Portfolio feedback-[UK] based

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Topic Author
johnscookies
Posts: 9
Joined: Mon Jun 29, 2020 8:38 am

Portfolio feedback-[UK] based

Post by johnscookies » Mon Jun 29, 2020 1:52 pm

Hi all,

I am new to the forum and new to investing but I'm glad these two coincided. After I did some background reading, podcasts etc I came up with the portfolio below, which I am hoping to optimise over the next few months before ultimately committing to it for the long term. Please see details below:

Country of Residence: UK

International Lifestyle: No plan to move for 10 years, could consider moving to an EU country after this

Currency: GBP

Emergency funds: 6-month emergency fund already in place

Debt: No debt currently, fund for house deposit already in place- aiming to buy using a mortgage within 12 months

Age: Early 30s

Desired Asset allocation:100% stocks

Current portfolio size: Mid 4-figures, with planned monthly contributions of around 600 GBP

Stable job, contributing for state pension

General principles: Investing for the long term (25 years and above), primarily for retirement, comfortable with risk, willing to stick to the plan for the long term regardless of market drops. Happy to acquire some meaningful factor exposure, without it dominating the portfolio. Index tracking ETFs are what I am looking for.

Portfolio:
- Vanguard S&P 500 (VUSA)- 22.5%
- iShares FTSE 100 (ISF)- 7.5%
- Vanguard FTSE Europe ex UK (VERX)- 7.5%
- Vanguard FTSE Pacific ex Japan (VAPX)- 5%
- iShares MSCI Japan (SJPA)- 7.5%
- iShares MSCI Emerging Markets (EMIM)- 10%
- SPDR MSCI USA Small Cap Value (ZPRV)- 20%
- SPDR MSCI Europe Small Cap Value (EUSV)- 5%
- Vanguard FTSE World High Dividend (VHYL)- 15%

This roughly works out as 52.5% Large Cap Blend, 22.5% Large Cap Value, 25% Small Cap Value based on Morningstar
Total weighted expense ratio: 0.18%
All of the above are held within a non-taxable Stocks and Shares ISA. I am using a free trading app for all the transactions.

Portfolio rationale:
- The 1st 6 ETFs would make up a diversified global portfolio, with an expense ratio small enough to tolerate the high expense ratios of the last 3. This is the reason I chose them over a VWRL that currently sits on a 0.22% alone.
- I have chosen the SPDR funds for small cap as they were the only ones available through my free trading app that were value weighted. To my understanding avoiding small cap growth stocks would be desirable.
- I have chosen VHYL for large cap value tilt rather than for the dividends themselves. This was mostly because VVAL is actively managed rather than tracking an index.
_______________________________________________________________
Questions:
1. Any overall feedback on the portfolio would be very much appreciated.
2. Do you think the global part of the portfolio is diversified enough to track the market?
3. Do you think the last 3 ETFs provide me with the factor exposure I aim for? To be meaningful, I think it needs to be around at least 10% of the portfolio. I aimed more towards 20% here but any feedback would be very welcome.
4. Having attempted to get a grasp of the actual factor papers, I can see that the momentum factor is very persistent. However, I find it difficult to see the added risk that results to higher expected returns. As I have decided to go for some factor exposure, do you think it would make sense to add a Momentum ETF as well? Alternatively, would it make sense to just rebalance less often in an attempt to try and get some momentum?
5. Would you advise for my monthly payments to be made in the percentages above and then rebalance quarterly/annually? Or as needed to achieve the percentages above (essentially rebalancing monthly)?

Sorry for the long thread and thank you for your time.

TedSwippet
Posts: 2920
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Portfolio feedback-[UK] based

Post by TedSwippet » Tue Jun 30, 2020 3:05 am

Welcome!

The only thing about this that caught my eye straight away was its bias towards small cap value stocks, but that's here by design, not by mistake. I don't share your enthusiasm for factors, but that doesn't make you wrong. :-) Given your aims and beliefs, I'd say you've done a good job of putting together something that should implement them efficiently.

As for your question on rebalancing ... doing this between asset classes is fine, but you need to be careful if doing it across geographies. For example, if the UK (drastically!) shrinks from around 6% to 0.01% global market cap, would you stick to 7.5%? If you're going to maintain anything, it's probably the 52.5%/22.5%/25% large cap blend, value, and small cap ratios you'd want to look to first. Rebalancing every year or so should be fine. Or, consider rebalancing using tolerance bands; I find this much easier to implement and stick with.

