Weekend reading: Many managers can’t manage much longer

What caught my eye this week.

I suppose it’s because I’ve long worked from home anyway, but I’ve been overlooking a big aspect of ‘back to office’ post-Covid debate.

Hitherto I’ve mostly focused on the productivity angle. How would firms weigh productivity gains from remote work against the loss of culture or development potential, I wondered?

As an active investor, I’ve spent 18 months shifting my money back and forth between work-from-home stocks like Zoom and Atlassian and beaten-up commercial property, reflecting my changing views.

But what I’d forgotten is that people are people. And that some of them are desperate to get back to an office simply to justify their jobs.

I’m someone who has more than once left office life – and killed my career prospects doing so, at least in that dark pre-lockdown era – just to escape the politics, busywork, colleagues I’ve have to carry, and clueless managers.

So it’s pretty dumb of me not to see that those who thrive in such an environment might want it back, pronto, entirely for their own reasons.

Logged out

One class of such people are, more or less, the loafers.

These are the non-working workers celebrated in books like City Slackers, Bonjour Laziness, and Michel Houllebecq’s Whatever.

They need to be in an office because remote work is usually more carefully measured work.

Doing nothing soon adds up.

I haven’t got anything personally against such people. Some of my best friends and so on. Many jobs are rubbish and soulless. Not everyone is cut out to be a cog in a modern machine.

However I don’t want to effectively be paying for them with my output, as the lack of their own drags us all down.

As a freelance I have no choice but to be measured on my own output. At least that way I live or die by my own sword.

How do they manage?

The other type of office denizen who has been drowning for 18 months – while waving all the time – perches at the other end of the org chart.

I’m thinking of high-flying, do-nothing managers.

I’m lucky to have had several great employers in my short on/off work CV. A couple of companies that regularly win/won awards as great places to work.

And largely they were.

Yet their corridors were still patrolled by a few of those passive-aggressive managerial types who climb up the career pole with spiked boots and aren’t concerned with who they gouge in the head on the way.

These are people whose days are packed with meetings where they talk a lot but rarely contribute. People who apparently did something great a few years ago, but always seem to be stealing someone else’s ideas today. People in charge of people that you wouldn’t let look after your dog.

An article from MSN this week brought them flooding back:

Remote work lays bare many brutal inefficiencies and problems that executives don’t want to deal with because they reflect poorly on leaders and those they’ve hired.

Remote work empowers those who produce and disempowers those who have succeeded by being excellent diplomats and poor workers, along with those who have succeeded by always finding someone to blame for their failures.

It removes the ability to seem productive (by sitting at your desk looking stressed or always being on the phone), and also, crucially, may reveal how many bosses and managers simply don’t contribute to the bottom line.

The horror. The horror.

What do you do again?

The CEO of a company I consulted for once admitted to me that he had no idea what a highly-paid mutual acquaintance on his payroll actually did.

This guy was on many projects. Yet looking for his fingerprints in the output was like hunting for the Higgs boson. Younger staff came up with the things that moved the company ahead. Meanwhile our chum was always in a meeting.

The CEO admitted he kept this chancer around almost out of superstition. The company was doing well ever since this chap was hired, even if nobody could say exactly why. The people he managed despaired of him.

I suggested perhaps our mutual contact’s direct reports worked harder under him in order to try to get past him – in the same way you’ll try to overtake a dangerous driver to put him in your rear-view mirror.

The CEO pondered this for a bit. And kept him on.

Poor petals!

Some of these high-flying underachievers do add a sort of social glue that – at least historically – bigger companies have seemed to need to grow.

Others have a brilliant idea every year or two and then fall back into a coma. That might just be enough to justify their salary and position.

But many are simply friction in the system. After a year of sending fifty Bcc-d emails a day or pinging Slack like a teenager on Snap and saying the most on Zoom in meetings but basically saying nothing, they risk being unmasked.

Meanwhile lots of actual workers at the coalface have been working from bed during the pandemic and still turning out great stuff. So it’s not like these unmanageable managers’ fears of the company culture being eroded or destroyed by homeworking are unfounded. Even if it’s actually being replaced by something better.

Often charmers, the best of these people remind me of those flowering epiphytes that thrive high in the rain forest canopy.

Growing on the sides of the trees who do all the proper hard work, they are beautiful and exotic and for hundreds of years scientists have debated whether they are harmless, subtly value-adding, or flat-out parasitic.

If you’re a fancy orchid that bears no fruit, no wonder you’re desperate to get back to the hothouse.

Even as many of the rest of us head for the doors.

Have a great weekend – whoever you are!

From Monevator

Best Emerging Market bond ETFs and bond funds – Monevator

An introduction to thematic ETFs – Monevator

From the archive-ator: What I learned about investing from a cult card-based strategy game – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Johnson could rethink National Insurance rise after Tory backlash – Guardian

Another platform acquired: Charles Stanley by Raymond James – LSE

House prices now 30% above 2007 peak, says Zoopla – ThisIsMoney

Should you consider this loophole to avoid the rise in pension age to 55? – Which

Over five million people in the UK had parcels lost or stolen last year – Guardian

Physical stores going hybrid with micro-fulfillment centres – Axios

City high-end housing markets bounce back [Search result]FT

Products and services

Lloyds has launched a new credit card offering 0.5% cashback – Which

Why cheques aren’t dead yet [Search result]FT

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Homes for the festival season, in pictures – Guardian

Comment and opinion

Tracking spending: a foundational skill of personal finance – Managing FI

The first million is the easy bit – Banker on Fire

How to predict a market crash – A Wealth of Common Sense

Life is a tale of two halves – Humble Dollar

A chat with Burton Malkiel of random walk fame [Podcast]Next Gen Personal Finance

The US has never seen inflation so high with bond yields this low – The Irrelevant Investor

The case for investing your emergency fund – Trek Wealth

Problems buying a house in the UK with crypto gains due to anti-money laundering regulations – Reddit

Gen Z is rewriting the rules for personal finance in real-time – Money

Tim Ferris talks to Ramit Sethi (author of IWTYTBR) [Podcast]Tim Ferris

Americans with a higher net worth at midlife tend to live longer – Science Daily

Naughty corner: Active antics

Cash on Cash return versus IRR – AVC

Carson Block’s take on China’s crackdown on US-listed giants – Institutional Investor

When quality companies face a reckoning – Intrinsic Investing

Eventually, valuation matters – Compound Advisors

Covid corner

95% of British adults still [sometimes] wearing a mask when out – Guardian

The Delta variant is keeping US workers from the office… – Axios

…more US restaurants and bars only serving the vaccinated – MarketWatch

…and Netflix to require all actors and set staff to be vaccinated – Deadline

…while anti-vaxxers and Covid deniers party at the Lake of the Ozarks – Politico

Kindle book bargains

Elastic Habits: How to Create Smarter Habits That Adapt to Your Day by Stephen Guise – £0.99 on Kindle

Zen: The Art of Simple Living by Shunmyo Masuno – £0.99 on Kindle

A Colossal Failure of Common Sense: The Collapse of Lehman Brothers – £0.99 on Kindle

SAS: Leadship Secrets from the Special Forces by various authors – £0.99 on Kindle

Environmental factors

MPs fear UK grid won’t cope with a surge in electric vehicles – ThisIsMoney

What growing avocados in Sicily tells us about climate change and the future of food [Search result]FT

Plants feel pain and might even see – Nautilus

Climate benchmarks and the big oil companies – DIY Investor (UK)

Off our beat

Lap it up: what’s so special about swimming? – The Conversation

The end of free speech in Hong Kong – The Atlantic

Can you be addicted to travel? – Atlas Obscura

And finally…

“Large, comfortable companies today must stay on the offensive or they might find themselves in the dustbin of dividend history. Just look at Kodak or Nokia.”
– Todd Wenning, Keeping Your Dividend Edge

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The post Weekend reading: Many managers can’t manage much longer appeared first on Monevator.

Best Emerging Market bond ETFs and bond funds

This post – part three of a Monevator deep dive into Emerging Market debt as an asset class – will compare the best Emerging Market bond ETFs and funds I can find.

The two previous posts examined the case for and against Emerging Market bonds:

Part one investigated the superior risk-adjusted returns of EM debt.

Part two dug into why the asset class’s historic out-performance may not be repeated.

While I think the argument in favour is marginal, I’m still tempted to invest in Emerging Market US$ sovereign bonds. I believe they may be a useful diversifier on the growth/risk side of my asset allocation.

But how do passive investors put money to work in this asset class? Which index trackers best match the returns of EM US $ sovereigns?

Read on for the pick of the best Emerging Market bond ETFs and funds.

Best Emerging Market bond ETFs and funds

Cost = OCF (%)
Yield-to-maturity (YTM)
Sub-investment grade (%)

iShares Emerging Markets Government Bond Index Fund Class D Acc (USD)


iShares JP Morgan USD Emerging Markets Bond ETF (Dist)


Xtrackers USD Emerging Markets Bond ETF 2D
FTSE Emerging Markets USD Government and Government-Related Bond Select

Vanguard USD Emerging Markets Government Bond ETF Dist
Bloomberg Barclays EM USD Sovereign + Quasi-Sov

Invesco Emerging Markets USD Bond ETF Dist
Bloomberg Barclays Emerging Markets USD Sovereign

Legal & General Emerging Markets Government Bond (US$) Index Fund I Class
JP Morgan EMBI+3



Source: Fund providers’ data (A dash means data not provided).

All products are Emerging Market US$ sovereign bond funds (an ETF is just a type of fund), currency unhedged.
EM debt also divides into EM US$ Corporates and EM local sovereign. There’s no need to add these sub-asset classes as well. (Use GBP hedged ETFs if you do pick EM local sovereign, however).
See our best bond funds piece for quick explanations of table categories such as duration and yield-to-maturity.
iShares EM Gov Bond Index Fund publishes yield-to-worst data in its factsheet, not YTM.
Most providers don’t publish the average credit rating of their EM funds. I’ve included an estimate of sub-investment grade (junk) bond holdings as a placeholder for how much risk is embedded in these products.
The risk inherent in Emerging Market debt products means they behave like an equity/bond hybrid. For this reason, hold them in the growth portion of your asset allocation and not on the defensive side

Selecting the best Emerging Market bond ETFs is not as straightforward as choosing the best global tracker funds. It’s certainly not as simple as picking the cheapest product and moving on. Every fund has an issue, which I’ll run through in two ticks. 

But before we get into that, let’s do a performance check.

Best Emerging Market bond ETFs – results check

Source: Trustnet’s charting tool.

Important: Because past performance is no guarantee of future results, the right fund isn’t the one that did best last Tuesday, or even beat the pack by a nose over three years.

