FTSE ex-UK v All Cap. What’s the craic?

[johnboy99]

Hey Folks

So I’ve been doing my research on a fund to invest into in 2024 (S&S) once the new tax year arrives and I’m hedging towards FTSE Developed World ex-UK. (VDWXEIA)

Comparing this to the FTSE Global All Cap and the ex-UK has comfortably beaten it year on year

ex-UK - 1 year 20.33%, 3 year 40.98%, 5 year 84.78%, 10 year 230.07%, inception 527.23%

All Cap - 1 year 16.52%, 3 year 32.08%, 5 year 69.73%, 10 year N/A, inception 102.21%

What am I missing?? I see lots of chatter on the All Cap but very little on the ex-UK even though it’s historically outperformed the All Cap and has a 0.09% lower OCF.

These are both Vanguard funds btw.

 

[joltor0517]

@johnboy99 Theyre not really like for like funds.

The main difference is that the developed world fund doesn't include any emerging markets, it's only developed economies. It's a perfectly reasonable fund to invest in but it's taking a decision that you believe that developed economies will continue to outperform developing economies for the foreseeable future. A lot of people aren't confident enough in that prediction to bet their £££ on it hence they'd rather have exposure to a fund that incorporates emerging markets too like global all cap.

 

[harley]

@joltor0517 The large weighting to China has really hurt emerging markets tracker performance recently. EM ex-China has probably been doing ok.

Just checked VFEM (Vanguard EM ETF), that has a 27.2% China weighting after the China underperformance.

Trustnet chart comparing Vanguard VFEM (incl. China) to Amundi EMXC (excl. China)

 

[rjtiller]

@johnboy99 This will take a while to answer but I hope you will read through it all.

1) The FTSE Global All Cap Index Fund is the most neutral, multifactor, passive fund out there. By choosing this fund you are effectively saying thank you to every active institutional/ retail trader, money manager, hedge fund, options trader (etc). These people are collectively setting the price of every stock and if you believe in market efficiency (you should), it's the perfect fund.

2) The above fund is what the average investor should choose.

3) Developed world ex UK is taking a position. You'll be excluding small cap stocks, UK stocks and all Emerging Market stocks. Why should you do this? The answer from a rational/logical side is, it's a bad idea. Perhaps, avoiding the higher fee fund is the most logical way of looking at it, but your post seems to be hinting that you want higher returns rather than a 0.09% lower yearly fee.

4) Where do stock returns come from? The answer is "expected" stock returns (using discounted cash flow models) and "unexpected" stock returns (you can't predict this one). Seeing as you can't predict the stock market (trust me, you can't), it's foolish to look at historical returns from the two funds and use it to predict future growth (you can't invest in a back-test). There has also been a lot of unexpected growth in large US companies in the past 10+ years, don't let the past cloud your current judgement when it comes to your money. Again, unexpected means unexpected.

5) When your knowledge on investing increases in the future (look at factor funds). You are far more likely to sell/switch the Developed World ex UK vs sell the Global All Cap Index Fund.

6) This is anecdotal: During the tech wreck of 2022, the UK stock market was one of the best performing indexes from around the world. Don't always assume that a higher allocation to the USA creates guaranteed out-performance. Diversification is your friend.

7) Neither of the two funds are a "bad fund". I've made my position clear that the FTSE Global All Cap Index Fund being better out of the two, but the other isn't necessarily a bad fund. Investing should be boring and picking a fund which is completely neutral to your own personal biases is probably a good thing, as you will be wrong.

8) Lastly I keep saying things like "you can't predict the stock market", "trust me, you can't predict it", "you will be wrong". Don't take these as insults. Fully knowing and understanding that you're completely inferior vs the hundreds of thousands, possibly millions of experts/institutional traders participating and competing against each other in Global Markets is actually the first step to becoming the best investor. Thinking "its easy, I'll just exclude small caps, UK stocks and EM stocks and I'll produce alpha returns in the future due to historical returns" will get you laughed out of any room with financial experts.

 

[rjtiller]

For the record OP, you're doing extremely well. You've learnt that passive and low fees are the most important thing in designing an asset allocation that will help you in wealth generation for long periods of time. Don't let whatever I've said above put you off. If you have any further queries, do reply

 

[johnboy99]

@rjtiller I appreciate the time that you took to write this up and I did read all of it. I don’t have any bias other than wanting to maximise returns for my family and the advice I’m hearing is that the All Cap, whilst it’s performed worse that the ex-UK in recent history would expose to the next big thing if China suddenly boomed etc

 

[rjtiller]

@johnboy99 Just go for All Cap. There is an ETF version (not Vanguard) that's slightly cheaper at 0.18% if that's of any interest.

If you want to maximise returns, definitely do a deep dive into factor funds, however these do not guarantee greater returns, and are often make up a smaller section of your portfolio.

 

[johnboy99]

@rjtiller Price isn’t a major factor right now - I only really included it as part of my initial post because of how I was seeing ex-UK vs the All Cap (better returns and cheaper - no one really talking about it, what am I missing etc) and probably won’t be unless something crazy happens and my portfolio explodes to 7/8 figures (I can dream). It’s more so about making sure I don’t miss out on something by not asking questions. Currently also reading Monevators posts.

 

[rjtiller]

@johnboy99 https://www.reddit.com/r/FIREUK/s/zF5YoUxGbK

I made this comment on a previous post earlier this year which might help explain expected and unexpected returns.

Something crazy will happen to your portfolio at some point in the future. It will halve. It will fall 50%. Infact, I can guarantee it will fall by 50%. If that freaks you out, add bonds (or a fund like LifeStrategy).

If your job is sensitive to the economy and business cycles, it's better to add bonds or have a bigger emergency fund. Investing is only a single piece of your overall portfolio. An overall portfolio that is hedged against all possible outcomes is the best portfolio, not one that has the highest returns.

For example, someone that has critical illness cover, an emergency fund (cash), a final salary pension, a job that is very very safe and stable can take 100% equity risk in their S&S ISA.

Monevator is a very good resource

 

[cassieluv]

@johnboy99 that's what happened relatively recently. the next ten years could have completely different areas of the market winning and losing. the point of the all cap is it will not under or overweight anything. in all periods there will be things doing worse and better but you can't predict that upfront. if small cap and uk go gangbusters for 10 years you'll lose out with that fund. it might keep going the other way but at least with all cap you don't miss out too much on anything. in ten years there might be people writing posts here saying emerging markets have outperformed massively for ten year what's craic with the all cap fund people like when this one emerging fund tracker has trounced it. future is unknown.

 

[resjudicata]

@johnboy99 Yes I noticed the same. I think it's down to relative preference of the geographies. The US stock market has performed much better than the UK (and has a higher weighting in Ex UK funds). Doesn't mean to say that this trend will continue in future, hence focus on All World.

 

[joltor0517]

@resjudicata The bigger difference is that OP's fund doesn't include emerging markets