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 stock 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. Indexed Bond funds are rare, however, and mostly only available as ETFs. The broadest selection of bond ETFs is 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. The lowest cost per trade is 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 gain appropriate diversification, 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.

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 using 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.

A global fund can be 'synthesized' by combining appropriate regional funds. For example, a mix of 59% US fund, 22% Europe ex-UK fund, 10% Japan fund, and 9% Far East ex-Japan fund approximates a World ex-UK fund. The expense ratio of a combination of regional funds such as this can sometimes be lower than that of the global fund it approximates.

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 are not required to 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 can often be accomplished at no tax cost even if some gains are realized with no offsetting losses. In the UK, capital losses can be set against capital gains but not against ordinary income tax, so UK investors receive 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
These techniques work equally well for tax advantaged investments, that is, pensions and Individual Savings Accounts (ISAs), and for investments which are not tax advantaged.

For all of these, using a brokerage account or fund supermarket is often the simplest way to gain easy access to these funds and ETFs. A discount brokerage is a good choice, and there are several low-cost and online discount brokerages operating in the UK.

For pension savings, a UK investor can hold these funds or ETFs inside a Self Invested Personal Pension(SIPP) wrapper at many discount brokerages or fund supermarkets. And for ISAs, a UK investor can hold these funds or ETFs inside a self-select ISA wrapper, at most discount brokerages or fund supermarkets.

Papers

 * Pensions Bill -Impact Assessment

Books

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