Valuethinker
Posts: 40277
Joined: Fri May 11, 2007 11:07 am

Re: Portfolio feedback-[UK] based

Post by Valuethinker » Tue Jun 30, 2020 3:56 am

johnscookies wrote:
Mon Jun 29, 2020 1:52 pm
. This was mostly because VVAL is actively managed rather than tracking an index.
If VVAL is the one I think it is (I hold it in my ISA) then it's not actually actively managed in a "stock picking" sense.

What it does is run a quant screen against the universe of stocks and then use judgement as to what is/ not included. Slavishly tracking the index would get them into problems with liquidity and perhaps, also, value traps (stocks that look cheap but are in fact on the verge of bankruptcy, for example).

I am pretty happy with it *although* it pretty much follows country weightings (i.e. c 60% in the US index). The ishares equivalent (which I hold in a different ISA) aims way off, e.g. 35% in USA but also 30% in Japan (a massive overweighting).

minimalistmarc
Posts: 949
Joined: Fri Jul 24, 2015 4:38 pm

Re: Portfolio feedback-[UK] based

Post by minimalistmarc » Tue Jun 30, 2020 3:57 am

Personally, I would just stick with VWRP in your tax sheltered accounts (accumulating version of VWRL).

As your portfolio grows it will become a bit of a pain rebalancing all your contributions and dividends.

I value simplicity and efficiency very highly, as my 2 young kids and work keep my brain in a permanent fog, I don’t want to have to waste time thinking about my portfolio

Valuethinker
Posts: 40277
Joined: Fri May 11, 2007 11:07 am

Re: Portfolio feedback-[UK] based

Post by Valuethinker » Tue Jun 30, 2020 4:08 am

johnscookies wrote:
Mon Jun 29, 2020 1:52 pm
Hi all,

I am new to the forum and new to investing but I'm glad these two coincided. After I did some background reading, podcasts etc I came up with the portfolio below, which I am hoping to optimise over the next few months before ultimately committing to it for the long term. Please see details below:

Country of Residence: UK

International Lifestyle: No plan to move for 10 years, could consider moving to an EU country after this
I don't think any of us should plan to move to an EU country in the future, unless we have Irish grandparents or are descendants of survivors of the German Holocaust ;-). If you are in your 20s then a European country might find a place for you on demographic grounds (Canada or Australia certainly would) - but older than that is a real question mark.

Interesting story in Finland. Swedish is an official language in Finland. Brits in Finland of course can get by in English, but because they now need EU citizenship post Brexit, they are studying *Swedish* to pass the Finland citizenship test. Finnish (technically a Finno-Ugric language, so related to Hungarian, Estonian is virtually finished, but the next nearest relative is Turkish) is such a difficult language to learn.

I once did consulting at one of the EU banking institutions. Staff there need to be business fluent in 2 of the 3 official languages - so 2 of German French and English. Lots of 40 & 50 somethings Brits cramming frantically for their French exam ;-).
Currency: GBP

Emergency funds: 6-month emergency fund already in place

Debt: No debt currently, fund for house deposit already in place- aiming to buy using a mortgage within 12 months

Age: Early 30s

Desired Asset allocation:100% stocks

Current portfolio size: Mid 4-figures, with planned monthly contributions of around 600 GBP

Stable job, contributing for state pension


So either your employer has a "default" pension plan, like NEST? Or is it still in a career average or final salary scheme (very unlikely unless you are a civil servant).

So there is a pension there, by law, beyond your Basic State Pension (which is just a matter of years in the system). From memory it is 5% contribution by you, 3% by your employer, 1% by the UK govt - all paid in gross. If your employer practices "salary surrender" then it's a little better than that (you also save National Insurance on your contribution).

If there is a further employer match to your contributions, you should take it. That's a 100% return when you start.

You really should include that in your asset allocation - however with 100% equities, you perhaps already do?
General principles: Investing for the long term (25 years and above), primarily for retirement, comfortable with risk, willing to stick to the plan for the long term regardless of market drops. Happy to acquire some meaningful factor exposure, without it dominating the portfolio. Index tracking ETFs are what I am looking for.

Portfolio:
- Vanguard S&P 500 (VUSA)- 22.5%
- iShares FTSE 100 (ISF)- 7.5%
- Vanguard FTSE Europe ex UK (VERX)- 7.5%
- Vanguard FTSE Pacific ex Japan (VAPX)- 5%
- iShares MSCI Japan (SJPA)- 7.5%
- iShares MSCI Emerging Markets (EMIM)- 10%
- SPDR MSCI USA Small Cap Value (ZPRV)- 20%
- SPDR MSCI Europe Small Cap Value (EUSV)- 5%
- Vanguard FTSE World High Dividend (VHYL)- 15%

This roughly works out as 52.5% Large Cap Blend, 22.5% Large Cap Value, 25% Small Cap Value based on Morningstar
Total weighted expense ratio: 0.18%
All of the above are held within a non-taxable Stocks and Shares ISA. I am using a free trading app for all the transactions.

