Starting a HL Portfolio
Today’s post is about starting a HL portfolio – a portfolio with Hargreaves Lansdown, one of the most popular platforms in the UK.
Back in April this year, I wrote about my cousin wanting help with setting up a new ISA account.
- He’d originally asked for help back in August 2015, but then decided to wait until the new tax year.
This meant that I had to wade through all the platform and trading costs to work out which account he should open.
My conclusions were:
- It’s much cheaper to have larger portfolios (£250K seems to work well).
- Only iWeb and YouInvest were cheap for funds, and YouInvest have just doubled or tripled their charges for funds.
- Only iWeb and YouInvest were cheap for stocks (and ETFs and investment trusts)
- The YouInvest fees for stocks weren’t increased along with their fund charges
- I subsequently discovered1 that Fidelity are also cheap for a (not so) limited range of ETFs and investment trusts
At this point you must be wondering why the article is about starting a portfolio with Hargreaves Lansdown (HL), since they didn’t come out on top:
- they have a higher annual platform fee for funds (0.45%) than other providers
- they have a higher annual cap for stock fees in a SIPP (£200) than other providers
- their dealing costs are high (£11.95 per stock trade)
Their annual fees cap for stocks in an ISA is competitive, at £45 per year.
- This is the 0.45% fee on a £10K portfolio, so even one year’s full ISA contribution invested in stocks (£15K, rising to £20K next year) will start to show savings.
Back to “Why HL?”
- My cousin still hasn’t opened his new ISA – he has half of the tax year remaining
- But a friend of mine (we’ll call him Max, but that’s not his real name) has asked me to help him manage his ISA.
This ISA exists, and it has money in it, and it’s with HL.
- I like and use HL.
- Their service is excellent, but they aren’t cheap.
- But they do have once nice feature that I’m not aware is available on the other platforms.
HL allow you to link two or more accounts together so that they can be managed from a single log in.
- The service is designed to allow the financial member of the family to look after everyone’s accounts at once
- But you don’t have to be family to use it.
I use it already to look after my partner’s accounts, and I’ve used it in the past to manage a company stocks account.
Setting it up is pretty straightforward:
- You need the username, date of birth and password for the account in order to link
- Once linked, you never have to enter these again
- Links are one-way – if you manage someone else’s account, they can’t see the details of your account
Once the accounts are linked you can do most of the things you can on your own account:
- Monitor performance
- Access statements, valuations and tax certificates
- Read email notifications
- Check the amount subscribed in the tax year
- Carry out portfolio analysis
You can even place trades, using the second trading password if you know this.
- HL don’t recommend sharing the trading password.
What you can’t do is take money out of the account (or even move money between two HL accounts).
- HL stock accounts are linked to a single bank account (usually the holder’s current account)
- All money into and out of the account comes through this bank account
Max and I haven’t worked out the details of how we’ll manage the account, but since he works full-time and I don’t it’s likely that we’ll agree a strategy in advance and then I will execute it.
Max has no existing ISAs (he has some workplace pensions) so this will be a gentle introduction to the world of stocks and shares.
- We’ll start with low-risk investments, and work our way out (Max has a high risk tolerance).
The account has £9K in cash at the moment, and Max is adding £500 a month (£6K a year).
- So by the end of this tax year, we’ll have £13K
- At the end of the 2017/18 tax year, we’ll have £19K
Max is younger than me, and should be working for another 5 to 10 years.
- So if he sticks with this account, he’ll end up contributing something like £40K to £70K into it.
This is a lot less than I’d like (£250K is a lot easier to work with), but it’s not impossible.
The table below shows how I’d like to arrange the portfolio, and the annual charges it would attract (not including ongoing charges for ETFs and Trusts).
The idea is that we start with passive ETFs, add in a few investment trusts, and work our way towards individual UK stock holdings as the portfolio gets larger.
- I’ve used the value of the money put into the account here, though obviously we hope the account will grow over time.
- We’re roughly aiming for a 50:50 split between passive ETFs and active ITs and stocks
- The £45 annual cap on stock fees works well here, with the annual charge falling from 0.45% in the first year to only 0.06% by year 10.
- Instead of whittling down their long list into your short list, you have to start from a list, and check individually whether each ETF or IT can be traded on the HL system
- It’s almost as if they’d rather you bought the active funds that make them more money.
So we’ll have to start with some (passive tracker) funds in order to buy enough time to come up with short lists for ETFs and ITs.
The chart above shows plan B.
- The first £10K goes into tracker funds to buy time
- The rest follows the original plan, with a rough 50:50 split between passive and active
The snag is that this doubles the annual charges:
- £45 on the £10K of funds
- £45 on everything else (ETFs, ITs, stocks)
But it’s only £45 a year, and by the time the portfolio hits £50K, this will be less than 0.2% pa extra.
HL has a list of 13 of what it calls “Core Trackers”.
- These are basically tracker funds that HL has negotiated a discount on.
In choosing them, HL looked for:
- which index they track (they like broad ones)
- how low they could get the costs
- replication strategy (HL prefer full replication over partial since it leads to better tracking)
- stock lending (HL are ok with it as long as some of the revenue is used to lower costs and the fund manager “takes steps” to control the associated risks)
The list of 13 funds is shown in the table below:
Eight of the funds are from Legal & General, four are from BlackRock and one is from HSBC.
The HL Portfolio
Here’s my simplified table showing our planned allocations and charges:
With a £10K portfolio and equal weightings, it’s mostly a question of choosing which three funds to leave out.
- there are 3 UK equity funds
- there are 6 international equity funds
- there are 4 bond funds
I’m clearly not going to need 40% in bonds, so it’s easy to leave a couple of those out:
- I went for UK Gilts and Global Linkers
- We’re missing UK Linkers and UK Corporates, so I’ll look for those in the ETFs in due course
It’s easy to leave out the Global equity fund, since the other 5 international equity funds cover the same ground between them.
Which leaves us with 3 slots for the UK and 3 funds.
- In the end I doubled up on the FTSE-100 and left out the All-Share
- The impact of small companies on the All Share is minimal, and this sector is better covered by ETFs, investment trusts and individual stocks.
Here’s the portfolio again, without the funds that we aren’t using:
The charge for the portfolio of 10 funds is 0.11% pa, which is pretty reasonable.
- Unfortunately we have to add on the platform charge of 0.45% pa, which brings us up to 0.56% pa
- This is not great, but it’s probably less than the majority of investors are paying, and this is on a very small portfolio.
We have a workable small portfolio at a reasonable cost.
We’re missing any assets other than equities and bonds, and we also don’t have any exposure to “themes” (eg. biotech, water etc).
- I’ll look to add these through the ETFs and investment trusts
- I’ll also aim to at least maintain the current annual costs as the portfolio grows and becomes more diversified.
But at least today I’ve bought myself three months to come up with a shortlist of around 10 ETFs and 10 investment trusts.
Until next time.
- Via a reader [↩]