Switching from US ETFs to UK investment trusts

What consumer protection would I need to invest in a global equity fund? I'm happy to make my own decisions where to invest my money.

I don't actually offer investment advice to anybody on here. I just answer questions posed by other posters where I can and occasionally suggest what I would probably do in their stated circumstances.

While I certainly don't doubt that you are highly qualified to offer investment advice, I would note that I have corrected you twice already on this thread.
 
Sarenco,

You said and I quote “In any event, US ETFs cannot be distributed to EU-based retail investors without a KID so this is all a bit academic”

That statement was corrected by me and then you, once again, launched into an attack on a service that seeks to provide a solution to the subject of this thread.

You think a lot of yourself if you think that all of my posts are addressed to you personally.

When you ask “why would I need” you display a lack of appreciation of the needs of the vast majority of the investing public.

Furthermore, your approach has been consistently hostile to my posts which you seek to undermine at every opportunity. Given that you are annoymous and I am not in my view that displays a high degree of cowardice on your part.

Many people don’t have the same confidence as you do to make their own investment decisions.

They value the services and associated legal protections of working with an adviser.

You may choose not to do so and that is your right, but by constantly undermining my posts, you actually restrict the availability of informed commentary to the very investors you are trying to help.
 
Sorry Marc but that statement wasn’t corrected by you.

It is absolutely correct to say that US-domiciled ETFs cannot be distributed to EU-based retail investors without a KID.

Sure, an investor can hire a DFM to access these funds but I’ve shown that investing in an investment trust, such as FRCL, is a materially more cost effective solution. Hence, in my opinion, the fact that US ETFs can be accessed by EU-based retail investors through a DFM is all a bit academic.

You are obviously free to take a different view. But you are not entitled to your own facts - I will try and correct any errors or misleading statements when I see them.

If that’s hostile to your interests, well, so be it.
 
Hi Marc,

A few questions if I may, as the costs appear lower than I expected (certainly lower than I currently pay on some of my investments).

1. Assuming it's an appropriate investment strategy for me, if I invest via a discretionary manager, can I direct that my funds be invested in specific ETFs, or have I given over control to DM to make investment decisions once it follows agreed strategy?

2. On the costs side, at a high level would the costs that Sarenco quoted above from an earlier post of yours be representative of the total costs? Taking an example of 100k investment, are there other upfront or ongoing costs, of does that include initial financial planning / advice?

Thanks,
Red.
 
Before I answer RedOnion I will set the record straight on this:

1) Ex-ante
I have shown ex-ante that the overall cost of ownership is lower since the RIY figure calculated by FRCL is 1.2%pa (which includes such things as the cost of borrowings to provide leverage)
The RIY I calculated was 0.82%. This is not the TER as was stated above. So, on a like for like basis, the US ETF portfolio is "a materially more cost effective solution"

In addition, to purchase an Investment Trust, an investor would need to pay brokerage costs, Stamp Duty, stock exchange levy and the FX cost to transfer from Euro to Sterling.
Although I'm obtaining wholesale rather than retail FX I'm willing to let that point slide. But all things being equal, the cost to deal will be higher for FRCL just on the basis of the Stamp Duty.

QED

2) Ex-post

Now, in a slightly ironic twist, we actually use Investment Trusts in some of our sophisticated planning strategies so I actually have the historic share-price for FRCL (using monthly data from Bloomberg for the period 1988-2014). For the avoidance of doubt, we recommend that where suitable, some of our clients use Investment Trusts in order to create a proxy for a US ETF portfolio.

To be clear, it is a mathematical certainty (Bill Sharpe calls the arithmetic of active management) that ex-ante a US ETF portfolio will be cheaper, but for certain clients the fact that they pay little or no tax trumps that.

So, to present the case historically, I have taken the index data for the FTSE All World Index and adjusted it downwards by 140bps (1.40%pa) to match the ongoing total costs including financial advice of a typical investment portfolio constructed from US ETFS.

The results are presented below in Irish Punts/Euro at the market exchange rate for both Sterling and US$:


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F&C source Bloomberg 2014. FTSE Data published with permission of FTSE

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Past performance is no guarantee of future investment returns

I'll leave it there
 
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RedOnion

1. Assuming it's an appropriate investment strategy for me, if I invest via a discretionary manager, can I direct that my funds be invested in specific ETFs, or have I given over control to DM to make investment decisions once it follows agreed strategy?

To be clear this isn't an execution only service. You would need to work with an adviser who takes on the suitability responsibility.