Portfolio rationale:
- The 1st 6 ETFs would make up a diversified global portfolio, with an expense ratio small enough to tolerate the high expense ratios of the last 3. This is the reason I chose them over a VWRL that currently sits on a 0.22% alone.
- I have chosen the SPDR funds for small cap as they were the only ones available through my free trading app that were value weighted. To my understanding avoiding small cap growth stocks would be desirable.
- I have chosen VHYL for large cap value tilt rather than for the dividends themselves. This was mostly because VVAL is actively managed rather than tracking an index.
_______________________________________________________________
Questions:
1. Any overall feedback on the portfolio would be very much appreciated.
2. Do you think the global part of the portfolio is diversified enough to track the market?
3. Do you think the last 3 ETFs provide me with the factor exposure I aim for? To be meaningful, I think it needs to be around at least 10% of the portfolio. I aimed more towards 20% here but any feedback would be very welcome.
4. Having attempted to get a grasp of the actual factor papers, I can see that the momentum factor is very persistent. However, I find it difficult to see the added risk that results to higher expected returns. As I have decided to go for some factor exposure, do you think it would make sense to add a Momentum ETF as well? Alternatively, would it make sense to just rebalance less often in an attempt to try and get some momentum?
5. Would you advise for my monthly payments to be made in the percentages above and then rebalance quarterly/annually? Or as needed to achieve the percentages above (essentially rebalancing monthly)?

Sorry for the long thread and thank you for your time.
I see what you are trying to do, but for £600 pcm it seems very complex. Won't the dealing fees kill you? Have you priced the dealing fees (both the charges & the bid-ask spread) against just paying a somewhat higher ER for 1-2 funds?

Vanguard has a global equity fund which includes all capitalisations. That's what I use.

Factors I rather shake my head. I tilt value to about 25% of total portfolio and it has hurt, big time. I'll be right some day ;-). It seems to me that value is the one factor we know about that has a really long term track record. The Economist this week had a Buttonwood column which almost could have been entitled "the death of value" and that made me feel a bit better about this ;-). (what they said was that if you skipped 2000-03, value had been underperforming for 2 1/2 decades; which is true, the question is whether it is legit or not to cross out the dot com bust?).

I did use an EM Dividend Yield ETF to try to capture Value in Emerging Markets. SEDY from memory. That went well ;-). I was mostly worried about the huge weighting in EM indices from Chinese internet stocks, which have done well since :? :? :confused

Small cap was the rage having just been discovered when I got serious about investing (late 80s). Lots of small cap funds raised. They then underperformed for 10 years. In addition, it was later discovered that Rolf Banz had made some fundamental mistakes in his PhD research - it didn't show what he said it did. Later efforts seem to show there is a small cap effect, but it is mostly avoid small cap growth stocks/ stocks with no earnings, rather than anything else.

Momentum? There's many many billions of hedge fund and bank trading desk money behind momentum. Seems to me it's a recipe for disaster in a bear market. "Torpedo stocks" high PE stocks who disappoint on the E, but also see the PE-ratio come down as well - double whammy. See the "nifty fifty" period of the stock market in the early 1970s.

Low volatility and quality have more to argue for, and structural reasons why they might persist.

actuallyxy
Posts: 58
Joined: Wed May 24, 2017 6:25 am

Re: Portfolio feedback-[UK] based

Post by actuallyxy » Tue Jun 30, 2020 4:43 am

SPDR MSCI USA Small Cap Value Weighted (ZPRV) is only traded in USD or EUR, not GBP. Check what exchanges fees your broker will charge you every time you buy it sell it. It may not be worth holding.

An alternative may be Wisdomtree US Small Cap Dividend (DES).

