investment

basic funds

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A little while ago, regular commentator Llama for brains asked me if I could come up with a British equivalent to some funds that Trent of the Simple Dollar said were basic cheap ones - based on some suggestions from the mainstream press. Well, I’m happy to oblige, although there are some similarities and differences between the UK and US set-ups that complicate matters.

Here’s the funds Trent is talking about originally in Money magazine, together with his actual picks - note the heavy use of Vanguard.

1. A blue-chip U.S. stock fund - Vanguard 500
2. A blue-chip foreign stock fund - Vanguard Total International Stock Index
3. A small-company fund - Vanguard Small-Cap Index
4. A value fund - Vanguard Value Index
5. A high-quality bond fund - Vanguard Total Bond Market Index
6. An inflation-protected bond fund - Vanguard Inflation Protected Securities Fund
7. A money market fund - Vanguard Prime Money Market

Firstly, in translating for Brits, I’ll start by saying that there is no great equivalent of the Vanguard Prime Money Market fund. If you want a cash holding in your investment, they tend to be much of a muchness, and in any case you can usually do the same or better with a cash only ISA, or if you’ve already used up your ISA allowance, a high interest savings account.

I normally translate an S&P tracker (which the Vanguard 500 is) into a FTSE All-Share Tracker, the best (in this case definitely the cheapest) are the Fidelity Moneybuilder Tracker, in a Stocks and Shares ISA or stand-alone from Fidelity, or the HSBC Tracker in a pension from Hargreaves Lansdown.

A general international tracker suitable for a UK based investor is probably going to track the FTSE World ex-UK index. This avoids UK investments so is good for straightforward international diversification when combined with a FTSE All Share Tracker. The cheapest I’ve found is with Norwich Union.

The two bond funds that Trent has suggested are best matched by things that use these two indices FTSE-A Index-Linked All Stocks Index (inflation protected), or FTSE-A Government Securities All Stocks Index (all government bonds). Bond index funds are less common in the UK, the cheapest are usually with Legal and General, there are plenty of managed funds that have less than 1% in annual fees. I have to admit that this is on the edge of my own knowledge and I would defer to other people.

Finally, the small cap fund, and the value fund. I couldn’t find any index trackers for these. I’m afraid your guess is as good as mine as to which are the best funds. What you’re looking for in the small cap fund is one that invests outside the top say 200 companies in the UK, and for the value fund, I’d look at an equity income fund and check out its Morningstar style - it should say value. The UK fund market is notoriously uncompetitive on fees. In this area you’re essentially looking at an annual charge (discounted) of 1.5% for almost every fund. Good luck on that one.

In terms of asset allocation, the only major difference that you might want to consider between the UK and US, is that the UK makes up a smaller part of the world economy. This means that it’s arguable that you should diversify overseas more than Americans. Trent suggests 25%, perhaps considering that a minimum would be a good idea?

In general, the biggest difference between an American basic investing portfolio and a British one, is that it’s much more difficult to construct a cheap tracker-based British portfolio. Since I’m all about the trackers, I tend to stick to the FTSE All Share, and FTSE ex-UK trackers which are easy to come by, and leave the other sectors alone.

Sorry, I couldn’t be more helpful Llama, but I can’t really suggest good actively managed funds as there isn’t a clear way for me to tell them apart.

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