Monday, 14 May 2007
This step of the creation of the new diversified UK portfolio required translating the asset class selection into an actual fund to purchase. The process turned out to be somewhat iterative as I discovered that my initial intention to obtain diversification by buying US small cap and value funds could not be done since there are no such low-cost funds (there are probably high-cost actively managed OEICs or unit trusts but those have been excluded from the potential purchase list due to the harmful effect of those fees) available on the UK markets. Instead I picked European ETFs from the iShares stable. Since the low correlation behaviour of small cap (e.g. this research paper) and value funds (see this reference at Dimensional Fund Advisors and this research paper titled Global Portfolios with Market, Size and Value Considerations) has been found to hold internationally as well as in the US, this switch seemed reasonable to do.
The result of the search and selection process is shown on the spreadsheet summary with the fund names in the boxes of each asset class. I conducted the fund search through a combination of the iShares UK website, since they are the only company currently offering ETFs on the UK market, the TrustNet website and the SelfTrade broker website (another reason that it won out as my next post explains). It is interesting (to me at least!) that there are a few index-tracking low cost OEIC (i,e, not ETF) funds available to represent the UK FTSE index and a pan-European index. The reason I chose them instead of the comparable iShares ETF, is that the ISF only holds the 100 largest UK FTSE-listed companies, whereas the M&G UK Index Tracker holds the whole market and has a lower expense ratio (0.30% vs 0.40%). Similarly, the M&G European fund is far more representative than the largest 50-company iShares DJ Stoxx 50.
So that's it, with eight holdings, there are around 2000 companies from around the world that will form part of the total portfolio.
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