User avatar
Forester
Posts: 1293
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Portfolio feedback-[UK] based

Post by Forester » Tue Jun 30, 2020 10:46 am

iShares World Min Vol MINV
iShares Emerging Min Vol EEMV
iShares World Momentum IWFM
Vanguard Global Value VVAL

Could do worse than 25% in each

Topic Author
johnscookies
Posts: 9
Joined: Mon Jun 29, 2020 8:38 am

Re: Portfolio feedback-[UK] based

Post by johnscookies » Tue Jun 30, 2020 12:10 pm

TedSwippet wrote:
Tue Jun 30, 2020 3:05 am

As for your question on rebalancing ... doing this between asset classes is fine, but you need to be careful if doing it across geographies. For example, if the UK (drastically!) shrinks from around 6% to 0.01% global market cap, would you stick to 7.5%? If you're going to maintain anything, it's probably the 52.5%/22.5%/25% large cap blend, value, and small cap ratios you'd want to look to first. Rebalancing every year or so should be fine. Or, consider rebalancing using tolerance bands; I find this much easier to implement and stick with.
Thank you very much for your reply and for bringing this to my attention, I will definitely keep an eye on geographies.

Topic Author
johnscookies
Posts: 9
Joined: Mon Jun 29, 2020 8:38 am

Re: Portfolio feedback-[UK] based

Post by johnscookies » Tue Jun 30, 2020 12:19 pm

[/quote]

If VVAL is the one I think it is (I hold it in my ISA) then it's not actually actively managed in a "stock picking" sense.

What it does is run a quant screen against the universe of stocks and then use judgement as to what is/ not included. Slavishly tracking the index would get them into problems with liquidity and perhaps, also, value traps (stocks that look cheap but are in fact on the verge of bankruptcy, for example).

I am pretty happy with it *although* it pretty much follows country weightings (i.e. c 60% in the US index). The ishares equivalent (which I hold in a different ISA) aims way off, e.g. 35% in USA but also 30% in Japan (a massive overweighting).
[/quote]

Thank you for your reply, do you think VVAL compares favourably to VHYL in capturing value while avoiding the risks you mention above?

Topic Author
johnscookies
Posts: 9
Joined: Mon Jun 29, 2020 8:38 am

Re: Portfolio feedback-[UK] based

Post by johnscookies » Tue Jun 30, 2020 12:44 pm

minimalistmarc wrote:
Tue Jun 30, 2020 3:57 am
Personally, I would just stick with VWRP in your tax sheltered accounts (accumulating version of VWRL).

As your portfolio grows it will become a bit of a pain rebalancing all your contributions and dividends.

I value simplicity and efficiency very highly, as my 2 young kids and work keep my brain in a permanent fog, I don’t want to have to waste time thinking about my portfolio
Thank you for your reply. I appreciate the point and I'm sure I will be appreciating it more over time. In my portfolio, if you just keep the first 6 ETFs as the equivalent of something like VWRL/P, you get a weighted expense ration of 0.11% as opposed to 0.22% for VWRL/P. Would you consider that 0.11% insignificant as it is, or only when taking into account the considerable extra effort?

Topic Author
johnscookies
Posts: 9
Joined: Mon Jun 29, 2020 8:38 am

Re: Portfolio feedback-[UK] based

Post by johnscookies » Tue Jun 30, 2020 1:29 pm

[/quote]
So either your employer has a "default" pension plan, like NEST? Or is it still in a career average or final salary scheme (very unlikely unless you are a civil servant).

So there is a pension there, by law, beyond your Basic State Pension (which is just a matter of years in the system). From memory it is 5% contribution by you, 3% by your employer, 1% by the UK govt - all paid in gross. If your employer practices "salary surrender" then it's a little better than that (you also save National Insurance on your contribution).

If there is a further employer match to your contributions, you should take it. That's a 100% return when you start.

You really should include that in your asset allocation - however with 100% equities, you perhaps already do?

It is indeed a career average scheme.

[/quote]

I see what you are trying to do, but for £600 pcm it seems very complex. Won't the dealing fees kill you? Have you priced the dealing fees (both the charges & the bid-ask spread) against just paying a somewhat higher ER for 1-2 funds?

Vanguard has a global equity fund which includes all capitalisations. That's what I use.

Factors I rather shake my head. I tilt value to about 25% of total portfolio and it has hurt, big time. I'll be right some day ;-). It seems to me that value is the one factor we know about that has a really long term track record. The Economist this week had a Buttonwood column which almost could have been entitled "the death of value" and that made me feel a bit better about this ;-). (what they said was that if you skipped 2000-03, value had been underperforming for 2 1/2 decades; which is true, the question is whether it is legit or not to cross out the dot com bust?).

I did use an EM Dividend Yield ETF to try to capture Value in Emerging Markets. SEDY from memory. That went well ;-). I was mostly worried about the huge weighting in EM indices from Chinese internet stocks, which have done well since :? :? :confused

Small cap was the rage having just been discovered when I got serious about investing (late 80s). Lots of small cap funds raised. They then underperformed for 10 years. In addition, it was later discovered that Rolf Banz had made some fundamental mistakes in his PhD research - it didn't show what he said it did. Later efforts seem to show there is a small cap effect, but it is mostly avoid small cap growth stocks/ stocks with no earnings, rather than anything else.