However. we use a sophisticated algorithm to allow us to create many hundreds if not thousands of investment portfolios around investor preferences whilst maintaining an efficient portfolio asset allocation.

Each investor has their own personalised investment mandate which is constructed using a series of decisions.

So, for example, in certain implementations, Irish Investors can exclude REITS from some portfolios where they might be already overweight in property.

We have the Irish Tax optimised solution built around US ETFs, and via certain custodians we can build out a US ETF portfolio using either passive funds only or progressive tilts to smart-beta ETFs with progressive exposure to smaller companies or value stocks for example but you could just build a 100% passive low-cost portfolio its entirely up to you. Equally, you could have an Ethical Emphasis portfolio, an actively managed portfolio.

Each implementation might have up to 100 portfolios along the risk curve so you can see that we are able to cover off the needs and preferences of most investors without the typical shoehorning into 3 models that you see with other solutions in the Irish market. Although, I can't think of any specific Global Portfolios that only offer three options, in Ireland, can you?

If you decide you want to change the construction of the portfolio you just need to complete a new investment mandate.

Equally, we can test any particular combination of funds that an investor might hold or select against the efficient frontier in order to illustrate if you would be potentially better off on a forward-looking basis.


2. On the costs side, at a high level would the costs that Sarenco quoted above from an earlier post of yours be representative of the total costs? Taking an example of 100k investment, are there other upfront or ongoing costs, of does that include initial financial planning / advice?

Again, I have described the cost of the discretionary service which is separate from any financial advice that you might need.

I've also listed the additional incidental costs you would incur (including the cost of ongoing tax compliance which is a feature of the self-assessment tax system in Ireland)

That last point is entirely between you and your advisers and so difficult to quantify but is on both sides of this debate since you would need to engage a tax consultant if you really wanted to understand the extent of your tax liability for certain investments.

However, if you don't need financial advice, you shouldn't have to pay for it. But I can't honestly say that I've ever met anyone who wouldn't benefit from good financial advice.

Which is why I will continue to post on AAM
 
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For the sake of completeness, here is my UK Investment Trust Portfolio compared to FRCL

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Warning: For educational purposes only
Warning: Past performance is no guarantee of future investment returns

And the same portfolio to the end of August 2018 reported in Euro from Morningstar with FRCL:LN as the assigned benchmark
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What do those last numbers mean?

The average extra return (alpha) that the portfolio earned above the benchmark (FRCL) was 1.66%pa over 10 years.

From that you don’t need to deduct any investment costs as they are already baked into the calculation by
Morningstar.

So you would need to deduct advice, custodian and dealing charges.

If you built the portfolio yourself, you would have to pay the same (or possibly more) to deal the underlying trusts.

So if your only measure of the value of advice is the excess return earned above a randomly selected benchmark then I could have charged up to 1.66%pa and still been cost neutral.

However, if I add on the benefits of say tax planning then I could potentially add another 2% to 3%pa for some clients.
 

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And yet the share price return (what actually matters to investors in ITs) of FRCL modestly outperformed its benchmark (currently FTSE All-World, Total Return) over the 10 years ended 31 December 2017 -
[broken link removed]

Or from Morningstar (compare return with the Primary Prospectus benchmark return) -
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And that's before you adjusted the benchmark by 140bps :eek: per annum to match the total ongoing costs, including financial advice, of holding a typical portfolio of US ETFs. Or 82bps if you didn't need financial advice (assuming you could actually access this portfolio on an execution-only basis).

Not predictive of future returns, obviously, but in investing you typically get what you don't pay for.
 
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i’ve nothing against Marc but i don’t like the style of posting if i was looking to invest and came on askaboutmoney trying to find the best way to do it your postings would totally put me off .

I feel like your deliberately trying to make investing sound way more complicated than it is , if you buy FRCL your getting good diversification , all these 100’s of portfolio’s and risk curves your talking about just makes me annoyed .
You benefit by making investing seem complex so people come to you and you take a cut , these cuts are going to have more of a drag on a portfolio than the small charges at FRCL.

Buy cheap with degiro and hold investment trusts would be my advice for free , it’s simple do it yourself and top it up regularly . Look at who is telling you otherwise and ask yourself why .
 
@Marc

Thank you for detailed response.

One last question if I may regarding Tax so I have this clear in my head.

Marc said:
Apologies for sounding like a broken record but once again, I’m the bearer of bad tidings for some of you I’m afraid.

UK trusts are domiciled in the UK and therefore subject to UK inheritance tax.
Click to expand...