Rather, the point of the results check is to ensure that a dysfunctional product hasn’t crept onto the shortlist.

Maybe a fund doesn’t tracks its index well? Perhaps – despite its plausible sounding-name – it isn’t faithful to the industry-standard view of Emerging Market US$ sovereign bonds?

Comparing returns can reveal a fund that doesn’t behave as expected.

Even a runaway winner should ring alarm bells. It’s vanishingly rare for one index tracker to trounce its rivals. They’re meant to be me-too products.

I’m also not keen on drawing conclusions from any less than five years of data. More is better.

Strangely, Trustnet doesn’t have returns for the iShares Emerging Markets Government Bond Index Fund. That adds to the mystery surrounding this tracker (see below).

Meanwhile, over five years, the iShares JP Morgan $ EM Bond ETF (Ticker: SEMB) soundly beat its long-toothed L&G rival, despite costing more.

That’s one of the reasons the L&G index fund is at the foot of our table.

Wider selection criteria

I’ve gone through these index trackers with my finest tooth comb and uncovered a few bugs.

Firstly, it’s important to know that the index is key for EM US$ sovereign bonds.

Monevator reader and hedge fund quant, ZXSpectrum48k, explained that institutional investors overwhelmingly use the JP Morgan Emerging Markets Bond Index Global Diversified Index (JPM EMBIGD). It’s highly diversified and includes a 10% cap on the weighting of each country.

Why do institutional bond investors insist on capped indices? ZX is in the know:

This is to mitigate the impact of an ever-increasing weighting to an issuer (sovereign or corporate) that is declining in credit quality but also to offset the reduced diversification that can result from this effect.

Capped indices are now totally dominant in emerging government bond markets. Only retail use uncapped indices (they are cheaper to buy from index providers).

The ideal index is the JPM EMBIGD

Only iShares’ Emerging Markets Government Bond Index Fund tracks the JPM EMBIGD.

This fund also happens to be the cheapest retail EM US$ debt tracker by OCF. And it looks good on other metrics, too.

There’s only one problem – I can’t find it in the real world!

Neither Hargreaves Lansdown, AJ Bell, nor Interactive Investor list it in their fund centres.

A Google search doesn’t reveal any other platforms stocking it, either.

Yet it’s listed on iShares’ retail website in Class D shares. That share class is typically used by other iShares index funds that are available to retail investors like you and me. 

And the fund was launched in May 2018, so it isn’t new.

Is it available on your platform? Please let us know in the comments below.

Often platforms will list funds when they’re nudged by customers. Perhaps there just isn’t enough demand for it in retail-land.

The next best thing: JPM EMBIGC

EMBIGC stands for the Emerging Markets Bond Index Global Core. It’s a cut-down version of the EMBIGD.

ZX compares EMBIGC to its premium counterpart like this:

This [EMBIGC] excludes many less liquid, higher yielding countries, and knocks around 70bp off the yield.

iShares JP Morgan $ EM Bond ETF (Ticker: SEMB) tracks the EMBIGC.

You can spot the difference the index makes by comparing SEMB’s data with the EMBIGD-hugging iShares Emerging Markets Government Bond Index Fund.

SEMB lags the index fund by 0.24% annualised over three years.
According to iShares, the EMBIGC index trails the EMBIGD by 0.19% over three years.

That implies the SEMB ETF isn’t too shabby, even though its OCF is 0.27% chubbier than the index fund rival. We might have expected SEMB to lag by a much higher amount, given the combined OCF and index differential.

It’s also reassuring to see the two trackers’ Top 10 geographic exposures are similar. Same countries, with less than 1% difference in weight.

Maybe that tiny difference is mission critical to institutional investors with billions under management, but it doesn’t matter much to me. I’d be happy to hold SEMB instead of the EMBIGD-tracking index fund, especially when my platform’s fees favour ETFs.

Yes, SEMB’s holdings are slightly less diversified. But they’re spread more widely than the rest of the shortlist.

I’ll have to stop mooning after the index fund if it isn’t available, anyway.

The best of the rest

The other index trackers are all cheaper than SEMB by OCF.

The only one that stands out though is Vanguard’s USD Emerging Markets Government Bond ETF. It’s got a shorter duration (and hence a lower yield) than the pack. And it holds less junk.

The Xtrackers and Invesco ETFs both have niggling index discrepancies.

The Xtracker product tracks the FTSE Emerging Markets USD Government and Government-Related Bond Select index. But its index’s ticker is different from the index of the same name published by FTSE Russell.

Such inconsistencies make me feel like I’m missing something.

The Invesco ETF’s index isn’t listed on the Bloomberg Barclays site. I don’t like it when information is hard to find or non-existent.

The Invesco ETF’s index does sound superficially similar to the Vanguard ETF’s index. But the holdings of the two funds are distinct. And information about Vanguard’s index is published on Bloomberg Barclays.

What’s going on here? For now I just see red flags.

Meanwhile, L&G’s Emerging Markets Government Bond (US$) Index Fund tracks the JP Morgan EMBI+ index.

This is an older, less diversified member of JPM’s EM US$ sovereign bond index family that includes EMBIGD and EMBIGC.

L&G’s fund is the least diversified on our list. And I won’t invest when a provider doesn’t publish data like yield-to-maturity on its fund’s webpage.

Cap my ass

The JPM EMBI+ is pure market cap. This means it’s dominated by countries issuing large amounts of debt. That helps explain why the L&G fund is the least diversified on our list.

Meanwhile, there’s no mention of a country weighting cap on the Bloomberg Barclays EM USD Sovereign + Quasi-Sov index’s factsheet.

Vanguard’s ETF is thus more heavily concentrated in its top 10 countries than the others, bar L&G. It holds more individual securities, though.

The JPM EMIGC factsheet does reference a maximum weight per country. But it doesn’t say what it is!

Xtrackers states its ETF’s index country cap is US$25 billion. Its top 10 is as moderately concentrated as the EMBIGD index fund, although the country mix is quite different.

The Invesco ETF’s index sounds similar to Vanguard’s but is less concentrated, especially in China.

Transaction costs

Fund providers get extra integrity points for publishing their product’s transaction costs.

Transaction costs can undermine your returns, and they aren’t captured by the headline OCF fee.

Only Xtrackers is courageous enough to publish its ETF’s transaction cost on its webpage.

That cost is 0.11%, which accounts for the dealing fees notched up by the product in a year. It’s a large extra cost percentage, on top of the 0.25% OCF.

Vanguard publishes transaction costs, too, but buried in a PDF in a dark corner of its site. Add 0.09% to the cost of its Emerging Market bond ETF.

If the rest do publish transaction costs then they don’t make them easy to find. (Funny that.)

Until they do, I’ll assume transaction costs are at least 0.11% for the rest of our line-up.


Bond fund taxation is heavier than equities. That matters if you hold them outside your ISA or SIPP, and/or they burst the banks of your tax allowances.

Offshore bond funds are taxed at a higher rate still, if they don’t have reporting fund status.

Our shortlist all claim reporting status except the L&G fund, which doesn’t need it (UK domiciled), and iShares enigmatic index fund, which doesn’t bother saying one way or the other. (Truly this fund is too cool for school.)

Credit risk

As a passive investor I have no opinion on the differing degrees of credit risk embedded in each of these products.

I want to take the same amount of risk as the wider market because I have no edge over the market.

So I don’t think of average credit rating (or junk bond holdings) as a selection criteria for the best Emerging Market bond ETFs and funds – as long as its roughly in line with the market’s view.

The market is best represented by the leading EMBIGD index, which posts an overall credit rating of BB+ on its factsheet. The caveat is that EMBIGD’s latest factsheet is dated 2018.

We can also use the iShares Emerging Market Government Bond Index fund as an EMIGD proxy, because it follows the index.

Only Vanguard and Invesco actually publish average credit ratings (BBB- and BBB respectively).

Gauging by the junk bond holdings of the iShares and Xtracker ETFs, they’re a little riskier, which looks about right.

Emerging consensus

So that’s my best assessment of where things stand with emerging market sovereign bond ETFs and funds right now.

Apologies if it comes across as more of an artist’s impression than a blueprint. And please do add your own strokes in the comments below.

Part four in this once-thought-to-be-one part series will run through a very naughty Emerging Market bond valuation rule-of-thumb that is in no way to be relied upon.

Until then, take it steady,

The Accumulator

Emerging Markets Bond Index Global Diversified
Emerging Markets Bond Index Global Core
Emerging Markets Bond Index Plus

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An introduction to thematic ETFs

This article on thematic ETFs is by The Lone Exchanger from Team Monevator. Come back every Monday for another fresh perspective.

Opening up his browser and heading to the ‘Funds’ page of his online broker, The Lone Exchanger felt like trying something new.

Navigating away from the relative safety of his All-World Tracker, he discovered a fresh and potentially exciting world…

Setting the stage

We know the drill by now for long-term financial independence. Budget effectively and put aside as much as you can in tax-efficient savings vehicles. Make a global index tracker fund the core of your strategy.

But where is the fun in that? In dutifully popping a portion of your hard-earned wedge into a slow and steady grower?

Surely the game played by these City types isn’t that complicated?

Well, flicking through the Monevator archives reminds us that over a ten-year period, more than 70% of professional fund managers failed to beat the market.

What chance do you or I have of doing better?

Not much.

But human nature is curious. Despite all the evidence that index funds are best for most – and that successful stockpicking is fiendishly difficult – there remains a temptation to try to beat the market to juice returns.

And as ever the financial world has stepped up to scratch that itch.

Theme-me-up, Scotty

While they’ve been around for well over a decade, ‘thematic’ ETFs have become much more popular in recent years.

The idea is that investors can easily put money into a fund which aims to track an index comprised of a subset of companies who share commonality around a certain theme.

As the name suggests, thematic ETFs offer investors the opportunity to actively invest in that specific field, or theme, without needing to buy lots of individual stocks themselves.

That makes thematic ETFs both similar to, and different from, so-called sector ETFs, which focus on a traditional industry sector, such as Banking, Retail, or Consumer Staples.

Companies held within thematic ETFs often track across different traditional sectors. For example, an ETF focusing on Robotics may contain one company focused on Artificial Intelligence (IT sector), another which manufactures industrial robots (Industrial sector), and one which provides automated surgical equipment (Healthcare sector).

Variations on a theme

There are at least a hundred such thematic ETFs now trading on European exchanges – and many more in the US.

Themes include ‘Ageing Populations’, ‘eSports & Gaming’, and ‘The Future of Food’. They are often focused on future perceived trends or fields.

In recent years, these thematic funds have become especially popular with younger investors who may have a higher risk tolerance – or a higher misunderstanding of risk.

