Best Company to Invest in
But is it a good investment? You'd think that buying a fund that puts your money in about 100 different companies (the quarterly reshuffle can leave it with slightly fewer than 100) would be a good thing to do. After all, not ...
Best Company to Invest in
The UK's best-selling financial magazine Log in | Add to favourites HomeBlogInvestmentsTips & adviceNews & chartsOnline tradingPersonal financeHelp/AboutFree emails Newsletters Subscribe Latest issue RSS Articles Share price (UK) Home—Tips & advice—How to invest—Investment strategies—The best way to invest in Britain’
Giving your money to a professional fund manager is one option, but often a bad idea. Most of them charge you a lot of money for not a lot of performance.
Plenty of investors have already woken up to this fact and prefer to put their money into cheap index-tracking funds instead. But this is when you hit another problem – which one to pick?
It’s all too easy to think you’ll get a decent exposure to the British stockmarket by buying a simple FTSE 100 tracker. But I think this is a mistake. Here’s why and what you should buy instead.
Most of us are familiar with the FTSE 100 - an index of the biggest 100 UK-listed companies measured by their market value. How it has performed during the day is mentioned on the news every evening and talked about in the next day’s newspapers. But is it a good investment?
You’d think that buying a fund that puts your money in about 100 different companies (the quarterly reshuffle can leave it with slightly fewer than 100) would be a good thing to do. After all, not putting all your eggs in one basket is supposed to reduce your investment risk, right? But I’m not sure it does in this case.
You see the FTSE 100 is dominated by a few big companies and industry sectors. By buying a FTSE 100 tracker fund, you are getting a pretty skewed exposure.
If you have a look at how the FTSE 100 is made up you’ll see what I mean. For example, six stocks - Royal Dutch Shell, HSBC, Vodafone, BP, Glaxo and British American Tobacco - account for 37% of the value of the FTSE 100. The ten largest stocks make up nearly half its value.
Personally, I’ve got nothing against concentrated stock portfolios (ones with large positions in a small number of stocks). They can allow you to make a lot of money. But if I’m going to run one, I’m going to select companies because they are good quality and can grow a lot, not just because they are big.
If you think about this a bit further, why should very big companies be good investments? The law of large numbers tells us that it’s very difficult for things that are already big to become proportionately much bigger.
For example, it’s a lot easier for a company with a value of £10m to increase in value by 50% than it is for a company with a market value of £10bn to do the same.
Now have a look at the industries your money is invested in via the FTSE 100. 31% is in energy and mining, 18% in financial companies and 8% is in pharmaceuticals - not far off 60% in just three areas. This hardly looks diversified and low risk to me. I’m not sre about the growth prospects either.
And yet the majority of the fund management industry benchmarks itself against indices like this that are heavily invested in just a few sectors (note the FTSE All-Share index is dominated by the FTSE 100 companies with around 45% of its value in the three areas above).
The dominance of big companies and big sectors may explain why the FTSE 100 may struggle to go up much in the years ahead. Luckily there’s a good alternative to buying the FTSE 100.
If you are going to buy a UK index tracker fund, you might be better off buying one that tracks the FTSE 250 index - the 250 next biggest companies outside the FTSE 100.
Over the last decade, it has been consistently a much better home for your money, as it contains lots of smaller companies that find it easier to grow.
It’s also a much more diversified and less risky investment than the FTSE 100. Not only does it contain more companies but it is much more evenly spread across companies and industries. For example, builders merchant Travis Perkins (LSE: TPK) is the biggest company in the index but its market value only accounts for 1.16% of it.
As for what to buy, the HSBC FTSE 250 Index offers a cheap way to invest with a total expense ratio of just 0.29%. When buying these funds watch out for hidden platform costs though (costs that can be charged by some fund supermarkets or fund wrappers for holding these funds). Sometimes it can be cheaper to buy direct from the providers (the HSBC investor services line is 0845 745 6123).
QE has done very well at heading off depression. But continuing with it now risks disaster. So what should investors do? James Ferguson reports.
I'm not sure the FTSE 100 Index ever has less than 100 companies - it can have more than 100 shares, as when Schroder with its voting and non-voting shares is in the index.
Another fund readers might like to consider is the Vanguard FTSE UK Equity Income Index Fund. It is dirt cheap and in performance the equal of the sainted Woodford's High Income Fund.
From what I have read over the years the FTSE 100 and 250 indexes are cyclical and can reverse in performance. As ever i'm not convinced you can time this well though. Your data should include 20 and 30 year periods please.
Right or wrong I go for whatever FTSE tracker charges are the cheapest as I think this will have a greater effect over the long term.
The iShares FTSE 250 (ticker: MIDD) has only got a TER of 0.4% with no Stamp Duty and you can trade it anytime during LSE opening hours. This avoids the problem of trading Unit Trusts, when you only know the Bid or Offer price a day after you’ve placed your Order.