Momentum? There's many many billions of hedge fund and bank trading desk money behind momentum. Seems to me it's a recipe for disaster in a bear market. "Torpedo stocks" high PE stocks who disappoint on the E, but also see the PE-ratio come down as well - double whammy. See the "nifty fifty" period of the stock market in the early 1970s.

Low volatility and quality have more to argue for, and structural reasons why they might persist.
[/quote]

Thank you very much for the very comprehensive reply and the history revisiting. Is your 25% value tilt across all caps or focusing more on large caps? And is the rest growth or blend? The only thing I don't like about SEDY is the expense ratio of 0.6%. I have arbitrarily set a limit of 0.3% although I would be happy to reconsider this.

Topic Author
johnscookies
Posts: 9
Joined: Mon Jun 29, 2020 8:38 am

Re: Portfolio feedback-[UK] based

Post by johnscookies » Tue Jun 30, 2020 1:32 pm

actuallyxy wrote:
Tue Jun 30, 2020 4:43 am
SPDR MSCI USA Small Cap Value Weighted (ZPRV) is only traded in USD or EUR, not GBP. Check what exchanges fees your broker will charge you every time you buy it sell it. It may not be worth holding.

An alternative may be Wisdomtree US Small Cap Dividend (DES).
Thank you for your reply. My broker does not charge any fees for trading. I am worried a bit more about the very small fund size of around 35mil USD. Do you think that should not be an issue if going for the long hold?

Topic Author
johnscookies
Posts: 9
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Re: Portfolio feedback-[UK] based

Post by johnscookies » Tue Jun 30, 2020 1:41 pm

Forester wrote:
Tue Jun 30, 2020 10:46 am
iShares World Min Vol MINV
iShares Emerging Min Vol EEMV
iShares World Momentum IWFM
Vanguard Global Value VVAL

Could do worse than 25% in each
Thank you for your reply. I am already considering the last 2. Do you think the 2 Min Vol ETFs combined could be somewhere representative of the total market?

User avatar
Forester
Posts: 1293
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Location: UK

Re: Portfolio feedback-[UK] based

Post by Forester » Tue Jun 30, 2020 1:58 pm

johnscookies wrote:
Tue Jun 30, 2020 1:41 pm
Forester wrote:
Tue Jun 30, 2020 10:46 am
iShares World Min Vol MINV
iShares Emerging Min Vol EEMV
iShares World Momentum IWFM
Vanguard Global Value VVAL

Could do worse than 25% in each
Thank you for your reply. I am already considering the last 2. Do you think the 2 Min Vol ETFs combined could be somewhere representative of the total market?
iShares Europe don't have a Global min vol so we have to hold both the World (developed) & Emerging funds. 75% World 25% Emerging roughly gets you to a Global weighting. Perhaps it's more like 85/15 today, you can Google around and see what the correct EM weight should be.

actuallyxy
Posts: 58
Joined: Wed May 24, 2017 6:25 am

Re: Portfolio feedback-[UK] based

Post by actuallyxy » Tue Jun 30, 2020 2:06 pm

johnscookies wrote:
Tue Jun 30, 2020 1:32 pm
actuallyxy wrote:
Tue Jun 30, 2020 4:43 am
SPDR MSCI USA Small Cap Value Weighted (ZPRV) is only traded in USD or EUR, not GBP. Check what exchanges fees your broker will charge you every time you buy it sell it. It may not be worth holding.

An alternative may be Wisdomtree US Small Cap Dividend (DES).
Thank you for your reply. My broker does not charge any fees for trading. I am worried a bit more about the very small fund size of around 35mil USD. Do you think that should not be an issue if going for the long hold?
Your trades may be free, but are you sure you have free currency exchange?

In terms of the size of the funds, it may be of concern but unfortunately we don't have too many options when it comes to small cap value. As far as I'm aware, the only funds available are the SPDR ones and the Wisdomtree small cap dividend ones, which are also small.

VVAL has a significant exposure to small cap, so another option is to use VVAL as a single holding for your exposure to both value and small cap value.

Valuethinker
Posts: 40277
Joined: Fri May 11, 2007 11:07 am

Re: Portfolio feedback-[UK] based

Post by Valuethinker » Tue Jun 30, 2020 4:02 pm

johnscookies wrote:
Tue Jun 30, 2020 12:19 pm

If VVAL is the one I think it is (I hold it in my ISA) then it's not actually actively managed in a "stock picking" sense.