The lowering (or elimination) of share dealing fees and the introduction of fractional share trading has also made it easier to allocate money towards such funds – and to trade in and out of them at will.

The following graph from Defiance ETFs shows the huge flow of funds into thematic ETFs since the start of 2020, compared to other ETF categories such as Financials and Energy:

Source: Defiance ETFs

Storming or performing?

Performance of thematic funds, as with any asset or sub-asset class, is difficult to gauge.

Picking different start dates can change the theoretical returns. And as most investors adjust their holdings over time – ‘dollar-cost averaging’ in at best or selling their winners at worst – the performance over fixed dates can be misleading.

The Accumulator was underwhelmed when he reviewed several popular thematic ETFs in his ten-year review in late 2019.

A deeper delve into thematic ETFs can also be found at The Evidence-Based Investor. Its conclusion was that thematic funds have put up market-beating returns on a 3-5 year timeframe. But they’ve done worse over ten years.

In addition, thematic ETFs were more volatile. That can impact returns over the longer term.

We also need to touch upon costs.

Many large passive ETFs that track broad stock indices have very low costs. Annual charges can be below 0.1%.

In contrast, thematic ETF providers may charge 0.4% or more. This sort of fee drag will dig into your returns over time.

Higher costs may be justified if the ETF is invested in tricky international stocks, or in small cap companies with limited liquidity. But often these ETFs buy large liquid companies listed on major exchanges.

In that case the higher fees charged will go straight into the pockets of the ETF’s management company and the associated index providers.

Risk or reward?

Many of the popular thematic ETFs are focused on the future, with funds often heavily exposed to growth-orientated technology companies.

In a world of relatively slow growth rates and low interest rates, these shares have done well recently due to their strong revenue growth figures and that ultra-low interest rate environment, which boosts the value of their future cash flows.

However if global interest rates start rising, it’s likely that there will be a hit to the valuations of such companies.

Furthermore, we need to be mindful of concentration risk.

If you purchase a broader ETF such as one tracking the S&P 500 in the USA, you have exposure to a mixture of sectors. This will include Financials, Energy, Retail, and Construction, as well as technology. If a particular sector struggles, others may pick up the slack.

In contrast, it’s likely most individual companies in a specific Thematic ETF will move in relative lockstep as there is little diversification. We saw that at the start of this year, when the iShares Clean Energy ETF plunged by around 30% in a couple of months as the sector fell out of favour.

Another consideration is that some companies included within a thematic ETF may have relatively small market capitalisations. This means they could end up being owned in large part by such ETFs.

Should investors’ preferences change and the ETFs get dumped, the funds in turn could be unloading shares in relatively illiquid companies. That could exacerbate share price movements to the downside, increasing volatility.

Holding on

It’s therefore important to look under the hood of a thematic ETF. At the least you should establish the number of individual holdings, and scan to see if anything interesting pops out.

You can do this by pasting the ETF name into a search engine and going to the provider’s website. There should be information on returns, any dividend yields, and exposures to regions and currencies.

As an example of what you might find, until recently the aforementioned iShares Clean Energy ETF only held around 30 companies. Compare that to a world tracker, which could hold more than 3,000. Clearly each individual company will have a far larger impact in the concentrated portfolio.

Furthermore, individual weightings matter. Do the companies held by the ETF have a fairly equal weighting? Or do just a handful make up a large proportion of the fund? In the latter case performance could again be driven by just a few giant positions.

Some holdings within an ETF may only be tangentially related to the theme in question, at least in your view. The index provider will determine how strict or loose its criteria is. Candidate holdings may only need a 25% revenue exposure to the theme to be eligible, for instance.

Consider too the overlap with any existing investments you may own.

Many specialist funds contain giants like Apple, Google, and Amazon – which you probably already hold in your passive global tracker. You’ll be paying a higher cost to hold more of them within a thematic ETF, and increasing your reliance on their performance, too.

High? Low? Silver?

Individual investors are unlikely to beat the market over a long time horizon if they deviate away from passive index trackers – and that includes making forays into thematic ETFs.

With such ETFs, costs – a key determinant of returns – are higher, returns more volatile, and some themes may be subject to boom and bust swings that gyrate with the economic cycle or investor sentiment.

Thematic ETFs do offer the more adventurous investor a glimpse of a more exotic investing world. But caution and due diligence are vital.

See more articles from The Lone Exchanger in their archive.

The post An introduction to thematic ETFs appeared first on Monevator.

Weekend reading: Straight to the good stuff, summer 2020 edition

What caught my eye this week.

Hello! I’m half-on-holiday this week (and that’s without an NHS app ‘ping’ in earshot…)

My mini-break hasn’t stopped me reading the money and investing Internet. But it does limit my time to waffle on about it.

In other words, straight to the links this week.

Have a cool(er) weekend!

From Monevator

How spending on a credit card can protect the things you buy – Monevator

Emerging market bond risks – Monevator

From the archive-ator: 10 things you can do today to reset your life – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Savers seeking to keep early access to pension pots (at 55) face 2023 deadline [Search result]FT

Nearly 620,000 people told to self-isolate after NHS Covid app ‘ping’ – ITV

UK fails to renegotiate two-year old and allegedly brilliant Brexit deal – BBC

China signals the end to the $2 trillion US listing juggernaut – Yahoo Finance

Nobody expects the Spanish Inquisition to matter today, but it does – Joachim Klement

Products and services

UK to trial automatic energy bill switching system – Guardian

Coventry Building Society launches best-buy savings account – ThisIsMoney

EVs cheaper to own than petrol or diesel over seven years – ThisIsMoney

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

How to set up an online shop to make money from home – ThisIsMoney

Nationwide offers first sub-1% five-year mortgage fix – MoneySavingExpert

Special offer: Get £100 cashback when you switch your ISA to Interactive Investor [Ends 31 July, terms apply, affiliate link] – Interactive Investor

American Express to overhaul British Airways Avios reward cards – Which

High-tech homes for sale, in pictures – Guardian

Comment and opinion

The highest forms of wealth – Morgan Housel

At what price does safety come first for investors? [Search result]FT

We are all investors now – Of Dollars and Data

What should you do with an inherited investment portfolio? – ThisIsMoney

How to survive until payday when you’re out of cash – Be Clever with Your Cash

Suppose the 60/40 portfolio underperforms for a decade – Behavioural Investment

Some Chinese shunning careers for “low-desire” [FIRE] life – AP News

The whole world is turning Japanese, demographically – Abnormal Returns

Stumble, trip – Indeedably

Naughty corner: Active antics

Ether’s role in a diversified portfolio – Morningstar

Are US companies really better than European ones? – Albert Bridge Capital

Mental momentum investors – Klement on Investing

What about beta? The demise of alpha – CAIA Association

Covid corner

Covid infections around the UK continue to rise – BBC

How to find the best holiday Covid test, by price and trust – Guardian

Japanese ‘natto’ beans may be a new Covid treatment – New Food Magazine

Kindle book bargains

(Don’t have a Kindle? Buy one and join the cheap book club!)

Elastic Habits: How to Create Smarter Habits That Adapt to Your Day by Stephen Guise – £0.99 on Kindle

Zen: The Art of Simple Living by Shunmyo Masuno – £0.99 on Kindle

A Colossal Failure of Common Sense: The Collapse of Lehman Brothers – £0.99 on Kindle

SAS: Leadship Secrets from the Special Forces by various authors – £0.99 on Kindle

Environmental factors

Why climate change threatens your retirement savings – CBS News

Survivor: salmon edition – Hakai Magazine

Australian lobbying keeps Great Barrier Reef off ‘in danger’ list – Guardian

Off our beat

How to get out of your own head – Raptitude

A quick guide to negative online comments – Humble Dollar

A love letter to browsing record stores and book shops – The Walrus

Zoomtown-on-Sea? The lure of a new life on the coast – BBC

Google Doodle Champion Island Games [Retro-style Olympics game]Google

Trading sex for cosmetic surgery in Mexico’s narco capital – BBC

Neckties are the new bow ties – The Atlantic

And finally…

“It’s easier to stimulate asset prices than it is to stimulate an economy.”
– Terry Smith, Investing for Growth

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Freetrade. We may be  compensated if you pursue these offers – that will not affect the price you pay.

Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

The post Weekend reading: Straight to the good stuff, summer 2020 edition appeared first on Monevator.

Emerging Market bond risks

This is part two of a three-part series investigating whether Emerging Market bonds can enhance passive portfolios. Today we’ll consider Emerging Market bond risks.

In part one we looked at why you might be tempted to cast aside volatile Emerging Market equities in pursuit of the handsome risk-adjusted historic returns of Emerging Market US$ sovereign bonds.

But very few cases are one-sided in investing.

A big question mark still hangs over EM US$ sovereign debt.

Specifically, is its superior historic performance dependent on tailwinds that have mostly died down?

Emerging Market bond risks

The rise of Emerging Market bonds is partly a phoenix-from-the-flames success story.

Burned by crisis in the ’90s, developing world economies reformed their financial institutions. Their governments controlled spending and improved debt-to-GDP ratios. There was the helpful growth of China and globalisation, too.

Credit rating upgrades followed. Investors enjoyed high yields buoyed by outdated perceptions of Emerging Market bond risks.

Demand for EM debt got a further boost as Developed World yields shrunk. Many investors hunted further afield for income like truffle-loving pigs in a forest.

Fast-forward to 2021 and:

Globalisation has stalled

Chinese growth has slowed, even as Emerging Market economies are more reliant upon it.1

Emerging Market bond yields have declined and credit spreads tightened.

Vanguard warns EM bond outperformance could be a historical artifact:

A number of trends – including falling interest rates, tightening spreads, and several equity bear markets – substantially explain what we expect was a historical anomaly.

Over longer periods, we believe investors can reasonably expect to be compensated for equity risk through realization of the equity risk premium.

Source: Vanguard. (“Emerging-market bonds: a fixed income asset with equity-like returns (and risks).” August 2018. Page 7.)

To put that quote in context, Vanguard’s researchers cautioned against expecting Emerging Market bonds to continue to beat Emerging Markets equities on an absolute return basis.

Reading between the lines

Indeed any bond-curious metric we check doesn’t augur well for a repeat of EM bonds’ Olympian performance of the past 20 years. 

Yields have waned on Emerging Market bonds to near historic lows:

Yield-to-maturity (YTM) peaked at 15.6% in August 1998 as financial shocks ripped through Emerging Markets. The YTM is now below 5%.2

In other words, we’re being offered less reward for taking risk today than the bond investors of yesteryear.

Note, the bulk of long-term bond returns turn on the size of their coupons.3 This is especially true at the intermediate durations that dominate EM US$ sovereigns. Today’s lower bond interest payments signal moderate rewards ahead.

