UK Investing

From Bogleheads

This page deals specifically with investing in the United Kingdom

This page suggests some approaches and funds that enable a UK investor to invest using similar techniques to those outlined in The Bogleheads' Guide to Investing. The book contains sample portfolios for investors of different ages that utilize different stock market and bond mutual funds. This page offers some ideas for creating UK versions of these sample portfolios.

General Approach

The funds listed below are low cost indexed funds. In the UK these can be either unit trusts or ETFs. A few UK based companies offer low cost indexed unit trusts directly to the investor. Vanguard, HSBC Asset Management, Fidelity, and Legal and General all offer funds with low expense ratios. At the time of writing, Vanguard UK funds are only available through IFAs or the Alliance Trust fund supermarket. There are few indexed bond funds, but bond ETFs, as well as stock ETFs, are available from iShares.

In addition to the internal expense ratios, ETF purchases must be made through a broker and there is a per transaction cost. One low cost route is through Halifax's Sharebuilder which, as of the date of this writing, charges £1.50 per trade for scheduled regular purchases. Factsheets on ETFs traded on the London Stock Exchange are available from the Exchange.

Funds

Stocks

The UK stock market splits broadly into the large-cap FTSE 100 Index and mid-cap FTSE 250 Index. It is significantly smaller than the US and not as diversified. For example, three companies (Shell, BP and HSBC) comprise nearly 25% of the FTSE 100 Index.

To be properly diversified, the UK investor should pair FTSE indexed funds with a world indexed fund or a selection of regional non-UK funds.

UK Stock Indexes

The following are some examples of low cost indexed funds containing UK Stocks.

Fund	Type	Expense Ratio	Description
Vanguard FTSE U.K. Equity Index	Unit Trust	0.15%, and 0.5% (SDRT) purchase fee	The Vanguard FTSE U.K. Equity Index Fund (the “Fund”) seeks to track the performance of the FTSE All-Share Index (the “Index”).
Fidelity MoneyBuilder UK Index	Unit Trust	0.27%	The Fund’s investment objective is to achieve long term capital growth by closely matching the performance of the FT-SE Actuaries All-Share Index.
HSBC FTSE 100 Index Retail Inc	Unit Trust	0.27%	To provide long term capital growth by matching the return of the FTSE 100 Index. The Fund will invest in companies that make up the FTSE 100 Index.
HSBC FTSE 250 Index Retail Inc	Unit Trust	0.27%	The investment objective of the HSBC FTSE 250 Index Fund is to match the capital performance of the FTSE 250 Index.
HSBC FTSE All Share Index R Inc	Unit Trust	0.27%	The objective of this fund is to provide long term capital growth by matching the capital performance of the FTSE All-Share Index. The Fund will invest in companies that make up the FTSE All-Share Index.
iShares FTSE 100	ETF	0.4% (also incurs buying and selling costs)	The investment seeks to replicate, net of expenses, the FTSE 100 Index. The index is comprised of the 100 largest UK companies.
iShares FTSE 250	ETF	0.4% (also incurs buying and selling costs)	The investment seeks to replicate, net of expenses, the FTSE 250 Index. The index is comprised of 250 medium-sized UK companies.
Legal & General UK Index Trust	Unit Trust	0.52%	To provide the potential for reliable growth by tracking the performance of the FTSE All-Share Index. In order to accurately track this Index, the trust’s investments will closely replicate the holdings in that Index. To gain exposure to the UK stock market, but without all the risk attached to individual stock selection To provide an income where required.

Non-UK Regional Stock Indexes

The following are some examples of low cost indexed funds containing regional non-UK Stocks.