If the tracker fund is an open ended investment company (OEIC) - like the HSBC one I mention - then it will have a single price. However, you will probably have to pay a a dilution levy when you sell it.
Based on what I have seen, the costs of stamp duty and the dilution levy on the OEIC are similar to the bid-offer spread on the HSBC FTSE 250 ETF. TER's may be very slightly higher on the ETF's. The cost of ownership may not be that much different between the two.
The ability to trade the ETF throughout the day does offer more flexibility for those wishing to trade a lot. Those investors wishing to hold for long periods should not worry too much if they own the OEIC.
Probably no change. Index generally is only going side ways. It is a shame that times like now where almost 0 interest rates at the banks the stock market should use this times as an opportunity, but sadly they do not. Those on top running the stock market for years now think that their job is to ensure that morons like us investing their money will disappear over the long run.
You are quite right about the FTSE 100 but I can't see why you think the article is bull when you agree with it. Phil is recommending avoiding the FTSE 100 for reasons he sets out better than you have.
Phil, another option I have been looking at is the Schroder UK midcap investment trust. Its charges seem high for an IT but it's at 14% discount. Any opinion?
Actually I think I answered my own question. Assuming I was not trading to benefit from cyclical changes in the discount, the effect of the discount at 14% is simply to increase the yield (2.2%) to around 2.8% which doesn't compensate for a management fee of 0.8% plus a performance fee of up to 1% when the HSBC fund mentioned has a TER of 0.
Not only do most unit trust charge way too much to make the risk worthwhile for investors but the Schroder UK midcap UT, managed by the same chap as the IT, has been a dog.
I started drip feeding into Ftse Allshare tracker in early 2003 right at the bottom of the market. That has returned slightly more than the ftse100 at about 120% increase on those early installments. I wish now though having read this article that I'd opted for the 250 instead. What an expensive choice that was in hindsight, however I'm not about to shift to a ftse 250 tracker now because I can't help feeling that when looking at the charts for the 250 overlayed with a range of other common indices that the 250 is so completely out of step with all of them that, like a pace setter in a race, eventually has to come back into the pack.
The Index Ret (Retail) is the standard tracker charge while the C class is for the clean investment class. The latter unbundles the platform/financial advisor charge and hence will be cheaper.
As to which you use it may make little or no difference. Some investment platforms already refund the platform fee, whilst others that may not offer the C class option or charge you for holding it. Be wary if they charge you as it can be very high.
The best option for you depends on your platform provider so check with them. Firstly, find out if the platform gives 100% commission rebates. If it does then the share class doesn't matter. Otherwise, find out whether you can hold c class option, whether it costs extra if you do &, if so, how much.
Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
Giving your money to a professional fund manager is one option, but often a bad idea. Most of them charge you a lot of money for not a lot of performance.
Plenty of investors have already woken up to this fact and prefer to put their money into cheap index-tracking funds instead. But this is when you hit another problem – which one to pick?
It’s all too easy to think you’ll get a decent exposure to the British stockmarket by buying a simple FTSE 100 tracker. But I think this is a mistake. Here’s why and what you should buy instead.
Most of us are familiar with the FTSE 100 - an index of the biggest 100 UK-listed companies measured by their market value. How it has performed during the day is mentioned on the news every evening and talked about in the next day’s newspapers. But is it a good investment?
You’d think that buying a fund that puts your money in about 100 different companies (the quarterly reshuffle can leave it with slightly fewer than 100) would be a good thing to do. After all, not putting all your eggs in one basket is supposed to reduce your investment risk, right? But I’m not sure it does in this case.
You see the FTSE 100 is dominated by a few big companies and industry sectors. By buying a FTSE 100 tracker fund, you are getting a pretty skewed exposure.
If you have a look at how the FTSE 100 is made up you’ll see what I mean. For example, six stocks - Royal Dutch Shell, HSBC, Vodafone, BP, Glaxo and British American Tobacco - account for 37% of the value of the FTSE 100. The ten largest stocks make up nearly half its value.
Personally, I’ve got nothing against concentrated stock portfolios (ones with large positions in a small number of stocks). They can allow you to make a lot of money. But if I’m going to run one, I’m going to select companies because they are good quality and can grow a lot, not just because they are big.
If you think about this a bit further, why should very big companies be good investments? The law of large numbers tells us that it’s very difficult for things that are already big to become proportionately much bigger.
For example, it’s a lot easier for a company with a value of £10m to increase in value by 50% than it is for a company with a market value of £10bn to do the same.
Now have a look at the industries your money is invested in via the FTSE 100. 31% is in energy and mining, 18% in financial companies and 8% is in pharmaceuticals - not far off 60% in just three areas. This hardly looks diversified and low risk to me. I’m not sre about the growth prospects either.