Similarly, credit spreads (vs US Treasuries) have tightened:

The credit spread peaked at 1321 basis points – that’s 13.2% – in August 1998. The historic low was 1.6% in May 2007, just before the Great Recession convulsed the world. This spread is 3.3% at the time of writing.4

The mountainous credit spreads and yields of the late ’90s and early ’00s indicate EM debt was consigned to basket-case status back then.

A fear of further defaults jacked up yields.

But Emerging Markets comfortably surpassed investor’s low expectations in subsequent years.

Which meant those elevated yields rewarded investors who took on risks that happily failed to materialise.

Default position

The subsiding credit spread indicates the perceived risk of default is lower today.

Comforting. But it also implies there’s less room for ‘equity-like’ upside.

Ultimately defaults will probably rise and fall in line with the global boom-bust cycle. An investor in Emerging Market bonds will lose when yields lag defaults. They’ll win when the market over-reacts and higher yields dominate even as defaults hold steady or decline.

As a passive investor I can no more time this default cycle in bonds than I can exploit stock market turbulence.

EM bond durations have also increased a touch over time. We’re taking on more ‘term risk’ today to bag our yield.

Finally, the EM debt market is much bigger than it was. It’s not a secret anymore.

Prediction time

So much for history’s rear-view mirror. How about forward expectations?

Fund manager Research Affiliates provides a brilliant range of tools, including expected return forecasts.

And these are pretty downbeat for Emerging Markets US$ sovereign bonds over the next ten years:

This expected returns chart shows annual GBP real returns (based on current valuations) of:

0.7% Emerging Markets US$ sovereign bonds (blue bar)
5.1% Emerging Market equities (red bar)

Note: Research Affiliates offers a range of returns along a probability distribution curve. I’ve stated the mean return.

Research Affiliates also offers an alternative forecast model that shows Emerging Market bonds in a better light. This uses yield and growth predictions instead of current valuations:

Here we see:

2.8% Emerging Markets US$ sovereign bonds (blue bar)
4.8% Emerging Market equities (red bar)

I don’t have an opinion about the efficacy of these different models. You can find Research Affiliate’s methodology on its website if you’d like to delve.

Will Emerging Market bonds yield for you?

One gauge of a bond fund’s annual expected return is its current yield-to-maturity. 

Current yield-to-maturity is a reasonable estimate of what you can expect to earn over the fund’s duration.

The following chart shows that current YTM is quite well-correlated to actual returns for EM US$ sovereigns:

A quick eyeball of accessible EM US$ sovereign bond funds gives us a starting yield of around 4%. The average duration is about 8.

That’s more encouraging. Although the one thing we can be sure of with any long-range forecast is that it will be wrong!

What should we do?

I don’t think anyone should oust Emerging Market equities from their portfolio expecting Emerging Market bonds to score higher returns.

That’s because it’s reasonable to assume the equity risk premium will reassert itself sooner or later.

Rather, the case turns on the chance of EM US$ sovereigns continuing to deliver superior risk-adjusted returns versus EM equities.

Any retreat from globalisation or a misfire from China’s growth engine will hurt EM equities. And rising EM bond defaults will probably correlate with such stock market drama.

The fates of the two sub-asset classes are therefore intertwined.

That said, Emerging Market governments can raise taxes, dip into currency reserves, and raise loans from the IMF and World Bank. That makes them less risky than EM equities, in my view.

Moreover, Monevator’s friendly quant, ZXSpectrum48k, has argued:

I also like the absence of EM FX exposure which I think you are simply not compensated for in EM equities. EM sovereign debt has produced the same returns as EM equities but with a fraction of the volatility. It also offers a somewhat lower correlation with broader equities.

UK investors are exposed to US$ currency risk via Emerging Markets US$ sovereign bonds, but not to Emerging Market currency risk.

There’s no need to hedge this US$ risk, as Emerging Market bonds should be allocated to the equity side of your portfolio. And currency risk can be seen as a diversifier, as long as it isn’t in your defensive asset allocation.

Same difference

Speaking of diversification, the geographic spread of Emerging Markets US$ sovereign bonds is quite different to Emerging Markets equity.

Take a look at the Regional Split rows below:

State Street. “Case for Allocating to Emerging Market Debt.” February 2021. Page 6.

Latin America, Central and Eastern Europe, and the Middle East and Africa are much better represented in EM US$ sovereigns.

In contrast, the Asia Pacific region dominates Emerging Market equities.

(Note: Emerging Market US$ sovereign bonds are labelled Hard Currency Sovereign EM Debt at the top of the left-hand column.)

You can also see that EM US$ sovereigns have decent yield, intermediate average duration, and a credit risk exposure that’s split across investment grade and sub-investment grade (junk) bonds.

Final asset allocation thoughts

Monevator contributor and former hedge fund manager Lars Kroijer made the case for diversifying into riskier EM government debt in his book Investing Demystified.

Lars suggested a 10% allocation to sub-AA government debt carved out of the equity side. He calculated this was roughly in line with the global split of risky assets between equities, corporate debt, and sub-AA goverment debt. (At the time he was writing).

Lars didn’t argue that Emerging Market bonds were vital or transformative.

Rather Lars was showing how to enhance diversification if you can live with the complexity.

Emerging Market bond risks may be worth taking for diversification

Personally, I haven’t yet been rewarded for increasing complexity in my own portfolio.

Despite this, I do still look for opportunities to diversify. The future often throws up surprises that backtests and forecasts gull us into believing we can factor out.

I have no actionable view on the future direction of US interest rates, the China-America trade relationship, or the fiscal positions of 74 Emerging Market countries.

Nonetheless I’m likely to soon split my EM equity allocation in half. This will enable me to allocate 5% to Emerging Markets US$ sovereign bonds.

Such a small allocation is unlikely to make a big difference one way or the other. But I think it’s appropriate to the merits of the case.

In part three I’ll look at the best Emerging Markets US$ sovereign bonds index trackers we can buy.

(Right after I’ve pulled these fence splinters out of my backside!)

Take it steady,

The Accumulator

P.S. Bond fund taxation is typically higher than with equities. This could be another black mark against Emerging Market bonds if you can’t fit them into your tax shelters.

See Vanguard. “Emerging-market bonds: a fixed income asset with equity-like returns (and risks).” August 2018. Page 7.
That’s according to the market-dominant JPM EMBIGD index of EM US$ sovereign bonds.
How much a bond pays in regular interest payments.
Again, according to the market-leading JPM EMBIGD index of EM US$ sovereign bonds.

The post Emerging Market bond risks appeared first on Monevator.

Section 75 explained: How spending on a credit card can give you huge protection on things you buy

This piece on Section 75 is by The Treasurer from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

I was once scared of credit cards. I believed saving up for things I wanted to buy was always the right thing to do. Credit cards were the work of the devil. They were designed to trap you in debt at hideous interest rates.

I still believe those things to some extent. If I want something, I’ll save up for it. I only ever splash out if I have a real need, or if I consider it excellent value for money.

And I still think some credit cards – such as those with eye-watering interest rates pushing 40% – are awful. Especially those that target sections of society who can least afford it.

Yet as time has gone on I have also grown to understand that credit cards are essentially tools. Albeit tools with a dangerous edge.

Think of a credit card as like a very sharp knife. Extremely useful in the hands of a Michelin star chef. Less so – and potentially dangerous – when wielded by an amateur cook.

In other words, use credit cards in the right way (often contrarily to the goals of the card provider) and you can benefit, at no cost to you.

Get it wrong and you could find yourself servicing interest for years. That will leave your dreams of early retirement in ruins.

Cashback is a quick credit card win

An obvious way to use a credit card to your ‘advantage’ is cashback.

With a cashback credit card, you earn small amounts of money every time you spend on it. You’ll profit on everything you buy, so long as you pay off the balance in full every single month. That way you avoid paying interest.

I put ‘advantage’ in quotation marks above, because card providers still benefit when you use their card. Retailers must pay the card provider a small fee for each transaction. So using a cashback credit card as I’ve described won’t make your card provider lose sleep.

Of course your card provider won’t mind if you miss a payment and owe them a nice bit of interest, either. So unless you enjoy contributing to a banking giant’s annual Christmas party, set up a monthly direct debit to regularly clear your debt.

What is Section 75?

Now onto another way you can make credit cards work for you – to use one solely to benefit from Section 75 legislation.

Section 75 is part of the Consumer Credit Act. (Section 75 of it, shockingly enough).

This legislation dates back to 1974. The legal eagles who wrote it thought it would be unfair to have someone borrow to pay for something on a credit card, only to not receive the item, or to suffer issues down the line. Especially if they were still in the process of paying for it!

Today, almost 50 years later, Section 75 remains a powerful consumer tool:

Pay for something on a credit card that costs between £100 – £30,000 and Section 75 will automatically apply to your purchase. (As long as the thing you’ve purchased is for you).

Section 75 means the card provider which you buy from is equally liable for your purchase. So if anything goes wrong, you can knock at their door for a refund.

Importantly, you don’t have to pay for the whole item on a credit card for Section 75 to apply.

Pay just £1 or 25p –or any other humorously low figure – on a credit card, and your whole purchase is protected. Up to £30,000.

So if you’re buying a new car, then agreeing with the dealer to pay £100 on a credit card will give you protection on the whole purchase price.

You may find this a bit silly. But some retailers may put restrictions on the amount they’ll accept on a credit card, due to the processing costs involved.

(Since 2018 retailers can no longer charge a fee to use a credit card. However they can refuse to accept them).

Section 75: What are the main benefits?

Section 75 is particularly good for dealing with cases whereby a retailer has gone into liquidation.

For instance, you order a sofa and the supplier goes bust between the time it takes your payment and the delivery date – which can often be months away. Section 75 protection means the card provider can refund your cash. This sure beats making your case to an appointed administrator. There you’d probably have to settle for pennies in the pound, at best.

Section 75 doesn’t apply only when a retailer has gone bust. Say you want a refund for a defective or missing item and you’ve had no luck convincing the retailer to give you your money back. Section 75 enables you to seek a refund from your credit card provider instead.

A Section 75 claim doesn’t mean you’ll definitely be refunded – the card provider may not agree with your claim. But it’s fair to say that a banking giant is far more likely to pay up than a struggling retail provider keen to keep your cash. Financial companies usually have deeper pockets.

Even if your Section 75 claim is turned down, that’s not the end of the story. When you’ve paid on a credit card, you have the added option of taking your case to the free Financial Ombudsman service. It will then make a ruling on the behaviour of your card provider.

Remember, Section 75 makes both the retailer and card provider equally liable. So you don’t have to take your refund case to the retailer first. You can go straight to the card provider if you wish.

Section 75: What should I look out for?

There are no real drawbacks of Section 75. However there are some things to watch out for should you wish to rely on the protection.

