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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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10 comments for “basic funds”

  1. Instead of only looking for mutual funds, it might be worth considering ETFs as well (exchange traded funds).

    There are plenty of ETFs out there that track various indices and often they’ll be cheaper than the equivalent mutual fund…

    Posted by Kirsten | June 18, 2008, 5:43 am
  2. Great post. I’ve been trawling around looking for good UK equivalents of the popular US funds and you’ve just saved me some time.

    As for the small-cap fund equivalent, would the FTSE 250 Index suffice? It’s the FTSE 350 minus the biggest 100 companies (FTSE 100).

    Of course, there is the FTSE SmallCap Index which is the FTSE All Share minus the FTSE 350, but I’ve no idea how widely followed (or useful for a portfolio) it is. Any idea?

    Posted by Lloyd | June 18, 2008, 10:21 am
  3. @Kirsten:
    I have to admit that I didn’t think of ETF, probably because they’re only suitable for lump sum investments due to their fee structure. isharews usually have a good selection, and ETFs are always trackers.

    Yes, the FTSE 250 index would be good or the FTSE Small Cap, but I haven’t seen any trackers for them so you’d be taking a bit of a punt.

    Posted by plonkee | June 18, 2008, 12:34 pm
  4. Thanks plonkee ;)

    Just what I was looking for… and it highlights that it was not so easy to find the equivalents so I’m not completely stupid :p

    Do you actually have a FTSE ex UK tracker? Had not thought about that before.

    As to ETFs, I am still struggling a bit with those, not quite got my head around them.

    Talking about cash though… do you know about Halifax;s latest regular saver… 10% on up to £500 per month (moneysavingsexpert guy has more details). Unless my maths has completely deserted me, that means about 8%, although averaged out etc etc.

    Posted by Llama for Brains | June 18, 2008, 9:31 pm
  5. Another question is where to you hold your indexes? If this is not too personal a question!

    Posted by Llama for brains | June 18, 2008, 9:36 pm
  6. @Llama:

    I hold my index funds through Fidelity, they offer good prices and a reasonable interface, customer service is also good.

    I have a FTSE ex-UK tracker inside my company pension, and I suspect that when I have sufficient money accumulated with Fidelity I’ll diversify through an ex-UK tracker there.

    Halifax’s regular savings account looks good. If you’re a regular saver into your ISA and you’re definitely not going to touch the money, it actually might work out to be better than a cash ISA. Unfortunately for me, there’s every chance that I might need to tap into my savings this year, so I’m not going to get one.

    Posted by plonkee | June 19, 2008, 7:58 am
  7. Cheers for the info! At last I know the UK equivalents of what the US PF bloggers are talking about :)

    Posted by Steve | June 29, 2008, 8:30 am

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