If you’re a UK based investor who’s interested in keeping investment expenses low then it’s highly likely that you’re using Vanguard index and exchange traded funds (ETFs). If that’s you then on Wednesday there was some good news with Vanguard lowering many of the annual expenses associated with these funds.
Full details are here which contains a list of the OCF reductions.
In most cases the reduction is well less than 0.1% but I’ll still definitely take it. Less than 0.1% might not sound like much but I know for me personally every 0.1% reduction in expenses I can find is worth £1,400 more in my pocket annually. Now that does sound like a lot!
It seems to be getting too cheap. I hope it's not like Icelandic banks offering market leading interest rates for your money. I suppose there's some sort of arbitrage for them between you buying their funds and them buying the underlying assets, so the more money they hold the more they make. HSBC hold cash there.
ReplyDeleteDon't claim to be an expert so maybe a quick thought experiment. We know Vanguard do little sales/marketing so most of their costs must be operational. We also know their product is digital so I'm guessing most of those operational costs are rent, business rates, labour and IT infrastructure. So how much do they have to spend? Let's pick just 1 ETF, say VUKE. It's OCF is 0.09% with £2.7B of assets under management. I make that a revenue of £2.43M per annum on just that 1 fund. Eyeballing that single fund and I'd think with time they have room to reduce even further. Again though not an expert and somebody with more digital experience might be able to wade in here.
DeleteJumping over to the vanguard.com US site and assuming their equivalent to our FTSE100 ETF is an S&P500 ETF. They have VOO with costs currently listed at 0.03% although admittedly it does have $493B of assets within it.
Etf's and index funds have effectively managed to keep a focus on charges for all kinds of collective investments . That attention has resulted in many OEIC's and active funds reducing their charges as well . Those reductions can be considered as a slight
ReplyDeleteincrease in yields from the funds - as less of the overrall yield is being " taken " as expenses. NB IT's have mostly much lower annual charges than OEIC's although some have performance fees as well as management charges.
But fund expenses , charges , fees have much less of an effect on overrall performance than the real or comparative performance of the investments themselves. As part of a portfolio low interest rates has turned the investment world upside down.
Holding cash no longer looks attractive as a defensive stance ( you may effectively be receiving a negative yield after expenses ) and the lack of dividends from holding gold looks that much more attractive in a low interest rate environment.
However - gold and cash do have a place in a portfolio including your total assets ( including your house - value of equity in - and debts ( mortgage , loans and CC's etc )
Announcing the overrall performance of a collective investment over the last few years (one that has not held cash during that time ) will look that much better compared to the overrall performance of the average investors portfolio. I mention ' over the last few years " as there has been a prolonged bull run in equity markets .
The bull market in UK index linked gilts may have passed you by - but have a look at fixedincomeinvestor.co.uk for charts showing this very strong performance.
0.1% may represent a " £1,400 " saving ( assuming your £1.4 mi of assets is all held in an etf or index fund )- but in a market setback of 10-20% that 0.1% really makes no difference in how well you sleep at night.
Horses for courses - and the odds are getting longer ( or shorter- depending on which way you are looking at it )
Great to hear from you stringvest. It's been a while.
Delete"But fund expenses, charges, fees have much less of an effect on overrall performance than the real or comparative performance of the investments themselves." I agree with what you say when the fees are already 'reasonable' but I think there are still some active funds out there that are still capturing the lions share. Also an important difference is that I can control the expenses but I can't control Mr Market. I've proven that I'm rubbish at trading so all I have left is expenses, taxes and diversification which with time might give me some free return vs volatility lunch.
I've held UK index linked gilts for quite a while now. My records show me buying my first back in 2011 and today 7% is still allocated. Since purchasing the total return has has been about 86%. In comparison the FTSE 100 has been 75%, the FTSE 250 has been 133% and the S&P 500 has been 163%. History definitely shows my over weighting to the UK, as I called the UK home, was definitely the wrong thing to do. Whether the future shows the same is of course the £1M question.
I see fees as like the brakes rubbing against the rim on my bike. The path ahead may be hilly but you want your bike to be as efficent as possible - because I am only peddling hard now because I want to freewheel the rest of the way.
ReplyDeleteGood thing that these fees are reduced because there is a lot of competition for low cost trackers and presumably the costs are low to run the fund and don't increase as funds grow.
This will save me a lot!
Nice analogy GFF!
DeleteThey may be cheaper but they are not a responsible company when it comes to climate. According to this recent report in the Guardian, Vanguard opposed or abstained on 84% of climate-related motion involving fossil fuel companies.
ReplyDeletehttps://www.theguardian.com/environment/2019/oct/12/top-three-asset-managers-fossil-fuel-investments
For this reason I decided to offload my Vanguard Lifestrategy holdings and would not consider placing my money with them until they stop protecting big oil from scrutiny over their obligations under the Paris Agreement.
Good point DIY. I know it's something you've mentioned on your blog multiple times and I believe you even wrote to Vanguard asking them to reconsider (or at least offer new alternatives) before you pulled your money.
DeleteThe other big player for low cost ETF's in the UK is BlackRock/iShares with that article also suggesting they are behaving similarly to Vanguard.
I know you've gone for IT's or individual environmentally responsible holdings. Do you know of any low cost ETF's that are more environmentally responsible?
Unfortunately I have yet to find a low cost global index fund/ETF which is climate-friendly. As the report points out, all the big players offer ESG or Sustainable options but these all hold fossil fuel companies as well as the big banks which fund their operations.
DeleteI hope they will respond to the growing global pressure to change and these large fund managers will realise that investors deserve better when it comes to addressing the existential threat posed by the climate emergency and can put their money into doing good rather than propping up an industry which is compromising life as we know it for future generations.
This may be of interest . The Norwegian " Oil Fund " - that's an irony - have tackled this ( or are in the process of ). They also have strict criteria for eliminating companies that they choose not to invest in . One large sector is ruled out - Oil and Gas - they recognise that the fund and the country have a large enough investment in the ol industry already. https://on.ft.com/31N8OgA
DeleteHope you can see these FT links . Here is another related story with some more " good news "
Deletehttps://on.ft.com/2PmGleS
Pops 321 here.
ReplyDeleteI am with the Pru following a DB transfer. After taking 25% lump sum out there is £650k in there of which £150k is in a cash fund.
Being hammered on fees and also an IFA charge who hasn’t rung me once.
It’s performed well so far but I need to take it out and place with a low cost provider once I have sorted my renovations which are taking up all my time.
I love that you keep reminding us to be vigilant about fees....it’s the niggle in my side I need.
I need to sit down and check it’s performance (less fees) v’s other low fee options. Will ditch the IFA this year though. That’s an easy one regardless of how busy I might think I am.