What it does is run a quant screen against the universe of stocks and then use judgement as to what is/ not included. Slavishly tracking the index would get them into problems with liquidity and perhaps, also, value traps (stocks that look cheap but are in fact on the verge of bankruptcy, for example).

I am pretty happy with it *although* it pretty much follows country weightings (i.e. c 60% in the US index). The ishares equivalent (which I hold in a different ISA) aims way off, e.g. 35% in USA but also 30% in Japan (a massive overweighting).
Thank you for your reply, do you think VVAL compares favourably to VHYL in capturing value while avoiding the risks you mention above?
I've never actually seen a regression run against the portfolio.

I tend not to know the tickers so I cannot be any more specific in answering your question...

Reaching ... a Value fund will capture more of the value factor than a dividend fund. It's a moot point whether one goes full Royal Marine Commando value (ishares) or Blues & Royals/ Household Cavalry (Vanguard). The former might win you the Victoria Cross, the latter means more dinners in London and lots of nice parades.

Dividend Yield is empirically one of the weakest ways of capturing the value factor.

A lot of companies have high yield because they have very low dividend cover (EPS/ DPS) or even negative (payout ratio > 100%) and so the market is in effect pricing in lo or no growth going forward.
Last edited by Valuethinker on Tue Jun 30, 2020 4:10 pm, edited 1 time in total.

Valuethinker
Posts: 40277
Joined: Fri May 11, 2007 11:07 am

Re: Portfolio feedback-[UK] based

Post by Valuethinker » Tue Jun 30, 2020 4:05 pm

johnscookies wrote:
Tue Jun 30, 2020 1:29 pm


I see what you are trying to do, but for £600 pcm it seems very complex. Won't the dealing fees kill you? Have you priced the dealing fees (both the charges & the bid-ask spread) against just paying a somewhat higher ER for 1-2 funds?

Vanguard has a global equity fund which includes all capitalisations. That's what I use.

Factors I rather shake my head. I tilt value to about 25% of total portfolio and it has hurt, big time. I'll be right some day ;-). It seems to me that value is the one factor we know about that has a really long term track record. The Economist this week had a Buttonwood column which almost could have been entitled "the death of value" and that made me feel a bit better about this ;-). (what they said was that if you skipped 2000-03, value had been underperforming for 2 1/2 decades; which is true, the question is whether it is legit or not to cross out the dot com bust?).

I did use an EM Dividend Yield ETF to try to capture Value in Emerging Markets. SEDY from memory. That went well ;-). I was mostly worried about the huge weighting in EM indices from Chinese internet stocks, which have done well since :? :? :confused

Small cap was the rage having just been discovered when I got serious about investing (late 80s). Lots of small cap funds raised. They then underperformed for 10 years. In addition, it was later discovered that Rolf Banz had made some fundamental mistakes in his PhD research - it didn't show what he said it did. Later efforts seem to show there is a small cap effect, but it is mostly avoid small cap growth stocks/ stocks with no earnings, rather than anything else.

Momentum? There's many many billions of hedge fund and bank trading desk money behind momentum. Seems to me it's a recipe for disaster in a bear market. "Torpedo stocks" high PE stocks who disappoint on the E, but also see the PE-ratio come down as well - double whammy. See the "nifty fifty" period of the stock market in the early 1970s.

Low volatility and quality have more to argue for, and structural reasons why they might persist.
Thank you very much for the very comprehensive reply and the history revisiting. Is your 25% value tilt across all caps or focusing more on large caps? And is the rest growth or blend? The only thing I don't like about SEDY is the expense ratio of 0.6%. I have arbitrarily set a limit of 0.3% although I would be happy to reconsider this.
The rest is total market. "Lord make me chaste, but not yet" - St Augustine.

Value tilt is all cap & therefore de facto large cap (but the super stocks are of course omitted - FAANGs + Microsoft - so there is a less huge cap bias, if you will).

Yes SEDY expense ratio is also grievous. It's a small part of my total portfolio - and thus I can wear the costs.

Valuethinker
Posts: 40277
Joined: Fri May 11, 2007 11:07 am

Re: Portfolio feedback-[UK] based

Post by Valuethinker » Tue Jun 30, 2020 4:08 pm

johnscookies wrote:
Tue Jun 30, 2020 12:44 pm
minimalistmarc wrote:
Tue Jun 30, 2020 3:57 am
Personally, I would just stick with VWRP in your tax sheltered accounts (accumulating version of VWRL).

As your portfolio grows it will become a bit of a pain rebalancing all your contributions and dividends.