Does the above mean to say that if I for example, (Irish resident / domiciled) hold shares in a publicly traded UK investment trust when I die, that the inheritance would be subject to UK inheritance tax?

Thanks,
Red.
 
RedOnion said:
@Marc


Does the above mean to say that if I for example, (Irish resident / domiciled) hold shares in a publicly traded UK investment trust when I die, that the inheritance would be subject to UK inheritance tax?

Thanks,
Red.
Click to expand...


Yes UK situs assets are liable to UK inheritance tax and US situs assets are subject to US Estate tax.

That doesn’t necessarily mean that you will have to pay any UK tax, but you do need to understand the law of succession and the estate taxes section of the UK and Ireland double tax treaty before you go off and buy assets abroad and technically some people will need a UK Will, which I can arrrange, and save up to 73% tax, but look I’m just being self-serving, forget I mentioned it.

I’m just making things complicated again, by drawing attention to those pesky inconvenient, facts, again.

I’ll try to remember to be a good poster...

Hey, bitcoin seems like a good idea.....


click to schedule a call
 
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Sarenco said:
I appreciate you take the view that an investor is more likely to stick with a strategy if they have hired an advisor. Personally, I think that's self-serving nonsense but others may well take a different view.
Click to expand...

In fairness, I wouldn't expect to get a call from you Sarenco, you are perfectly comfortable in doing your own thing. Just like my father in law who would never phone a tradesman to do a job. But there are lots of people who aren't; aren't interested in learning or can make more money running their own business and outsourcing the investment part.

Some people get benefit from using an advisor, others don't. That's perfectly fine with me.


Steven
www.bluewaterfp.ie
 
Apologies for sounding like a broken record but once again, I’m the bearer of bad tidings for some of you I’m afraid.

UK trusts are domiciled in the UK and therefore subject to UK inheritance tax.

The nil rate band is currently £325,000 with anything above that is subject to UK inheritance tax at a rate of 40%.

So if a sole investor holds more than the nil rate band the estate is subject to UK IHT.

Under the double tax treaty the country where the asset resides (the lex situs) has the right to tax. So UK law applies and a credit is given against Irish tax.

Now, if the account is joint between a married couple or civil partnership things get more complex.

If the first to die is a UK National and the other one isn't then HMRC see the surviving spouse as “non domiciled”

There is a restriction on non domiciles inheriting UK assets (like my Irish wife inheriting from me on my death) the max tax free amount is twice the nil rate band (£650k )

Anything in excess is subject to UK IHT at 40%.

Since there is no tax on transfers between spouses/civil partners in Ireland then there is no credit given against Irish CAT.

Worst case scenario tax at 73%.

Standard UK trust planning won’t work because of a timing difference between UK IHT and Irish CAT so a “typical” UK Will will also trigger the tax liability.

Most of the UK Wills I’ve reviewed don’t work for Irish investors holding UK assets.

We are not talking about UK Trusts, we are talking about UK INVESTMENT TRUSTS, quoted on LSE. A totally different animal. these are shares and we are just talking about taxes associated with shares
 
Thanks I hadn't noticed that typo

If now reads

"UK Investment Trusts are mainly listed on the LSE and therefore domiciled in the UK and therefore subject to UK inheritance tax."

We are of course talking about the same thing but thanks for bringing it to my attention.
 
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"We are not talking about UK Trusts, we are talking about UK INVESTMENT TRUSTS, quoted on LSE. A totally different animal. these are shares and we are just talking about taxes associated with shares"

Am I reading this correctly:

UK Investment Trusts are treated as shares for tax purposes (same as ETF for Tax Purposes so CGT losses cannot be applied against them? So taxed as Equity Funds.

Examples: Foreign & Colonial (FRCL:LSE) or Scottish Mortgage Investment Trust (LSE: SMT)
 
owenmcg said:
Am I reading this correctly:

UK Investment Trusts are treated as shares for tax purposes (same as ETF for Tax Purposes so CGT losses cannot be applied against them? So taxed as Equity Funds.

Examples: Foreign & Colonial (FRCL:LSE) or Scottish Mortgage Investment Trust (LSE: SMT)
Click to expand...

Yes and no. Yes they are treated as shares. But no, not the same as ETFs -- I don't know how you made the leap from shares to ETFs. They're treated like any equity -- CGT on gains, marginal rate of income tax on dividends.
 
"They're treated like any equity -- CGT on gains, marginal rate of income tax on dividends. "

That's the answer I was looking for,:) the ability to use CGT losses as opposed to ETF & Equity Investment Funds where you cannot. :(

Am I correct?
 
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