Fund	Type	Expense Ratio	Description
Vanguard U.S. Equity Index Fund	Unit Trust	0.2%	The Vanguard U.S. Equity Index Fund (the “Fund”) seeks to track the performance of the S&P Total Market Index (the “Index”).
Vanguard FTSE Developed Europe ex-U.K. Equity Index Fund	Unit Trust	0.25%	The Vanguard FTSE Developed Europe ex-UK Equity Index Fund (the “Fund”) seeks to track the performance of the FTSE Developed Europe ex-UK Index (the “Index”).
HSBC American Index Retail Inc	Unit Trust	0.28%	The investment objective of the Fund is to match, by use if a representative sample of stocks, the capital performance of the American Index (Standard & Poors 500).
HSBC Japan Index Retail Inc	Unit Trust	0.28%	The fund's investment objective is to provide long term capital growth by matching the capital performance of the FTSE World Japan Index.
Vanguard Japan Stock Indx GBP Inc	Unit Trust	0.3%	The Fund seeks to track the performance of the Morgan Stanley Capital International ("MSCI") Japan Index, which emphasises stocks of Companies located in or traded on recognised markets in Japan.
Vanguard Pacific Ex-Jap Stk Idx GBP Inc	Unit Trust	0.3%	The Fund seeks to provide long-term growth of capital by tracking the performance of the Morgan Stanley Capital International ("MSCI") Pacific ex-Japan Index, which is made up of common stocks of companies located in Australia, Hong Kong, New Zealand, and Singapore.
HSBC European Index Retail Inc	Unit Trust	0.37%	The investment objective of this fund is to provide long term capital growth by matching the capital performance of the FTSE World Europe (excluding UK) Index.
HSBC Pacific Index Retail Inc	Unit Trust	0.37%	The objective of this fund is to provide long term capital growth by matching the capital performance of the FTSE World Pacific (excluding Japan) Index.
iShares MSCI Europe ex-UK	ETF	0.4% (also incurs buying and selling costs)	The investment seeks to replicate, net of expenses, the MSCI Europe ex-UK Index. The index consists of approximately 400 non-UK stocks across the European Union, Scandinavia and Switzerland.
iShares MSCI North America	ETF	0.4% (also incurs buying and selling costs)	The investment seeks to replicate, net of expenses, the MSCI North America Index. The index reflects the performance of the North American stock market and covers approximately 85% of the combined market capitalization of the US and Canadian markets.
iShares MSCI Japan	ETF	0.59% (also incurs buying and selling costs)	The investment objective of the Fund is to track closely the performance of the MSCI Japan Index. In order to achieve this investment objective the investment policy of the Fund is to invest in a portfolio of securities that so far as possible and practicable consist of the component securities of the MSCI Japan Index.
iShares MSCI Pacific ex-Japan Inc	ETF	0.6% (also incurs buying and selling costs)	The investment seeks to track the price and performance yield, before fees and expenses, of the MSCI Pacific ex Japan index. The fund seeks to invest in a portfolio of equity securities that as far as possible and practicable consists of the component securities of the index.

World Stock Indexes

The following are some examples of low cost indexed funds containing world stocks. UK stocks are a component of most world funds, leading to overlap if combined with UK funds. An ex-UK world fund can reduce this problem.

Fund	Type	Expense Ratio	Description
Vanguard FTSE Developed World ex-U.K. Equity Index Fund	Unit Trust	0.3%	The Vanguard FTSE Developed World ex-UK Equity Index Fund (the “Fund”) seeks to track the performance of the FTSE Developed ex-UK Index (the “Index”).
iShares MSCI World	ETF	0.5% (also incurs buying and selling costs)	The objective of the Fund is to achieve a total return that reflects the return on worlds developed equity markets as represented by the MSCI World Index.
iShares FTSE Developed World ex-UK	ETF	0.5% (also incurs buying and selling costs)	The investment seeks to track the price and performance yield, before fees and expenses, of the FTSE Developed ex-UK index. The fund seeks to invest in a portfolio of equity securities that as far as possible and practicable consists of the component securities of the index..
Legal & General Global 100	Unit Trust	1%	To provide the potential for reliable growth by tracking the performance of the S&P Global 100 Index, converted into pounds sterling. In order to accurately track this Index, the trust’s investments will closely replicate the holdings in that Index. To gain exposure to stock market investment, but without all the risk attached to individual stock selection.

Bonds

Short Term Bond Fund

There are no indexed short term bond funds denominated in pound sterling.

Intermediate Term Bond Funds

The following are some examples of indexed intermediate term bond funds denominated in pound sterling.

Fund	Type	Expense Ratio	Description
Vanguard U.K. Government Bd Idx GBP Inc	Unit Trust	0.15%, and 0.1% purchase fee	The fund seeks to provide returns consistent with the performance of the Barclays Capital Global Aggregate U.K. Government Bond Index, a market-weighted index of the U.K. Government fixed-income securities denominated in Pound Sterling.
iShares Pound Sterling Corporate Bond	ETF	0.2% (also incurs buying and selling costs)	The investment objective of the Fund is to provide investors with a total return, taking into account both capital and income returns, which reflects the total return of the Sterling denominated investment grade corporate bond market. The fund tracks the iBoxx Sterling Liquid Corporates Index.
iShares FTSE UK All Stocks Gilt	ETF	0.2% (also incurs buying and selling costs)	iShares FTSE UK All Stocks Gilt is a fixed income fund that offers you exposure to a diversified basket of UK government bonds, across all maturities. iShares FTSE UK All Stocks Gilt can give you immediate access to liquid, sterling-denominated investment grade government bonds. This fund can enhance diversification away from equities and provide steady income at regular time periods.
Legal & General All Stocks Gilt Index I Inc	Unit Trust	0.22%	The investment objective of this Trust is to track the total return of UK Government Securities, as represented by the FTSE Actuaries Government Securities All Stocks Index after adjustment for management charges and taxation, by investment in a representative sample of stocks. Use may be made of optimisation techniques to construct and maintain a portfolio, the underlying value of which exhibits the performance characteristics of the Index.

