectively’ true if you pick an unhedged ETF. From a retirement portfolio perspective, what you’re trying to do is diversify your equity exposure away from your domestic market while dampening portfolio volatility from (uncompensated) currency risk.

    As I’ve said in my replies above — and as you note — I’m only advocating a proportion here, not entirely domestic or entirely hedged or anything like it. 🙂

  • 46 theta April 20, 2016, 11:43 am

    A bit late to the party but here are my 2p: Given GBP’s positive correlation with global equities, currency hedging your equity portfolio increases its volatility. IMHO the best way to decrease its volatility would be to increase the proportion of domestic bonds and property relative to equities (including UK equities).

  • 47 Ray January 21, 2017, 6:26 pm

    I am late to the party, very late as I have retired. But I am making progress on the portfolio. BTW this is the most useful weekly email that I get, truly brilliant an oft overused word these days! So this week I bought all my investments together on a spreadsheet and found that I had 71% bonds, 17% equities (mostly global etfs, some even smart!!). But I have 13% in SIPPs in cash. Great! This came as a bit of a shock as I worked out that I would feel good on a portfolio of 75-80% fixed income. But I am not taking income at the moment and unlikely to for a few years(2-5 depending on when my dear wife decides to retire). The issue is that equities are at historic highs. So would you invest at the moment and if so where? Thanks again to investor, accumulator and all the posters who have contributed to my education.

  • 48 The Investor January 21, 2017, 8:07 pm

    @Ray — Thanks for the kind words about the site, generous of you and glad you’re enjoying it.

    I have to stress I can’t give you personal advice, and these are just my general musings and food for thought for you or anyone else reading.

    Anyway, if I were a passive investor and I wasn’t super hands-on with my investing, I’d probably just start moving money into a global tracker fund month by month until I reached the appropriate allocation, and not deciding rather late in life that I was better informed than the market about whether shares are expensive or not. 🙂

    If they fell, I’d move a bit more cash over and buy some more.

    But I’d keep massive fixed income and cash buffers, and I’d make sure I never took enough risk to risk the ship. If one has enough to be comfortable in retirement, then one has already “won” the game — why take more risk than you need to? 🙂

    People have been saying equities are too expensive every year for the past nine years. All these people who say shares were cheap in 2008 and 2009 — most weren’t saying it then. It sounded crazy to be optimistic. I’d take anonymous comments about investing from apparent geniuses on the Internet with a pinch of salt. (That includes mine, by the way 🙂 ).

    Over the years I have been called a reckless moron who was ignoring this and that obvious calamity that was supposedly clear as day in some asset class or another on this site over that time (typically I delete those rude comments) or for saying people should keep plugging away with equities according to their passive allocations, and get on with life.

    Not just shares, by the way. Same thing with bonds! You really can’t win with Internet commenters. 🙂

    Even US equities, which I’d agree look historically expensive, they have looked that way for years. Various smart sounding commentators have made bold pronouncements on this site in the comments in 2012, 2013 etc, wittering on about how I should look at a CAPE ratio and whatnot and come to my senses, and then presumably they missed that market going on to rise another 50-100%. (They tend not to come back to admit their mistakes.)

    The US market WILL crash again. ALL markets crash from time to time. So I guarantee that will happen, and who knows, maybe next week.

    I like to think about this stuff…


    …but since I’ve been writing this blog my conviction has only deepened that the average person should no sooner actively meddle with their portfolio allocations or attempt to make valuation calls or market time then they should have a crack at brain surgery.

    Of course I’m an active investor, not passive unlike the accumulator, Lars, etc, so this all sounds hypocritical to some. 🙂 But I know enough to know that mostly we’re dealing with unknowns, whereas Internet comment pundits invariably sound dangerously certain.

    Anyway, for what it’s worth Europe, the UK, Japan, EM, none of that looks particularly expensive to me. And personally I ignore talk about the FTSE 100 index crashing just because it’s over 7,000. The FTSE 100 started in 1984 at 1000. It was 7000 by 1999. Up seven-fold in 15-years! Now THAT is a bull run. Just getting back to where it was 17 years ago? Not so much. 🙂

    Obviously you’ll need to work out what allocation is appropriate for your age and status as a retired person no longer saving from earnings. These articles may be interesting:


    And this, on reducing risk if you’re nervous by investing methodically:


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