Firstly, if you’re paying for something with Section 75 protection in mind, ensure it’s for your own personal use as the cardholder.

While the law isn’t set in stone, you may suffer some pushback if you make a claim via Section 75 for an item or service that wasn’t intended for your own use. (That said, one popular consumer website suggests that group bookings should be covered.)

Secondly, for Section 75 to apply make sure the thing you’re buying is actually over £100.

Annoyingly, if you buy two single flight tickets costing under £100 each – with a combined cost over £100 – you probably won’t have any luck with a Section 75 claim. However, a return ticket costing more than £100 means the cover will apply. It’s considered a ‘single item’ in the eyes of the Consumer Credit Act.

Thirdly, there may be an issue with relying on Section 75 protection if you buy via a third-party intermediary. More on that below.

Finally, if you’re buying something costing less than £100, don’t assume that you haven’t got any protection at all.

Lesser ‘chargeback’ protection applies for all purchases made on either a credit or debit card. This protection doesn’t have a legal basis. Rather it is part of rules associated with the major card processors (Visa, Mastercard, and Amex).

With chargeback you can ask your card provider for a refund. However unlike Section 75, under chargeback your card provider will seek a refund from the retailer you purchased from, rather than reimbursing you directly.

While it’s much less powerful than Section 75 protection, chargeback is still a consumer tool worth remembering.

My own personal horror stories

Knowing I’m a personal finance wonk, friends and family members often come to me for unofficial guidance. Despite this I’ve found convincing them to sign up for a credit card – solely for Section 75 protection – a tough sell.

That’s ironic, given that in my personal life I’ve seen the importance of paying for big purchases on a credit card.

A few years back, a former flatmate contacted me for help. She had paid upfront for a teeth whitening service. The provider went into liquidation when she was only a quarter of the way through her treatment. I was horrified to learn she’d put the £3,000 treatment on a debit card.

Unfortunately my efforts to convince her to use a credit card for all big purchases in future couldn’t bring back her lost cash. And I’m sorry to report that her chargeback claim was unsuccessful.

Similarly, but fortunately not so devastating, a family member recently purchased a large camping item from a retailer based in continental Europe. The value was just shy of £1,000.

The first I’d heard about this purchase was when I was contacted to ask for help when the item didn’t arrive. I asked what was used to purchase the item. Yes, you guessed it, a debit card.

A package did eventually turn up, albeit in a very damaged box. It was the wrong item! The cost to send it back was over £80. Other than explaining to my family member how easy it would have been to claim back the cost from a credit card provider, there was nothing I could do.

The same family member also experienced difficulty in claiming a refund for a long haul flight last year that was later cancelled due to Covid-19.

While Virgin Atlantic eventually gave way and refunded the money many months later, this was another instance where Section 75 would probably have come up trumps.

Third-party complications

If you want to rely on Section 75, try not to use a third-party service if you can.

There have been a few stories of people missing out on Section 75 protection due to a requirement that there must be a direct link between the customer, the credit card company, and the supplier or retailer.

Using a third-party website, such as a travel agent, may therefore mean you won’t be able to make a claim under Section 75. That’s because the travel agent may be seen as ‘breaking the link’ between parties.

I say ‘may’ as the rules on this are pretty blurred, and there’s conflicting information across the web.

To play it safe, always book direct if you can. So if booking a flight over £100, for instance, it’s probably best to go directly to the airline’s website rather than going through a travel agent, if you want to maximize your Section 75 protection.

Section 75: The takeaway

I’m wary of calling anything a ‘no-brainer’. We should always consider the drawbacks of any particular product.

Yet, as long as you don’t use a credit card to recklessly borrow, signing up for a credit card and using it to pay for anything over £100 really is a no-brainer, due to the free Section 75 protection you get.

But don’t just take my word for it – let’s hear from some readers. Have you ever gone to your card provider to make a Section 75 claim? What was your experience? Let us know in the comments below.

You can see all The Treasurer’s articles in a dedicated archive.

The post Section 75 explained: How spending on a credit card can give you huge protection on things you buy appeared first on Monevator.

Weekend reading: Turning on the triple-lock

What caught my eye this week.

I was a big fan of real-time strategy computer games in my frugal but otherwise misspent youth.

You know – those games in which you’d martial digital resources and deploy armies to expand your burgeoning industrial-military complex (or gold based goblin empire).

At their best, real-time strategy games gave you a glimpse of what it was like to be Napoleon or Marcus Aurelius – commanding legions!

At their worst, they were invariably broken by glitches that threw the whole illusion out of whack.

For example, weapon combinations whose lethality escaped the game’s bug testers and made your troops invincible.

Or technology tree choices that exponentially repaid whatever you put into them, giving your faction near-infinite riches while your computer opponent was still rubbing two sticks together.

Triple-lock turns the screw on UK finances

I thought of these glitches when considering the fuss over the triple-lock for pensions. As Simon Lambert noted in ThisIsMoney (my bold below):

The government made a deal in its manifesto to stick with the triple lock, which raises the state pension by whichever is the highest of consumer prices inflation, average annual wage growth, or 2.5 per cent.

It uses September’s inflation figure but July’s average earnings number, and this week the UK’s public finances watchdog, the Office for Budget Responsibility, warned that the latter could trigger a shock £3billion bill.

This would come from pensioners getting a bumper rise due to a quirk from the coronavirus crisis.

Average earnings figures are temporarily being distorted by furlough, lockdown job losses and a comparison to pay cuts in the depths of the crash a year ago, meaning that average wage growth is currently coming in at a high level and rising.

Annual wage growth climbed to 5.6 per cent in the three months to April, according to the latest official figures, and the crucial three months to July figure could hit 8 per cent.

That’s a very nice uplift for doing nothing different if you can get it. But the triple-lock wasn’t meant to occasionally throw up three melons on the slot machine of financial life like this.

An 8% rise after everything we’ve been through looks like a classic glitch.

Still, it’s worth remembering the triple-lock has otherwise delivered roughly what it was meant to.

The State pension has increased ahead of average earnings since the triple-lock was introduced in 2011. This halted an ongoing decline in relative terms that was previously making pensioners ever poorer.

And that outpacing has come even though in most years the State Pension has only increased by 2.5%, as cited by the BBC:

That’s the great thing about guaranteed increases from a mechanism like the triple-lock, at least if you’re not the one who has to pay for it.

You always get some cream, without every suffering a sour year.

Screw who

With that point conceded to the triple-lock, an 8% rise does look dumb.

David Willetts, the president of the Resolution Foundation think tank, argues the annual earnings link should be replaced by figure that better reflects workers’ experiences of pay increases and declines:

“The Covid crisis has laid bare the design faults of the triple lock, with a severe jobs crisis last year inadvertently contributing to an unnecessary and unjustified 8% rise in the state pension next year.

The chancellor should take the opportunity this autumn to replace the triple lock with a smoothed earnings link.

This would mean the state pension would rise in line with the living standards of working-age people – a change that would be fair to all generations.”

You may remember Willetts was the unusually bold former Tory minister who in 2011 published The Pinch – a book highlighting potential inter-generational fallout from the good fortune of the Baby Boomer generation.

Since then Boomers have only gotten richer, and pensioners could now see an 8% uplift to their state income in the wake of millions of their grandkids being (rightly) ordered to stay at home, in large part for the sake of the elderly.

True, the UK’s State pension is not especially generous. Those who rely on it are not the same people that Willetts and others finger for hoarding an undue proportion of the nation’s wealth.

On the other – other – hand, one can argue today’s pensioners already had their chance to save during three decades of prosperity.

In contrast, today’s young now have to save for their future – at a time of financial crisis, lockdowns, globalization, Brexit, and near-zero interest rates, with houses unaffordable to most to boot.

But how many hands have you got? Because yet another point is that pensioners vote.

Something their favourite newspapers have pointed out repeatedly in calling for the 8% rise to sail through.

Pick your pension poison

It seems to me the 8% uplift is clearly a bug caused by unforeseen circumstances. In software terms, it needs a patch to update it.

However it’s also true the triple-lock was introduced to stop the state pension becoming inadequate over many decades of longer retirements and rising living standards. We all know that story.

Pundits who’ve never seen a state benefit they didn’t want to double argue we should all want to retain the triple-lock, because today’s young people will benefit from it in their old age, too.

Whereas ironically, many young people suspect they’ll never get a State pension – partly due to its high cost funded by a shrinking pool of workers.

A cost that could be made even worse – to the tune of £3bn forever – by this glitchy 8% uplift!

Finally, we have speculation – see my links below – that chancellor Rishi Sunak is looking to claw back money by further reducing the amount you can put into a private pension or by cutting the tax relief you receive.

You don’t need to be Daniel Kahneman to see that all this tinkering with the rules that govern payouts that you won’t receive for decades is deeply sub-optimal.

Pensions 2.0

I’m not especially old, and I’ve seen big pensions changes in my lifetime, myriad tweaks, and annual speculation that this allowance will be chopped or that relief will be scrapped.

That’s not even to get into the shifting age limits as to when you can get your hands on your money.

It’s pretty ridiculous.

Indeed I’m starting to wonder if we shouldn’t do a hard reboot towards a system so simple that everyone understands it – making it harder for future politicians to meddle with – albeit at the cost of more turmoil today.

I haven’t attempted to cost out the following idea, but in theory it could sweep away a lot of this ongoing nonsense in one go.

We evidently believe as a society that old people should have a minimum standard of living.

We also believe younger people should know they have a comfortable future to look forward to, for all kinds of good reasons.

Finally, we understand it’s incredibly difficult to make any forecasts and commitments about the far future – financial or otherwise.

Funding your retirement been described as the hardest problem in finance, due to all the uncertainty.

But perhaps the one entity that can make firm commitments is the State, backed as it is by taxpayers.

So – maybe we should set a universal state pension at a much higher level than today’s payout. Say 50% of a median workers earnings.

That would deliver a State pension of about £15,000 a year right now, compared to less than £10,000 under the current system.

Wow, right? But how do we pay for it?

Well for starters we then scrap the entire artifice around private pensions and tax relief.

All of it. Everything.

People could still save and invest whatever they liked in the usual way, of course. There would be no prohibition on aiming to be a multi-millionaire in your old age.

But the government wouldn’t help you get there.

So there’d be no private pensions. No annual allowances or tax-free lump sums. No crystalization events or similar. No tax wheezes at the margins.

All gone, at a huge (though possibly not sufficient) saving to the government of time, money, and bureaucracy.

Possibly ISAs could remain. We’d have to do the sums. But before you get too indignant, remember you’d be getting that far bigger state pension, too.