And yet the majority of the fund management industry benchmarks itself against indices like this that are heavily invested in just a few sectors (note the FTSE All-Share index is dominated by the FTSE 100 companies with around 45% of its value in the three areas above).
The dominance of big companies and big sectors may explain why the FTSE 100 may struggle to go up much in the years ahead. Luckily there’s a good alternative to buying the FTSE 100.
If you are going to buy a UK index tracker fund, you might be better off buying one that tracks the FTSE 250 index - the 250 next biggest companies outside the FTSE 100.
Over the last decade, it has been consistently a much better home for your money, as it contains lots of smaller companies that find it easier to grow.
It’s also a much more diversified and less risky investment than the FTSE 100. Not only does it contain more companies but it is much more evenly spread across companies and industries. For example, builders merchant Travis Perkins (LSE: TPK) is the biggest company in the index but its market value only accounts for 1.16% of it.
As for what to buy, the HSBC FTSE 250 Index offers a cheap way to invest with a total expense ratio of just 0.29%. When buying these funds watch out for hidden platform costs though (costs that can be charged by some fund supermarkets or fund wrappers for holding these funds). Sometimes it can be cheaper to buy direct from the providers (the HSBC investor services line is 0845 745 6123).
QE has done very well at heading off depression. But continuing with it now risks disaster. So what should investors do? James Ferguson reports.
I'm not sure the FTSE 100 Index ever has less than 100 companies - it can have more than 100 shares, as when Schroder with its voting and non-voting shares is in the index.
Another fund readers might like to consider is the Vanguard FTSE UK Equity Income Index Fund. It is dirt cheap and in performance the equal of the sainted Woodford's High Income Fund.
From what I have read over the years the FTSE 100 and 250 indexes are cyclical and can reverse in performance. As ever i'm not convinced you can time this well though. Your data should include 20 and 30 year periods please.
Right or wrong I go for whatever FTSE tracker charges are the cheapest as I think this will have a greater effect over the long term.
The iShares FTSE 250 (ticker: MIDD) has only got a TER of 0.4% with no Stamp Duty and you can trade it anytime during LSE opening hours. This avoids the problem of trading Unit Trusts, when you only know the Bid or Offer price a day after you’ve placed your Order.
If the tracker fund is an open ended investment company (OEIC) - like the HSBC one I mention - then it will have a single price. However, you will probably have to pay a a dilution levy when you sell it.
Based on what I have seen, the costs of stamp duty and the dilution levy on the OEIC are similar to the bid-offer spread on the HSBC FTSE 250 ETF. TER's may be very slightly higher on the ETF's. The cost of ownership may not be that much different between the two.
The ability to trade the ETF throughout the day does offer more flexibility for those wishing to trade a lot. Those investors wishing to hold for long periods should not worry too much if they own the OEIC.
Probably no change. Index generally is only going side ways. It is a shame that times like now where almost 0 interest rates at the banks the stock market should use this times as an opportunity, but sadly they do not. Those on top running the stock market for years now think that their job is to ensure that morons like us investing their money will disappear over the long run.
You are quite right about the FTSE 100 but I can't see why you think the article is bull when you agree with it. Phil is recommending avoiding the FTSE 100 for reasons he sets out better than you have.
Phil, another option I have been looking at is the Schroder UK midcap investment trust. Its charges seem high for an IT but it's at 14% discount. Any opinion?
Actually I think I answered my own question. Assuming I was not trading to benefit from cyclical changes in the discount, the effect of the discount at 14% is simply to increase the yield (2.2%) to around 2.8% which doesn't compensate for a management fee of 0.8% plus a performance fee of up to 1% when the HSBC fund mentioned has a TER of 0.
Not only do most unit trust charge way too much to make the risk worthwhile for investors but the Schroder UK midcap UT, managed by the same chap as the IT, has been a dog.
I started drip feeding into Ftse Allshare tracker in early 2003 right at the bottom of the market. That has returned slightly more than the ftse100 at about 120% increase on those early installments. I wish now though having read this article that I'd opted for the 250 instead. What an expensive choice that was in hindsight, however I'm not about to shift to a ftse 250 tracker now because I can't help feeling that when looking at the charts for the 250 overlayed with a range of other common indices that the 250 is so completely out of step with all of them that, like a pace setter in a race, eventually has to come back into the pack.
The Index Ret (Retail) is the standard tracker charge while the C class is for the clean investment class. The latter unbundles the platform/financial advisor charge and hence will be cheaper.
As to which you use it may make little or no difference. Some investment platforms already refund the platform fee, whilst others that may not offer the C class option or charge you for holding it. Be wary if they charge you as it can be very high.
The best option for you depends on your platform provider so check with them. Firstly, find out if the platform gives 100% commission rebates. If it does then the share class doesn't matter. Otherwise, find out whether you can hold c class option, whether it costs extra if you do &, if so, how much.
Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
No comments:
Post a Comment