Investing from the UK

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.

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.

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

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.

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.

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

All-in-one Funds
Vanguard offers a range of "LifeStrategy" funds that automatically rebalance across asset classes. These may offer a single fund solution to creating a well diversified portfolio.

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.

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.

If a "LifeStyle" fund has an asset allocation is close to an investor's selected asset location, the investor might use a single "LifeStyle" fund, or a combination of these funds, in place of multiple funds covering different asset classes. These funds have the added advantage that they rebalance automatically.

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. The capital gains allowance cannot be carried across tax years, so UK investors should try to use as much of it as is possible, up to the limit, by realizing gains where appropriate. Once a gain is realized on a sale, the same holding cannot be re-purchased within 30 days, but a similar (but not identical) replacement can be purchased.

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.

Unit trusts often provide two distinct types of units: accumulation, and income. Accumulation units retain dividend distributions within the unit price, in effect automatically reinvesting them. Income units pay out dividends as cash. The tax treatment of dividend payments is identical for a UK investor. UK investors might prefer income units in ordinary taxable accounts, as dividends can be used for rebalancing without the complicated capital gains tax calculations that could arise from unit sales. Accumulation units are useful for long-term holdings in a pension or ISA wrapper, where capital gains tax is not an issue.

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.

For account balances where a SIPP is impractical, UK investors might instead use a stakeholder pension scheme. These usually offer a limited range of funds, and have capped fee structures. Stakeholder pensions are generally not as flexible as a SIPP, but can be cost effective for low balances when weighed against annual SIPP administration fees. The funds listed above are unlikely to be available directly from stakeholder plans, but it is often possible to find index and tracker funds within the plan that can be substituted.

TD Waterhouse, Fidelity, Hargreaves Lansdown, Interactive Investor and Alliance Trust all offer both offer ISA and SIPP wrappers. Cavendish Online specializes in cutting costs by refunding IFA commissions, and offers a selection of stakeholder pension plans.

Papers

 * Pensions Bill -Impact Assessment

Books

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