Saturday, 19 April 2008

Structure Your Own Fund on Hesta and Pay Low Fees

I am with Hesta Super Fund. I didn't choose this fund. It was simply what the employer gave to me.

Most people invest in the default option, which for Hesta is the Core Pool, a diversified fund that holds a reserve to smooth out bumps. The problem with this fund is that it holds only 55 per cent of its assets in shares, which is far too conservative for someone who is 24. The rest of the fund invests in property, infrastructure, private equity, commodities, fixed interest, and cash. Wanting something more aggressive, I chose the Shares Plus Fund, which invests 76 per cent of its assets in shares. This fits in with Bogle's rule that what percentage you should invest in stocks is 100 minus your age.

The problem is that the Shares Plus Fund has a management expense ratio of 0.70 per cent (and performance fees of 0.32 per cent). This is rather high.

Luckily, Hesta has a Your Choice option that allows investors to make their own portfolios. This means I can pick and choose more specific asset classes like Australian Shares and International Shares and imitate a diversified fund like Shares Plus or even Vanguard High Growth Fund for a lower cost. So that is exactly what I did.

I decided to construct in Hesta a fund that looks exactly like Vanguard's High Growth Fund. The only problem was that Vanguard invests 7 per cent of its High Growth Fund in emerging markets and small companies. Hesta doesn't have any of these as Your Choice options. So I made an assumption that the Absolute Return Strategies option, which invests in hedge funds, is similar in risk and return characteristics.

The weighted management fee of this imitation fund is 0.55 per cent with performance fee of 0.29 per cent. This is considerably lower now!

The following asset allocations are used for the imitation fund: Fixed Interest (10%), Property (10%), International Shares (29%), Australian Shares (44%), and ARS (7%). I have copied the asset allocations used by Vanguard.

Could I do the same thing with my Vanguard fund? Right now I invest all my money into Vanguard's diversified High Growth Index Fund. However, what if I put 44 per cent into Vanguard's Australian Shares Fund, 29 per cent into Vanguard's International Shares Fund, and so on? The problem is that Vanguard doesn't offer retail funds that invest in emerging markets or small companies. Furthermore, Vanguard offers quantity discounts. I am charged 0.90 per cent on my High Growth Fund currently but for investments beyond $100,000 I am charged only 0.35 per cent. A minimum of $5,000 is also needed to start a new fund with Vanguard. All this, combined with the fact that I only work part-time, means that it is not worth it making my own fund in Vanguard. They have probably already thought about this.

Some people tell me that yet a cheaper way to invest is not through traditional mutual funds but through ETFs (exchange traded funds). This is something I'll write about more later.

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