Don’t worry, be happy

Obviously the lower-paid and poorer would gain the most though from this system. I’m not sure that’s a bad thing, given the direction of travel of society over the past 20 years.

But richer people like most of us are (or will be) would benefit, too.

Our retirement plans could be built on stronger foundations. Difficult choices about whether to lock money away and what would happen to it would be replaced by simply saving as much as you could and wanted to.

Billions would be saved in accountancy costs and other fees.

One snag would be it would make the Boomers even richer. The wealthiest cohort of society would suddenly get a far higher State pension despite not paying much towards it. (They’d pay something – they pay tax, remember).

Perhaps we’d need a windfall wealth tax to smooth the transition? If that meant Boomer retirees short on liquidity moving out of their mostly empty five-bedroom homes to release capital or whatnot, that’d probably be a good thing, too.

Now as I said I haven’t costed out my alternative pension system.

Why bother? Even if I was an elected MP there’d be zero chance of it being implemented.

But I think it’s worth thinking about big alternatives to this ongoing muddle.

Otherwise we will battle on for years with shifting rules and benefits and a future target that looks more like a swarm of bees than a bullseye.

More patches and glitches – and the occasional threat of a crash – forever.

Good business for financial planners, politicians, and tax specialists. Not bad for money bloggers, either.

But a pretty dumb way to encourage people to plan their way through life.

Have a great weekend everyone. Stay hydrated!

From Monevator

A guide to personal finance for immigrants to the UK – Monevator

Emerging market bonds and your portfolio – Monevator

From the archive-ator: Life insurance and protection: a primer – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

UK inflation rate hit 2.5% in the year to June, highest in three years – BBC

Petrol prices at an eight-year high, says the AA – BBC

Average UK house prices surge 10% year over year – Sky News

Child benefit tax ruling sparks widespread concern [Search result]FT

Total household wealth increased by 6% (£900bn) in pandemic, but richest 10% did far better, finds report [PDF]Resolution Foundation

Revolut becomes a £24bn tech giant on latest investment round [That’s more valuable than Natwest]Sky News

The mutual fund structure is giving way to ETF dominance – Yahoo Finance

Hong Kong’s exodus is real, diminishing its importance as a global hub – Bloomberg

The quest for the investment Holy Grail: an index of everything [Search result; 60/40 returns cited seem off]FT

Products and services

Get £100 cashback when you switch your ISA to Interactive Investor [Promotional offer, ends 31 July, terms apply] – Interactive Investor

Buy-to-let mortgage choice is improving for landlords – Which

How Apple and Klarna are cutting up credit cards [Search result]FT

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

The promise and peril of Ethereum – Morningstar

Homes for sale in seaside hotspots, in pictures – Guardian

Comment and opinion

How does a raise early in your career affect your finances? – Of Dollars and Data

Five threats to your pension [Search result]FT

What have you got in your ‘too hard’ pile? – Morningstar

Too smart – Morgan Housel

Transactional costs don’t matter much nowadays – Morningstar

Home bias and the best time to diversify – Compound Advisers

The language you speak may impact your financial decisions – Klement on Investing

A FIRE-ish update from a long-lost money blogger – The FIREStarter

Maladjusted money mindset mini-special

Frugality is a means, not an end to itself – Enso Finance

Choose both – Humble Dollar

Why do we always focus on the bad stuff? – A Wealth of Common Sense

Naughty corner: Active antics

Put down the dividends, and slowly walk away – Validea

Building a long volatility strategy without options – Factor Research

Covid corner

One in a hundred people in the UK likely have Covid right now – BBC

England’s Covid unlocking a ‘threat to the world’, warn 1,200 scientists – ES

Lockdown didn’t save lives from cancer – The Spectator

Hygiene theatre: how excessive cleaning gives us a false sense of security – Guardian

Kindle book bargains

A Colossal Failure of Common Sense: The Collapse of Lehman Brothers – £0.99 on Kindle

SAS: Leadship Secrets from the Special Forces by various authors – £0.99 on Kindle

Ultralearning: Accelerate Your Career, Master Hard Skills, and Outsmart the Competition by Scott Young – £0.99 on Kindle

The $100 Startup by Chris Guillbeau – £0.99 on Kindle

Environmental factors

Trains far greener, but much more costly to take than planes – Guardian

Amazon rainforest now releasing more carbon than it can absorb – CNBC

Yet another future of work mini-special

The future of work has arrived on Wall Street – Politico

The five-day workweek is dead – Vox

Four-day week? Not if it means a pay cut, say British workers – Guardian

Your boss secretly wants to quit. Leaders can’t take Covid-19 work life anymore – Globe and Mail

US cities are now marketing to remote workers, not companies – Axios

Community – Josh Brown

Off our beat

How your personal data is being scraped from social media – BBC

Can people still play the same video games as they get older? – Wired

And finally…

“I have lived with several Zen masters – all of them cats.”
– Eckhart Tolle, The Power of Now

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Freetrade. We may be  compensated if you pursue these offers – that will not affect the price you pay.

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The post Weekend reading: Turning on the triple-lock appeared first on Monevator.

Emerging Market bonds: why they belong in your portfolio

There’s credible evidence that Emerging Market bonds are a useful diversifier in passive portfolios. Albeit in a very different role from the one that bonds traditionally play.

Instead of slotting into the defensive ramparts of your asset allocation, Emerging Market bonds belong on the growth side.

They may offer equity-like returns while lowering overall portfolio risk.

Sounds too good to be true? Let’s see…

The case for Emerging Market bonds

We were tipped off about the potential of Emerging Market bonds by Monevator reader and hedge fund quant – ZXSpectrum48k.

Regular readers will be familiar with ZX’s insights over many years. They’ve dropped into our comment sections like messages from a friendly extra-terrestrial, with access to technology far in advance of our own.

ZX’s thesis is:

Emerging Market US$ denominated sovereign bonds have historically produced better returns than Emerging Market equities.

They’ve done so while being much less volatile than Emerging Market equities. As such, they’ve inverted the standard risk-reward relationship for more than 20 years.

That sounds like a good deal. Especially as Emerging Market bonds exhibit lower correlations with global equities than Emerging Market equity.

And ZX isn’t alone in noticing the special properties of Emerging Market debt. Vanguard’s research paper Emerging-market bonds: a fixed income asset with equity-like returns (and risks) states:

Their strong historical returns and high yields, along with the improved economic fundamentals of their issuers, have generated investor interest in holding them as a distinct portfolio allocation…

…We find that emerging market bonds have performed more like equities than like bonds.

Emerging Market bond types

Emerging Market (EM) debt divides into three main categories:

Emerging Market US$ sovereign bonds – government debt and government guaranteed debt, denominated in dollars.

Emerging Market local sovereign bonds – government debt and government guaranteed debt, denominated in the issuer’s local currency. This local EM debt is typically more volatile and less diversified than its US$ counterpart.

Emerging Market US$ corporate bonds – corporate debt, denominated in dollars.

The three flavours diversify across Asia Pacific, Eastern Europe, Latin America, Africa, and the Middle East, in quite different proportions to Emerging Market equity index funds. Holdings include a blend of investment and sub-investment grade bonds (also known as junk bonds).

You could mix all three types, but that’s taking complexity too far. Emerging Market US$ sovereign bonds bestow the benefits we’re after. That’s also what ZX uses. 

The chart below is from JP Morgan. It shows EM US$ sovereigns sitting close to the efficient frontier that denotes the risk-return sweet spot. (Okay, it’s a curve not a spot. Shoddy journalism, I know…)

We’ll focus on Emerging Market US$ sovereigns for the remainder of this three-part series.

Emerging Market bonds: historical returns

The primary return drivers for Emerging Market US$ sovereign bonds are:

The credit risk of Emerging Market governments
Interest rate exposure to US Treasuries

The EM US$ sovereign bond market has existed in its contemporary form for just over 30 years. History therefore offers us fewer crumbs to crunch on than our usual century’s worth of Developed Market data.

Publicly available EM sources are also few and far between.

However the research does suggest that something is going on:

Source: Vanguard. “Emerging-market bonds: a fixed income asset with equity-like returns (and risks).” August 2018. Page 8. US$ returns (2002 – 2017).

Emerging Market US$ sovereign bonds beat all other asset classes including global equities and US equities during this period. Only US bonds bested EM sovereigns on a risk-adjusted basis.

Source: State Street. “Case for Allocating to Emerging Market Debt.” February 2021. Page 7. Euro returns (2002 – 2020).

This second graphic shows Emerging Market US$ sovereign bonds on the far left. It’s labelled as Hard Currency Sovereign Debt. Compare its turquoise drawdown bar against Emerging Markets Equity on the far right.

While equity returns nosed ahead, EM US$ sovereigns won on a risk-adjusted basis. They inflicted less than half the pain for a similar gain.

Emerging Market bond returns including the pandemic

That’s all very well. But has the pandemic torn EM government balance sheets a new one?

We can compare EM US$ sovereign bond returns versus Emerging Market equities using iShares ETFs.

Here’s the data from February 2008 up to June 2021:

Source: justETF. (Cumulative GBP returns, income reinvested)

Emerging Market US$ sovereign bonds: +208% (Blue line).
Emerging Market equities: +118% (Red line).

As you can see, the EM debt idea has not been torpedoed by the pandemic.

Yes, there was a sell-off during the Coronavirus Crash of March 2020, followed by a moderate dip earlier in 2021.

But recent performance doesn’t suggest the market thinks that EM economies are being crushed.  

Emerging Market volatility during the Coronavirus Crash

Source: justETF. (GBP returns, income reinvested)

The lower volatility of EM US$ sovereign bonds relative to EM equities held up during the Corona Crash:

Emerging Market US$ sovereign bonds: -14% (20 February to 19 March 2020, blue line).
Emerging Market equities: -23% (20 February to 23 March 2020, red line).

Emerging Market volatility during the Global Financial Crisis

Source: justETF. (GBP returns, income reinvested)

The lower volatility thesis for EM US$ sovereigns also delivered during the Global Financial Crisis. EM hard currency bonds dropped less than a third as much as EM equities when the market hit rock-bottom:

Emerging Market US$ sovereign bonds: -16% (18 May to 23 October 2008, GBP, blue line).
Emerging Market equities: -53% (18 May to 27 October 2008, GBP, red line).

Emerging Market bond returns including the 1990s EM Financial Crisis

I know what you’re thinking. What about the 1997-98 Emerging Market Financial Crisis? Surely the returns above all hark from the Noughties because the Asian Contagion of the previous decade strips this notion bare like a Chinese groom cling-filmed to a tree, in a pre-wedding hazing ritual? [Er, indeed… surely? – Editor]

Not so.