Inflation Protected Bonds

The following are some examples of indexed inflation protected bond funds denominated in sterling.

Fund	Type	Expense Ratio	Description
L&G All Stocks Idx Linked Gilt Index Inc	Unit Trust	0.22%	The investment objective of this Trust is to track the performance of the FTSE-A Index Linked (All Stocks) index after adjustment for management charge and taxation. The Manager will seek to achieve this objective by investing primarily in government or other public securities issued by the government of the United Kingdom.
iShares £ Index Linked Gilts	ETF	0.25% (also incurs buying and selling costs)	The investment is a fixed income fund that offers exposure to a diversified basket of UK government bonds, with all maturities. It can be used to offset the inflation risk in a portfolio. The invesment provides access to the performance of Barclays UK Government Inflation-Linked Bond Index.

Sample Portfolios

Listed below are UK equivalents to some of the sample asset allocations outlined in The Bogleheads' Guide to Investing. These are appropriate for different stages in life.

A Young Investor's Asset Allocation

Domestic Stocks	30%
World Stocks	50%
Intermediate Term Bonds	20%

A Middle-Aged Investor's Asset Allocation

Domestic Stocks	20%
World Stocks	40%
Intermediate Term Bonds	20%
Inflation Protected Securities	20%

An Investor in Early Retirement's Asset Allocation

Domestic Stocks	10%
World Stocks	30%
Intermediate Term Bonds	30%
Inflation Protected Securities	30%

An Investor in Late Retirement's Asset Allocation

World Stocks	20%
Intermediate Term Bonds	40%
Inflation Protected Securities	40%

Implementation

A UK investor can use the low cost funds and ETFs listed earlier to create a portfolio that matches their selected asset allocation. If a portfolio uses a world fund or ETF that includes UK stocks (one that is not ex-UK) there will be some overlap in the funds, so the allocations to each fund needs to be slightly adjusted. The UK accounts for just under 10% of the MSCI World Index.

An investor might 'synthesize' a global fund by combining appropriate regional funds. For example, mixing 59% US fund, 22% Europe ex-UK fund, 10% Japan fund, and 9% Far East ex-Japan fund approximates a World ex-UK fund. A combination like this can sometimes have an expense ratio lower than that of the global fund it replaces.

A brokerage account or fund supermarket is often the simplest way for UK investors to easily purchase and hold unit trusts and ETFs. A discount brokerage (sometimes also known as an execution-only stockbroker) is a good choice, and there are several low-cost and online discount brokerages operating in the UK. TD Waterhouse, Hargreaves Lansdown and Interactive Investor are three popular ones.

Taxes

Some of the tax management strategies mentioned in The Bogleheads Guide to Investing and other US literature have no relevance to UK investors. UK funds do not pass capital gains on to investors, and UK investors are not liable for capital gains tax on unit trusts or ETFs until the asset is actually sold, so there are no UK 'tax managed' funds.

UK investors have a capital gains tax allowance, meaning that rebalancing is often possible at no tax cost even if some gains have no offsetting losses. UK investors can set capital losses against capital gains but not against ordinary income tax, so there is no additional advantage from tax loss harvesting.

UK investors do not need to consider timing unit trust purchases around ex-dividend dates. Where an investor holds fund units for less than the dividend period, some of the next dividend paid will be classified as an 'equalization'. This is a return of capital, and UK investors are not liable for tax on this portion of the dividend.

Pension and ISA Wrappers

The portfolios outlined above, and the example funds and ETFs listed, work equally well both for ordinary and for tax advantaged investments. Tax advantaged investments in the UK are, most commonly, pensions and Individual Savings Accounts (ISAs).

For ISAs, a UK investor can hold funds or ETFs inside a self-select ISA wrapper. These wrappers are offered by almost all discount brokerages or fund supermarkets, and usually operate like a normal trading account with a few added features and limitations (typically a limit on the total amount that can be investing in a single year, in line with annual ISA allowances).

For pension savings, a UK investor can hold funds or ETFs inside a Self Invested Personal Pension(SIPP) wrapper. Many of the usual discount brokerages offering trading and ISA accounts also offer SIPP accounts, and though there may be a few extra restrictions on what investments an investor may hold, SIPP wrappers generally operate like both ordinary trading accounts and ISA wrappers.

TD Waterhouse, Hargreaves Lansdown, Interactive Investor and Alliance Trust all offer both offer ISA and SIPP wrappers.

External Links

Papers

Pensions Bill -Impact Assessment

Books

Hale, Tim (2006). Smarter Investing. London:Financial Times/Prentice Hall

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