Compared to the US, low cost investing in the UK is a bit of a misnomer, but we still have to make the most of a bad situation. A recent article in the FT (Behind the paywall sorry) highlighted this problem sharing Morningstar’s Global Investor Experience study which found that the US was one of two countries to score an A, while the UK scored a poor C+.
There was a great post from Mebane Faber showing four cheap portfolios without commissions for US investors.
The portfolio is nicely balanced with:
- 40% domestic equity (US)
- 25% broad market
- 10% small cap
- 5% Real Estate
- 20% international equity.
- 10% broad international
- 5% international small cap
- 5% emerging markets
- 40% fixed income.
- 30% investment grade or T bonds
- 10% Inflation linked
The total expense ratios were between 0.13% and 0.27% all had free trading/ switching mostly online only.
Can this be done in the UK?
For my own personal investing and potentially for the interest of other UK investors, I thought it would be a worthwhile exercise to try to replicate a similar portfolio based on the options available here.
The low cost nature of the portfolio is obviously appealing, but there may also be the added benefit of lower fee funds out performing.
In the UK, the only way to do this at present would be via a fund supermarket such as that offered by cofunds, Skandia, Fidelity & hagreaves Landsdown. The annoying thing is that most of these market to advisors rather than opening the platform up directly to consumers. I’m not sure how this will change with the introduction of RDR (Banning of sales commission on funds), the situation is complex with some believing that the fund supermarkets are actually responsible for driving fees higher.
The alternative to a funds super market is to use a self invested ISA or Pension to choose ETFs. The trouble is that fund supermarkets that allow free dealing/ switching, but in a share ISA that allows ETFs, any investments/ top ups/ rebalancing in ETFs will incur dealing charges each time.
As the FT recently noted, the UK is indeed in dire need of its own John Bogle.
That’s enough moaning, let’s see what we can do with the resources available to us in the UK. My first criteria is that it is tax efficient (Pension or Isa wrapper).
Fidelity
I’m going to start with the Fidelity stocks & shares ISA because it has a very useful fund evaluator.
I used the tool to search for funds with a maximum TER (Total Expense Ratio) of 0.5% with no standard initial charges or exit charges.
This cut 1,200 funds down to just 13!
I then honed in on the funds with the smallest tracking error picked the ones with the smallest fees if multiple funds covered the same sector.
- 40% domestic equity
- 25% HSBC FTSE all share index retail.
- 15% HSBC FTSE 250 Index retail.
- 20% international equity.
- 10% Schroder QEUP Core US.
- 5% HSBC Pacific Index ex Japan.
- 5% HSBC Europe Ex UK.
- 40% fixed income.
- 30% HSBC UK guilt index
- 10% Legal & General Index linked gilt
Average expense ratio of 0.28%
So not bad, but it’s not quite there. There were no small cap (domestic or international) with low enough fees and no real estate fund. The Pacific ex Japan was also the closest I could get to an emerging markets fund.
In a follow up post I’ll look at what can be found from a different fund super market or through a SIPP/ ISA taking into account annual rebalancing fees.
Please don’t take this as investment advice and all that…
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