I value simplicity and efficiency very highly, as my 2 young kids and work keep my brain in a permanent fog, I don’t want to have to waste time thinking about my portfolio
Thank you for your reply. I appreciate the point and I'm sure I will be appreciating it more over time. In my portfolio, if you just keep the first 6 ETFs as the equivalent of something like VWRL/P, you get a weighted expense ration of 0.11% as opposed to 0.22% for VWRL/P. Would you consider that 0.11% insignificant as it is, or only when taking into account the considerable extra effort?
On £100k, 0.11 per cent is £110 pa. That would, of course, be compounded over say 30 years. Only you can decide if that is a lot or a little.

minimalistmarc
Posts: 949
Joined: Fri Jul 24, 2015 4:38 pm

Re: Portfolio feedback-[UK] based

Post by minimalistmarc » Tue Jun 30, 2020 4:09 pm

johnscookies wrote:
Tue Jun 30, 2020 12:44 pm
minimalistmarc wrote:
Tue Jun 30, 2020 3:57 am
Personally, I would just stick with VWRP in your tax sheltered accounts (accumulating version of VWRL).

As your portfolio grows it will become a bit of a pain rebalancing all your contributions and dividends.

I value simplicity and efficiency very highly, as my 2 young kids and work keep my brain in a permanent fog, I don’t want to have to waste time thinking about my portfolio
Thank you for your reply. I appreciate the point and I'm sure I will be appreciating it more over time. In my portfolio, if you just keep the first 6 ETFs as the equivalent of something like VWRL/P, you get a weighted expense ration of 0.11% as opposed to 0.22% for VWRL/P. Would you consider that 0.11% insignificant as it is, or only when taking into account the considerable extra effort?
I have £1 million approx in VWRL/P so could save 1 - 1.5k a year by splitting it myself. I don’t think it’s worth the extra effort. Also, it helps me to stay the course as I just login and top up the all world. I am hoping the all world charges come down further with time, and suspect they will.

Topic Author
johnscookies
Posts: 9
Joined: Mon Jun 29, 2020 8:38 am

Re: Portfolio feedback-[UK] based

Post by johnscookies » Wed Jul 01, 2020 11:01 am

Valuethinker wrote:
Tue Jun 30, 2020 4:02 pm
johnscookies wrote:
Tue Jun 30, 2020 12:19 pm

If VVAL is the one I think it is (I hold it in my ISA) then it's not actually actively managed in a "stock picking" sense.

What it does is run a quant screen against the universe of stocks and then use judgement as to what is/ not included. Slavishly tracking the index would get them into problems with liquidity and perhaps, also, value traps (stocks that look cheap but are in fact on the verge of bankruptcy, for example).

I am pretty happy with it *although* it pretty much follows country weightings (i.e. c 60% in the US index). The ishares equivalent (which I hold in a different ISA) aims way off, e.g. 35% in USA but also 30% in Japan (a massive overweighting).
Thank you for your reply, do you think VVAL compares favourably to VHYL in capturing value while avoiding the risks you mention above?
I've never actually seen a regression run against the portfolio.

I tend not to know the tickers so I cannot be any more specific in answering your question...

Reaching ... a Value fund will capture more of the value factor than a dividend fund. It's a moot point whether one goes full Royal Marine Commando value (ishares) or Blues & Royals/ Household Cavalry (Vanguard). The former might win you the Victoria Cross, the latter means more dinners in London and lots of nice parades.

Dividend Yield is empirically one of the weakest ways of capturing the value factor.

A lot of companies have high yield because they have very low dividend cover (EPS/ DPS) or even negative (payout ratio > 100%) and so the market is in effect pricing in lo or no growth going forward.
Would you then suggest something like the iShares MSCI World Value Factor ETF more than a high dividend yield if trying to get value exposure?

Topic Author
johnscookies
Posts: 9
Joined: Mon Jun 29, 2020 8:38 am

Re: Portfolio feedback-[UK] based

Post by johnscookies » Wed Jul 01, 2020 11:06 am

actuallyxy wrote:
Tue Jun 30, 2020 2:06 pm
johnscookies wrote:
Tue Jun 30, 2020 1:32 pm
actuallyxy wrote:
Tue Jun 30, 2020 4:43 am
SPDR MSCI USA Small Cap Value Weighted (ZPRV) is only traded in USD or EUR, not GBP. Check what exchanges fees your broker will charge you every time you buy it sell it. It may not be worth holding.

An alternative may be Wisdomtree US Small Cap Dividend (DES).
Thank you for your reply. My broker does not charge any fees for trading. I am worried a bit more about the very small fund size of around 35mil USD. Do you think that should not be an issue if going for the long hold?
Your trades may be free, but are you sure you have free currency exchange?

