UK Index Funds

The first investment I made in my life was Hang Seng Index Fund, when I was 17. I, accompanied by my mum, bought the fund at a small branch of Hang Seng Bank in Luen Wo Market. I still remember the excitement when I witnessed my mum signing the documents, although there was really nothing exciting about index funds, which are by definition average, and therefore dull. It would however appear that dull, for the lack of a better word, is good, according to the little blue book The Elements of Investing, or Warren Buffett's letters to shareholders.

I have been collecting funds tracking the Hang Seng Index and MSCI China Index through MPF, Tracker Fund (2800:HK) and iShares MSCI China (2801:HK). Even in these "chaotic times" (to borrow the words of Mr. Lawrence Lok SC), I still believe that China businesses are great in the long run. On the other hand, I will have to diversify part of our investments into other regions to mitigate the home bias and there is nothing better than investing in the second home - there will be second home bias but we can deal with that later.

Among the Hong Kong offices of iShares, SPDR and Vanguard, there is only one index fund tracking UK/Europe stock index: Vanguard FTSE Developed Europe Index ETF (3101:HK). Hongkongers are not particularly interested in index funds and there will unlikely be many choices in Hong Kong in the near future. While there are many ETFs listed on the London Stock Exchange tracking FTSE 100 and other stock indices, it may not be worth the hassle due to taxes, unless of course there is no alternative here in Hong Kong.

Vanguard is apparently selling the same fund (tracking the FTSE Developed Europe Index) in the UK, at the total expenses ratio of 0.15% and it may want to explain why the total expenses ratio quoted in Hong Kong is 0.25%. One possible explanation is that 3101:HK is new (inception on 10 June 2014) but I would not be surprised if its TER remains unchanged for some time due to the lack of real competition in Hong Kong. Be that as it may, considering the tax implications and logistics I would not mind paying a premium of 0.1%.

As at May 2014 32.1% of investments were in the UK, followed by France (14.5%), Germany (13.7%) and Switzerland (13.6%). The price/earnings ratio was 20.0x and the equity yield was 3.1%. Not a bargain, but I will keep an eye on this.

Now time for a bit of nostalgia. Hang Seng is still offering index funds to its customers. Indeed it is selling a fund supposedly tracking the FTSE 100 Index (the performance of the fund is telling a somewhat different story). The subscription fee is 3% whereas the annual management fee is 0.9%. What I cannot now remember is that I had such a deep pocket when I was 17.