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 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 – and they’ve just had 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 should be 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.

In reabalancing, 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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