The Bogleheads are a wonderful online community of passive investors. And one of the Bogleheads’ key statistics wizards provided the following returns data over a period that also includes the 1994 Mexican Peso Crisis:

Sub-asset class
Annualised return (%)
Volatility (%)

Emerging Market US$ sovereign bonds

Emerging Markets Equities

Source: Bogleheads, JP Morgan Emerging Market Bond Index Global Diversified (JPM EMBIGD), MSCI Emerging Markets Index. US$ returns (1994 – 2018).

Yes, Vanguard and State Street could have an incentive to data-mine. They want to support their Emerging Market fixed income products.

But neither ZX nor the Bogleheads are trying to sell me anything. And I’m further reassured by their reminder that the evil twin of equity-like returns is equity-like falls:

ZX cautions:

As a fixed-income credit product, it’s definitely not low-risk. For example, the index dropped 21.8% between Jun ’08 and Nov ’08.

Meanwhile the Bogleheads point out that Emerging Market bonds dropped by 40% in 1998!

Buyer beware. If you need to find room for Emerging Market debt in your portfolio, please replace a percentage of your equity asset allocation. Do not swap out any of your defensive bonds.

Does this data hold up for UK-based investors?

I calculated annualised returns and volatility in GBP (pound sterling) terms for EM US$ sovereign bonds (1994 – 2021):

Annualised total return: 8.85%
Annualised volatility: 13.66%1

Source: JP Morgan EMBIGD index. Monthly sterling total returns (31 December 1993 – 28 May 2021).

The data is from the market-leading index. It runs from its inception date to the latest month available as I write.

In comparison to the earlier Vanguard numbers, return is down and volatility up. The gloss has come off a little.

But we are still looking at equity-like returns with lower volatility.

Portfolio diversification

The Emerging Market bond story stacks up so far. The bonds outperformed Emerging Market equities, on a historical risk-adjusted basis at least.

Good portfolio building materials include asset classes that add return and reduce overall volatility.

Portfolio-level volatility can be lowered by asset classes that offset each other’s performance. If Asset A rises when Asset B falls, then your portfolio’s volatility is reduced.

Correlation measures the closeness of the relationship between the prices of two such asset classes.

A correlation score of:

1 means that the price of two assets rise and fall in lockstep.
0 means there’s no relationship between the two. Think of a random walk.
-1 means one asset rises when the other falls, in perfect synchronicity.

According to State Street2, the correlation scores for Emerging Market US$ sovereign bonds were:

0.49 with MSCI World equities
0.4 with Emerging Market equities
(January 2003 – December 2020)

So EM US$ sovereign bond prices tend to move in the same direction as the two equity classes above. However the relationship is relatively modest.

State Street calculated that Emerging Market equities correlation with MSCI World equities was higher still, at 0.76.

In other words, Emerging Market US$ sovereign bonds were a better diversifier than Emerging Market equities, in portfolios dominated by World equities.

Naturally, asset correlations aren’t static. That would be too easy. They change over time, and differ by data source.

However, Schroders’ correlation-check shows a similar, if less impressive relationship between EM US$ sovereign bonds and equities:

0.6 with global equities
0.7 with Emerging Market equities
(December 2002 – December 2018)

EM equities were again more highly correlated with global equities, at 0.9.

Hat-tip to Monevator reader c-strong who shared the Schroders piece. (Note, Schroders labels it as marketing.)

How much difference do Emerging Market bonds make?

The Vanguard and State Street papers include back tests. And it’s fair to say a slug of Emerging Market sovereigns wouldn’t have changed your life.

Vanguard’s test is the least shonky. It shows a 0.5% increase (at best) in annualised portfolio returns (from 1993 to 2017).

Source: Vanguard. “Emerging-market bonds: a fixed income asset with equity-like returns (and risks).” August 2018. Page 11. US$ returns (1993 – 2017)

The lime green line shows the uplift that accompanies replacing progressively bigger wedges of equities with EM US$ sovereign bonds.

The plum line usually refers to The Accumulator’s telephone number. But in this case it shows that risk-adjusted returns are improved by larger EM debt dollops. 

Finally, we performed the first-ever Monevator backtest using our patented data-torturer methodology.

Okay, really I threw together a passive portfolio using the longest-running and most relevant ETFs I could find:

10% iShares JP Morgan USD Emerging Markets Bond
70% iShares MSCI World
20% iShares Core UK Gilts

This portfolio made a cumulative gain of 227% from 15 February 2008 to 19 June 2021.

That’s a marginal improvement on the 217% gained if I substitute the EM bond ETF for iShares MSCI Emerging Markets Equity ETF.

If the grass is always greener, this is like moving from ‘moss green’ to ‘kale’ on the Pantone chart.

Emerging Market bonds: the underlying rationale

Asset classes must show more than juicy historic returns and hopes of lower volatility to justify their place in a passive investor’s portfolio. 

We also need a rationale. Something to explain why an investment can repeat that performance in the future.

ZX points out that EM US$ sovereigns are partly propelled by the carry trade:

It’s a classic carry product but backed by the fact that the debt fundamentals of most EM countries are in far better shape than developed market governments or, more importantly, the private sector.

Carry refers to the tendency for higher-yielding assets to deliver superior returns to lower-yielding assets. The carry factor is closely associated with currency markets. But it shows up in other asset classes, too.

Essentially, you can expect to earn a carry premium as compensation for investing in riskier, high-yielding assets versus safer, low yield assets.

But as with the equity risk premium, expected average returns are no guarantee of future returns. The premium may disappear, or not materialise in your investing lifetime. That’s the nature of risk. It’s not peculiar to the carry trade, of course.

As with any source of risk, the carry trade is a double-edged sword. It cuts both ways:

It’s moderately correlated with the stock market overall, and provides an additional source of diversification. 
But the carry trade is highly correlated with other risky assets during downturns. 

The carry premium is historically robust. It scores a moderately high average excess return, according to research

But it can inflict major losses during a crisis as capital flees to safe havens

You may well have exposure to other sources of carry, too, such as in high-yield corporate bonds3, and via EM equities, UK equities, Value, and Small Cap. 

Carry on investing

This piece is meant to be the case for Emerging Market bonds. I’ve saved the case against for part two. 

But I think it’s already clear the upside to reallocating to EM debt is likely to be marginal-to-vanishing for most Monevator readers. Especially if you’re a passive investor whose secret weapon is simplicity

Nevertheless I’m tempted

Vanguard’s backtest shows much improved risk-adjusted returns with Emerging Market bonds. That’s the main potential win.

The prospect of bagging a substantial discount to the swingy-ness of Emerging Market equity has me seriously thinking about a switch. Or perhaps giving half my EM equity allocation to EM bonds, as I do like the idea of a heftier diversification to the carry trade.

My main concern is the historic data may just reveal a one-off, golden period of outperformance. 

Emerging Market bond yields have fallen a long way since the dark days of the 1990s. Yields are always a key driver of bond returns. That ‘equity-like’ performance could be a thing of the past. 

I’ll get deeper into EM debt in part two. Get ready for enough downers to suck the soul out of Motown.

Take it steady,

The Accumulator

Standard deviation

Case for Allocating to Emerging Market Debt. February 2021. Page 10.
Which share commonalities with EM market bonds.

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A guide to personal finance for immigrants to the UK

This guide to personal finance for immigrants is by The Learner from Team Monevator. Come back every Monday for another fresh perspective.

A new adventure? Relocating for work? I recently moved to the UK, too, from Australia. That meant rebooting my financial life.

Moving country is a huge job and so I’ve prepared the following guide on personal finance for immigrants from my own experience of coming to the UK.

I hope it can help to make your transition that bit easier!

Before you leave home

1. Build up your savings ready for the move

However much money you think will be enough, double it.

The UK government guide on coming over with a Tier 5/Youth Mobility visa (a live/work visa for under-30-year olds) suggests you’ll need a minimum of £2,530 in savings.

But there are so many things you wouldn’t imagine you’d need, and the extra stability and security will help when everything is new and changing.

My recommendation is to bring whatever amount you need to make a substantial change of game plan.

For example, you may get here and suddenly discover you aren’t able to find jobs in the field you want to work in. Or, you may fall in love with a beautiful foreigner and want to study a foreign language instead.

Even if you have secured a job in advance, it’s not a bad idea to plan for a change.

In addition, your first few months will be fun (plus a few moments when you’ll want to pull your hair out) so consider a small budget to treat yourself, too.

You’ll also want to have drinks with new housemates, catch up with old friends that live here, and to explore your new surroundings.

2. Have an address – your first accommodation sorted

This is critical. It’ll be pretty much impossible to get or plan anything without first knowing where you’ll be staying.

Whether it’s an AirBnb or a friend’s place or a flat you rent, you need an address to apply for everything, from SIM cards to bank accounts.

I rented a place in advance on a six-month lease. But looking back, I would have been better off staying in temporary accommodation, and taking the time to suss out locations, transport, and to figure out what’s value for money in the UK. (Hint: set the bar low if you’re coming to London).

If you do choose to get permanent accommodation in advance, rental agencies will typically want either proof of income and savings or else ask you to pay three-to-six months upfront and/or to have a guarantor, such as a family member, who will cover you financially and legally if you fall short.

Once you know where you’re staying, help yourself out by choosing to pick up your BRP card (proof of legal immigration status) at a Post Office nearby.

3. Check out your banking options

If you can begin to sort out a bank account in advance, why not?

In the UK, there are retail banks that have physical branches across the UK, and mobile banks where you will only interact via a mobile app.

You can research different current account options via a variety of internet sources, including:

Money Saving Expert

Mobile banks and apps such as Monzo, Starling, and Revolut are popular for their ease of use, low-cost, and efficiency, although some people still value the reputation of traditional banks such as Barclays or Lloyds.

Note that signing up for a mobile bank is done via the bank’s app. Ironically, when you try to download this app via Apple’s App Store, Apple ID might ask you for a local credit card to proceed.

I found myself in this ‘hilarious’ endless loop circumstance where in the end I had to use a housemate’s card details to download the mobile bank’s app – in order to get my own local card!

Whichever bank you pick, keep in mind you will go through some kind of application process where the bank will want to verify your identity.

I suggest giving it a go before your move. However, if they need to see your BRP, you will have to wait until you arrive in the UK!

Some banks will only open a new account with you in-person at a branch. If this is you, book your appointment in advance for when you arrive, after you pick up your BRP card.

This was a surprise for me. In Australia, I was used to being able to walk in and see someone immediately. In the UK, appointments for new accounts can be booked up for weeks in advance, especially in busy periods. 

You can research savings accounts using the same services I listed earlier.

Savings accounts tend to require less rigour in their identity checks, so you could very well open one from abroad, provided you have your UK address.

Keep in mind the interest rates for savings accounts in the UK are currently quite low. 

