The world funds are a stock market index fund and are ideal for investors buying for the long term (10 years plus), that want to invest in a wide range of global companies (1400+) and are able to accept some market volatility. The companies in world funds consist of a wide range of sectors within international markets.
It really is the ultimate fund for diversified stocks and it is possible for this fund to make up a large percentage of your overall stock portfolio. You may want some safer assets such as bonds, or some local stocks for the dividend and tax benefits, or some property or value funds, but well diversified international stocks are the backbone of any stock portfolio and these funds provide just that.
The downside to investing overseas is the increased tax costs which we will get into later. Unfortunately it is a price we pay for full diversification.
Superlife, Smartshares and InvestNow all use Smartshares, which invest directly to the Vanguard total world stock fund. This fund tracks the performance of the FTSE global all cap index, which covers the largest companies in both developed and emerging markets. 58% of the fund currently invests in the biggest companies in North America, 19% in Europe, 13% in the Pacific, and 9% in emerging markets. Currency this fund is not hedged, meaning you are exposed to currency fluctuations.
Sharesies and InvestNow use the AMP Capital global fund which tracks the MSCI world index. This index invests in large and medium sized companies from 23 developed countries. This index, unlike Smartshares, excludes companies involved with tobacco or weaponry. So it is a partially ethical fund. You will also notice that it doesn’t invest in emerging markets, only developed markets. This is in contrast to the 9% in emerging markets for the Smartshares fund. North America makes up 65% of this fund currently, so a significantly higher weighting in North America than the Smartshares fund. Bear this in mind as it may have an impact on your diversification needs or portfolio overlap. This fund targets an amount of 69% hedged against the NZ dollar.
InvestNow have a third low cost world fund so plenty of options there. This is the Vanguard international fund, which is either hedged or unhedged. I have chosen to analyse the unhedged version because for the long term investor this is the fund with the best after cost returns. Hedged is an unnecessary cost for the long term investor as while currencies may be volatile in the short term, in the long term they tend to remain stable. The hedged version of this fund costs 0.26% in management fees, as opposed to 0.2% unhedged.
This fund also excludes weaponry and tobacco. Normally you would need $500,00 to invest in this fund, so the $250 minimum of InvestNow is a low barrier to entry to what would normally be very difficult to get into this fund. The downside is you need to do your own tax return for this fund. If your fund value is less than $50,000 then you just pay tax on the dividend income. If the fund value is over $50,000 then there are several ways to calculate your tax.
There are two main methods for calculating your tax obligations:
1/. FDR (Fair dividend rate) which calculates your taxable income based on 5% of the funds opening value. For example, if your opening balance was $60,000 and your tax bracket is 30%, you would calculate your tax as $60,000 x 5% x 30% = $900. This method must be used if the value of your fund (capital gain and dividends received) increases by more than 5% annually. It is a bit more complicated than that, with a few exceptions, so it is always recommended to interact with an accountant, especially the first time you are doing this. This is the method that all the other PIE funds use, except the most tax you will pay is 28% of 5% (1.4%). With the InvestNow Vanguard fund you can pay up to 33% of 5% (1.65%) depending on your personal tax rate.
2/. CV (comparative value) which is basically your end of year balance (plus any stock income received from sales) minus your start of year balance (plus total value of purchases). This method should be used if the value of the fund has gained by less than 5% or lost money.
The downside is obviously the extra work and cost needed to do your own taxes. The upside is that you can use an appropriate method of calculating taxes. For example, if the fund returns 2% one year, it wouldn’t be good to pay 5% of the opening balance using the FDR method. You have the option to use the CV method and pay less tax when your fund is not performing as well. The other funds in this analysis are PIE funds and they use the FDR method regardless of returns.
Now that I have given you a headache with all this tax talk, let’s go to the final fund in this battle. The Simplicity growth fund. This fund is a bit different to the others in that it doesn’t entirely track an index. It is not an index fund. It is a managed fund with a mix of growth and fixed assets. I have included it here though because it is a low cost fund that invests internationally and it deserves consideration. This fund invests 48.5% (can vary up or down) in a similar ethical Vanguard international fund that InvestNow uses, except it also excludes non renewable energy and vice products such as alcohol, gambling and pornography. You also won’t need to worry about doing your own taxes since Simplicity is a PIE fund. So if you want to invest in this fund but don’t like the idea of doing your own taxes, then Simplicity may be a good alternative. Bear in mind though that it makes up just 48.5% of the fund, not 100% like with InvestNow. Simplicity do hedge their international investments against the dollar if you are looking for that certainty.
The Simplicity fund also currently invests 29.5% in Australasian equities, 12.5% in international bonds, 7.5% in NZ bonds, and 2% in cash. This calculates to 78% in growth assets (stocks) and 22% in fixed assets (bonds and cash). This may not be aggressive enough for some investors. Because of this, i’m not going to include the results of the Simplicity fund in my declaration of the low cost world fund winner. Because it is not a 100% world fund. This fund is still here though as I didn’t know where else to put it and it is a diversified low cost fund that invests almost 50% in international markets so may be a handy comparison for someone who wants a little bit less risk or an all in one diversified fund that covers multiple asset classes.
If the world fund makes up a large part of your portfolio it is also easy to over diversify. For example, with US markets making up approximately 60% of the Vanguard world fund, it wouldn’t make a lot of sense to also invest in the US500 fund. It’s important to look at the mix of the assets of the fund you are investing in so you don’t have too much overlap among funds. You want to be looking for separation so you can smooth out your risk of being overexposed to one market.
For the data I have assumed investor annual contributions of $600 to meet Smartshares and InvestNow minimum requirements for a level playing field.
For this fund I am assuming a 6% return after costs for all funds.
For the brokerage selling fees I have used ASB Securities rates and fees. Only Simplicity, Superlife, and InvestNow Smartshare fund customers don’t incur selling fees for the world fund. The rest all incur some form of selling costs.
Unlike the previous rounds, I have had to include tax calculations in this battle, since the InvestNow Vanguard fund has a different way of calculating your tax obligations. This to to level the playing field so we are including ALL costs of investing.
I have used the FDR method for the InvestNow Vanguard international fund, with the assumption the investor is on the 30% tax rate. I have assumed annual dividends of 2.5%. So, investors with less than $50,000 are taxed 30% of 2.5%. Investors with more than $50,000 are taxed 30% of 5% of the years opening value. For the other funds, I have also assumed 2.5% dividends, but they are taxed at a top rate of 28%, instead of 30%. This is because they are PIE funds.
Just remember that if you are in a lower PIR tax bracket, then Sharesies and Smartshare investors will need to claim the difference by making a tax refund application. Those two companies will tax you 28% even if your rate is lower.
For the Simplicity fund, since only 60% of the fund is in international bonds and shares, I have only calculated international tax on 60% of the portfolio. The other localised 40% I assumed 28% tax on 4% income which is a benefit of investing locally.
The numbers on the following tables is the price of the fund if it were to be sold at that period in time.
With that out the way, lets have a look at how the fees stack up for an investor who has an investment worth $100, $1,000, $10,000, or $100,000.