How to build a low cost investment portfolio

The basics of investing in low-cost ‘passive’ funds, and some possible options for your own portfolio.

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. Rob Morgan

Minimising costs is an easy way to assist long-term performance. Charges act as a drag on returns, and over time they can significantly reduce the size of your investment pot.

For instance, if you invest £100 per month for 10 years in a fund that achieves growth of 6% a year, your investment would be worth £16,388 at the end. However, increase charges by 0.5% a year and the sum falls to £15,951, and up them by 1% and it reduces to £15,528.

One way to reduce costs is through passive investments or ‘trackers’. These aim to replicate the performance of an index, say, the FTSE 100, rather than beat it. This is in contrast to active funds, which aim to outpace the market over the longer term. Often they don’t, though, partly because their fees are higher.

We believe there are pros and cons for both methods of investing. Charges are generally lower for passive funds, especially the competitive ones. They are also simple and transparent – you should get a similar return to the relevant market, albeit they usually end up marginally underperforming due to the charges, however small they are.

In contrast, active management can lead to a wider range of possible returns – potentially good if the manager gets things right, but also bad if they don’t. For those who prioritise cost, or simply don’t believe active managers can consistently outperform in a particular investment area, passive investing represents the potentially more appealing route.

Passive funds on the Foundation Fundlist

The market for passive or tracker funds following major indices is highly competitive. A number of fund ranges including those from Fidelity, Vanguard, Legal & General and BlackRock’s iShares have driven down the cost of investing.

When selecting this type of fund for the Foundation Fundlist, our list of preferred investments across the major sectors, overall cost and transparency are the key factors.

There are a huge number of passive funds available covering a wide variety of markets, and even specific sectors. For those that are interested in constructing a low-cost passive portfolio our Foundation Fundlist provides some basic options in the major investment areas including:

UK Equities

Fidelity Index UK P (TOC* 0.05%)

Global equities

Fidelity Index World P  (TOC 0.12%)

International equity markets

Fidelity Index Europe ex UK (TOC 0.05%)

Fidelity Index Emerging Markets (TOC 0.22%)

Legal & General Pacific Index (TOC 0.15%)

Fidelity Index US  (TOC 0.06%)

Please note inclusion here does not imply a specific buy recommendation and past performance is not necessarily a guide to the future. The value of investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Our usual charges apply to holding tracker funds on top of the fund’s own charge.

*TOC - The Total Ongoing Charge represents all the annual costs of the fund. It includes the Ongoing Charges Figure (OCF), which comprises the cost of investment management and administration, plus other costs of running the fund, such as fees for custodians (organisations that hold the assets safely for the investment managers), regulators and auditors. In addition it takes account of trading costs in the underlying investments and any ancillary costs such as performance fees. These figures can change and are correct at the date of this article.

Older passive funds

If you have longstanding tracker funds in your portfolio it is worth checking the charges. Some older passive funds have relatively high annual charges, sometimes amounting to many times the cost of the ones listed above. Investors in these funds may wish to consider alternative investments as the relatively high charges could result in poorer returns over the longer term.

Even more options: Exchange Traded Funds (ETFs)

ETFs offer further passive options ranging from conventional equity indices to esoteric ones such as individual countries or sectors. Unlike funds that are priced once a day ETFs are traded on the stock exchange, which means pricing is normally continuous during market hours.

For this reason they may appeal to shorter-term traders as well as investors with larger sums looking to track a given index for the long term. ETFs are designed to be low cost products, but it’s important to note that as well as the annual charge there are costs associated with dealing in shares – stockbroking commission, stamp duty and the ‘spread’ between buying and selling prices. Therefore they may be less cost effective than funds when dealing in smaller amounts. Major providers of ETFs include db X-trackers, ETF Securities, iShares and Vanguard.

The risks of ETFs vary significantly. Not only do they invest in all sorts of different areas, some of which can be exceptionally volatile, but they have a variety of different structures which makes it very important to understand what you are buying. In particular, those based on derivatives rather than physical holdings have additional risks.

 

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

More from author

  1. Rob Morgan

    The rise of giant tech stocks means greater ‘concentration risk’ for investors

    Date: 20th May 2019 15:30pm

    The meteoric rise in tech stocks has resulted in an imbalance in certain market indic...

  2. Rob Morgan

    June's most widely bought and sold funds

    Date: 20th May 2019 15:30pm

    We reveal the funds most commonly bought and sold by customers using Charles Stanley ...

  3. Rob Morgan

    June’s top and bottom performing funds

    Date: 20th May 2019 15:30pm

    A round up of the notable market and fund sector trends in June as the developed worl...

Most read articles

  1. How to build a low cost investment portfolio

    June's most widely bought and sold funds

    Date: 20th May 2019 15:30pm

    We reveal the funds most commonly bought and sold by customers using Charles Stanley ...

  2. How to build a low cost investment portfolio

    June’s top and bottom performing funds

    Date: 20th May 2019 15:30pm

    A round up of the notable market and fund sector trends in June as the developed worl...

  3. How to build a low cost investment portfolio

    Harnessing the power of technology in your portfolio

    Date: 20th May 2019 15:30pm

    Rob Morgan looks at the tech sector and our favoured investment in the area, Allianz ...

Investment involves risk. You may get back less than invested.