4. Learn about pension and investment options in the UK

To have a pension in the UK, you’ll need to have a National Insurance (NI) number, which may have been given to you automatically with the BRP.

If not, don’t fret. You can apply for an NI number online, and visit a centre once you’re in the UK.

There are both workplace and private pensions (for the self-employed and others) available. Check out one of the many online guides for more info.

As for selecting investment platforms and brokers, peruse Monevator’s comprehensive guide.

The UK offers tax-efficient wrappers called Individual Savings Accounts (ISAs) to encourage you to save tax-free. Note that there are strict annual allowances on how much you can put into your ISAs each year.

5. Can you transfer your pension to the UK? How will your investments be affected?

How will moving affect your existing pension and investments? Arrangements between different countries and the UK will differ, so check specific sources to your country.

When in doubt, please seek out an expert financial advisor.

For pensions, if your current country partakes in the Qualified Recognised Overseas Pension Scheme (QROPS), you can potentially look at using QROPS to consolidate your pensions into one plan.

As for your investments, it’ll help to learn about the UK’s tax laws. Expatica has a useful guide to start you off.

After you’ve arrived in Britain

6. Transfer funds into the UK

Once you’ve set up your bank account, you can use low-cost transfer agencies such as Wise to send money internationally to the UK

Typically, you’ll be asked to make a local transfer to a Wise intermediary bank based in your ‘from’ country (Australia in my case), and then be paid from Wise into your new bank account in the UK.

Transfers can happen in a matter of 1-2 days, but I’d plan for one week.

7. Set up your credit profile for success

You’ll need some time to build up a credit profile in the UK.

There are three main credit agencies in the UK – Equifax, Experian, and TransUnion.

The following services are free, and will enable you to check your credit profile across the various agencies:

Credit Club (Experian)

ClearScore (Experian)

Credit Karma (Equifax & TransUnion)

MoneySavingExpert has a good guide on building your credit profile in the UK.

You’ll want to:

Sign up on the electoral roll.
Try to minimise the number of credit applications and hard searches on your profile (which can be tough at first when setting up utilities, mobile phone accounts, and so on.)
If you have been offered credit, keep your credit utilisation low (between 1-20%) and make all minimum payments or pay your card off monthly, in full.
Take out a credit builder card if you need extra help, such as Aqua.

Monevator has a legacy guide to the best credit cards that covers what to look for – but needs updating on the specifics. (Hint hint!)

8. Embrace open-mindedness and a growth mindset

Now that we’ve got you prepped financially for your new life in the UK, it’s time to enjoy it.

While exciting, coming to a new culture can be tough, so it’s important to stay open-minded and curious about learning about the UK.

Be sure to speak up for yourself, network, and share your own background and culture with love. Nurture your ‘growth mindset’.

Personal finance for immigrants is all part of our adventure

Surprises, twists, and turns will come your way, so stay present in the journey and trust your ability to adapt.

After all, you’re learning and growing.

Oh, and welcome to the UK!

Further reader: Finances 101 for UK immigrants

Monevator has lots of non-native born readers, so please share your tips and experiences on personal finance for immigrants in the comments below. And do check back for more articles from The Learner.

The post A guide to personal finance for immigrants to the UK appeared first on Monevator.

Weekend reading: The economics of free share trading

What caught my eye this week.

Like most people, the first time I heard about Robinhood I underestimated the zero-commission pioneer. I put a link in Weekend Reading. But I didn’t write an article predicting it would mean the end of retail dealing fees.

Indeed, the same day I first mentioned it on Monevator – 8 March 2014 – was also the day my co-blogger was on BBC Radio 4’s Money Box to talk platform fees. The Accumulator didn’t bother the middle-classes masses by citing Robinhood over the airwaves, either.

Robinhood was then just a curious side story. And it still seemed that way even as readers started emailing me to ask if there was a UK equivalent.

Seven years later and most US brokers have cut their trading commissions fees to zero. My blog tells me I didn’t see that coming, just as surely as my trading journal reminds me of the dumb reasons I had for selling Tesla.

Perhaps if you weren’t publishing your views back then you did predict Robinhood’s success? I’m sure you’ll let us know in the comments!

Peter pays Paul

One excuse for doubting Robinhood was I knew well the finance industry’s long history of extracting money from its customers. I’ve blogged about that since 2007. So in as much as I thought about Robinhood in those early days, I feared a wolf in revolutionary stockings.

Perhaps those instincts weren’t entirely off.

Robinhood is about to float on the US stock market. It’s had to reveal the workings of its business in an S1 filing. And lots of people have digested the details.

Most striking is that on holding $80bn in assets from 18 million customers, Robinhood generated $522m in sales in the first three months of 2021.

For fun we can crudely1 annualize that to estimate Robinhood might make $2bn of revenues on $80bn of AUM over a full year.

That represents 2.5% generated off its customers’ wealth. Compare that to less than 0.25% levvied by a typical cheap index fund. The real-life Robin Hood’s men had every right to be merry if their economics were anything like this.

I’m not saying Robinhood shouldn’t make this money, necessarily. Crucially (though some would say arguably) much of that $2bn would not be tithed from its customers’ wealth. Much would be so-called ‘payment for order flow’, which comes from third-parties. Many commentators are adamant such payments are against the interests of Robinhood customers, but they won’t directly reduce those customers’ portfolio balances.

Other big income streams for Robinhood include crypto trading – not even Bitcoin, but Dogecoin – and option trading. One can legitimately wonder how well this will take those 18 million customers to riches. But it’s famously a free country.

Still, I’m amused by the picture that emerges from the S1. Similar to how 1970s feminists wouldn’t have imagined a million young women using their liberation to cavort for money on OnlyFans, so Robinhood surely isn’t what Vanguard’s Jack Bogle had in mind when he took the fight to Wall Street.

People gonna people, I guess.

Free share trading in the UK

Remember that as a shareholder in the UK sort-of-rival Freetrade, I’m biased (and that we will both get a free share if you sign up via that link…)

Moreover, as Freetrade co-founder Viktor Nebehaj explained in a podcast interview with Meb Faber this week, its business model is very different.

Payment for order flow is illegal here. Freetrade has also chosen not to support options trading, nor leverage. Instead it mostly makes money from currency conversion fees and – increasingly – from low-cost subscription tiers for ISAs, SIPPs, and enhanced trading features.

Freetrade now has 800,000 customers, so it’s doing something right.

Will it ever mint money like Robinhood?

Probably not.

But as a shareholder who runs an educational blog for private investors, I’m far more comfortable that its business model is aligned with its users. It also seems more sustainable.

This time next year Rodney

What I’m not, sadly, is a genius – no more than I was back in 2014 when I first heard of Robinhood.

Because despite seeing the growth of the US fee-free originator from the ground floor by covering it here, I still dithered when I first got the chance to take a stake in Freetrade.

I did invest a (small) amount of money in its subsequent crowdfunding. But in that podcast Viktor revealed some first-round investors have been made millionaires as the start-up’s valuation has grown.

Sigh. Trading options or punting on crypto on Robinhood might be a quick way to lose money. But investing has a whole panoply of other ways to make you feel like a muppet…

Enjoy the weekend – get your free share if you haven’t – and come on England!

From Monevator

The Slow and Steady passive portfolio update: Q2 2021 – Monevator

Comparing the cost of electric car ownership – Monevator

From the archive-ator: Debating whether you should count your own home in your net worth ‘number’ – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!2

Rishi Sunak hints that pension triple-lock could be scrapped – Yahoo Finance

UK house prices fell in June, says Halifax, as stamp duty holiday ended – Guardian

Swedish Coop supermarkets closed due to US ransomware cyber-attack – BBC

Covid leaves students with a bitter financial legacy [Search result]FT

UK liable to pay EU €47.5 billion in post-Brexit financial settlement – RTE

Products and services

NS&I reveals four changes that will affect savers this year – Which

Get £100 cashback when you switch your ISA to Interactive Investor [Promotional offer, ends 31 July, terms apply]Interactive Investor

Could you be holding onto an old mobile phone worth thousands? – ThisIsMoney

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

HSBC launches two-year fixed mortgage with rate of just 0.94% – ThisIsMoney

Homes for military history buffs, in pictures – Guardian

Comment and opinion

Why art and sneakers usually fail to make the investment grade [Search result]FT

The practicality of money [Malaysian but relevant!]Mr Stingy

Rebalancing: the most ignored investing premium – Validea

Don’t run scared of pension saving savings limits [Search result]FT

How to keep your financial accounts secure – Humble Dollar

Is downsizing to a smaller home right for you? – Which

Overcoming the frugality syndrome – Advisor Perspectives

You’re richer than you think – The Irrelevant Investor

Patient investing [in return factors] is hard – The Evidence-Based Investor

Naughty corner: Active antics

Returns from infrastructure have come from trading – Joachim Klement

Uber’s not-so-secret value – Axios

Rumpelstiltskin and meme stock investing – Albert Bridge Capital

Even the best active funds lag for long periods – Behavioural Investment

Alpha erosion and hot dogs – The Waiter’s Pad

Covid corner

Up to one in 160 people have Covid; R 1.2 to 1.5 – BBC

England’s Covid-19 gamble as society reopens despite skyrocketing cases – NBC

Children’s extremely low Covid risk confirmed by study – BBC

The most common symptoms have changed, finds Zoe study – iNews

‘Dread and anxiety’ among NHS staff as Covid cases surge again – Guardian

Concerns rise about Chinese vaccine efficacy, but poor countries have few choices – CNBC

Anti-vaxxer geniuses call for Heineken brand boycott – The Drum

Kindle book bargains

The $100 Startup by Chris Guillbeau – £0.99 on Kindle

A Colossal Failure of Common Sense: The Collapse of Lehman Brothers – £0.99 on Kindle

SAS: Leadship Secrets from the Special Forces by various authors – £0.99 on Kindle

Ultralearning: Accelerate Your Career, Master Hard Skills, and Outsmart the Competition by Scott Young – £0.99 on Kindle

Environmental factors

Investing in Chargepoint, an EV charging equipment supplier – DIY Investor

Can a heat pump really replace your gas boiler? – ThisIsMoney

Off our beat

Marina Hyde: We can’t keep politics out of sport, but please keep politicians out of football – Guardian

On the benefits of slowing down – Ness Labs

Spin machines: the curious history of video games on vinyl – Guardian

Why the Pentagon can’t identify flying objects – Slate

Is it time to give up our invisible addiction to coffee? – Guardian

And finally…

“In noisy systems, errors do not cancel out. They add up.”
– Daniel Kahneman, Noise: A Flaw in Human Judgement

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The exact timings don’t align with respect to those historical numbers, and Robinhood is still growing fast in terms of future numbers. So this is just the gist.
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