In terms of the size of the funds, it may be of concern but unfortunately we don't have too many options when it comes to small cap value. As far as I'm aware, the only funds available are the SPDR ones and the Wisdomtree small cap dividend ones, which are also small.

VVAL has a significant exposure to small cap, so another option is to use VVAL as a single holding for your exposure to both value and small cap value.
Yes, they don't charge anything for currency exchange. Given this, shall I be aiming for ETFs trading in GBP or is it just irrelevant as we cannot predict how will GBP perform in the future?

actuallyxy
Posts: 58
Joined: Wed May 24, 2017 6:25 am

Re: Portfolio feedback-[UK] based

Post by actuallyxy » Wed Jul 01, 2020 1:00 pm

johnscookies wrote:
Wed Jul 01, 2020 11:06 am
actuallyxy wrote:
Tue Jun 30, 2020 2:06 pm
johnscookies wrote:
Tue Jun 30, 2020 1:32 pm
actuallyxy wrote:
Tue Jun 30, 2020 4:43 am
SPDR MSCI USA Small Cap Value Weighted (ZPRV) is only traded in USD or EUR, not GBP. Check what exchanges fees your broker will charge you every time you buy it sell it. It may not be worth holding.

An alternative may be Wisdomtree US Small Cap Dividend (DES).
Thank you for your reply. My broker does not charge any fees for trading. I am worried a bit more about the very small fund size of around 35mil USD. Do you think that should not be an issue if going for the long hold?
Your trades may be free, but are you sure you have free currency exchange?

In terms of the size of the funds, it may be of concern but unfortunately we don't have too many options when it comes to small cap value. As far as I'm aware, the only funds available are the SPDR ones and the Wisdomtree small cap dividend ones, which are also small.

VVAL has a significant exposure to small cap, so another option is to use VVAL as a single holding for your exposure to both value and small cap value.
Yes, they don't charge anything for currency exchange. Given this, shall I be aiming for ETFs trading in GBP or is it just irrelevant as we cannot predict how will GBP perform in the future?
The performance of the GBP is irrelevant because a US small cap value fund will be mostly exposed to the US dollar, regardless of its trading currency.

So in principle the trading currency is irrelevant. Just make sure they are not sneaking in a hidden charge by giving you an unfavourable exchange rate.

Valuethinker
Posts: 40277
Joined: Fri May 11, 2007 11:07 am

Re: Portfolio feedback-[UK] based

Post by Valuethinker » Thu Jul 02, 2020 3:23 am

johnscookies wrote:
Wed Jul 01, 2020 11:01 am


Would you then suggest something like the iShares MSCI World Value Factor ETF more than a high dividend yield if trying to get value exposure?
Yes. But beware, as I noted above the country allocation is really really different from the index. Expect big divergence of performance from the index.

That's why I hold the Vanguard value one (which does follow country weightings pretty much, ie US is c 60%) as well.

We are then basically relying on either ishares/ Blackrock computers or the Vanguard ones to get this right - to pick the cheapest stocks.

Value really is the world's most patient strategy. The Economist (Buttonwood column) was pointing out that Value had underperformed since about 19940 *except* for the 2000-03 period (when it massively outperformed - the Tech Media Telecoms collapse).

The Value effect is tilted towards the smallest stocks, as well. Lots and lots of academic papers as to why. A big chunk of the Value effect is simply avoiding horrifically overvalued stocks or actively shorting them - right now, that would be Tesla on all measures. But, of course, Tesla really could become one of the world's leading car companies by sales (as opposed to market cap). A value hedge fund right now would be short Tesla and long BMW & Daimler & Toyota (perhaps also GM & Ford & Fiat).

The quant metrics don't let you pick out an Amazon - a company which is genuinely disrupting its industry segments. Or a Microsoft, which is moving its customer base to an annuity model (Software as a Service) and thus increasing the quality of its revenues all the time. The valuation of those companies is not irrational (although conversely if they disappoint, their share prices will fall by a lot).

For some reason my platform does not allow me to buy EMVL - the ishares Emerging Market Value ETF. Hence the use of SEDY (EM Dividend Yield) at the high expense ratio.

I shrug. I put 25% in value (developed markets) and 75% in the global index (Vanguard gives you the whole world including mid and small cap, EM, in one fund). So far the Value has declined by 30% relative, so I've drifted to 80%/ 20% - style drift, not rebalancing. Painful lesson in the power of whole market indexing. I shall be right some day ;-).

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