S&S ISA Experiment – May 2021 Update

First update on my S&S ISA Experiment – I don’t know that I’ll actually do these monthly for the long term, but at least for now I’m curious to see how it’s doing.

Quick recap of the experiment: Americans can’t hold index funds in a S&S ISA due to PFIC regulations 😦 But we can hold individual stocks! Now, I’m generally a strong believer in indexing, the Bogleheads philosophy, buy and hold, etc., but the vagaries of the US/UK tax system are forcing me into individual stocks. So, I’ve constructed a “pseudo-index” of 20 stocks, roughly replicating the FTSE 100 index of the largest UK stocks. I’m not trying to beat the market, just match it without spending a fortune in fees – my bet is really that my performance is close enough to the index that the UK tax advantages of an ISA save more money than the fees and tracking error cost, compared to investing in an actual index fund in a US taxable brokerage account.

My S&S ISA is at Hargreaves Lansdown, one of the few UK brokers that is willing to work with Americans. Their fees aren’t the lowest (£11.95 per trade adds up if you aren’t careful!), but they are manageable with some planning, and really, there aren’t any better options I’ve found. I have been pleased with their service, interface, etc. – no hesitation recommending them for people in the same situation.

To track the performance of my pseudo-index, I’m comparing my ISA against the Vanguard FTSE 100 ETF (VWRP) – that’s probably what I’d buy if I could actually buy a FTSE 100 ETF. I’m mostly interested in whether or not my selection of 20 stocks is a reasonably close approximation of the FTSE 100, but I’ll also keep track of fees along the way (I expect that will mostly just show that Americans in the UK are forced to pay higher fees than necessary, but that’s life…).

This investment makes up part of my UK equities asset allocation – it’s cheaper to buy UK-listed individual stocks (no currency exchange fees), and the the UK market is a lot smaller than the US, so I’m hoping that 20 stocks is a better representation of the FTSE 100 than it could be of the S&P 500 or something like that.

April 2021 Activity

I opened my ISA in March, but only bought 2 (AstraZeneca & Unilever) of my 20 stocks to start with – just enough to get the account open. The way the HL fees work, it’s far cheaper (£1.50 a trade instead of £11.95) if you buy stocks on a monthly plan. Fortunately, you can change the stocks and the amount every month, so as long as you have patience you can save a good chunk on fees.

April was my big startup month – I bought about £500 each of 16 more stocks, plus brought my first two up to around £500 cost basis. I’ll contribute to the last two stocks in May, fully constituting my roughly equally weighted (on a cost basis) 20 stocks. From there, I’m planning on just working my way through the 20 stocks by lowest cost basis, adding every month. I probably won’t hit the full £20k annual ISA limit, barring some unexpected good fortune.

So, as of now, I own roughly £500 each of the following: Associated British Foods, AstraZeneca, Aviva, BAE Systems, bp, Compass Group, CRH, Diageo, Experian, InterContinental Hotels, International Consolidated Airlines Group, London Stock Exchange Group, Ocado, RELX, SSE, Tesco, Unilever, and Vodafone. I’ll top that up with GSK and Reckitt Benckiser in another week or so.

There’s also about £15 in uninvested cash – with on-demand trades costing £11.95, I plan to wait until there’s at least £100 in cash before doing any trades other than the monthly £1.50 ones, and I need to keep a little cash to pay for the platform fee (0.45% a year, capped at £45, paid monthly). I have been tailoring the purchase amounts of each stock to try not to leave any more uninvested cash than necessary – for example, if a stock is £75 a share, I’ll try to buy 6 (£450) or 7 (£525) shares, not allocate £500 and leave £50 in uninvested cash, but with price movements between the day I allocate the money and the day of purchase, some cash is inevitable.

FTSE 100 vs Pseudo-Index

I’m taking a unitized approach to comparing my performance vs the FTSE 100. So whenever I buy stocks, I’m also making an Excel entry noting how much it was, the price of VWRP (the Vanguard FTSE 100 ETF), and how many units of the ETF I would have bought with that money.

For example, on 12 April I bought £8,370 of stocks, £8,293 after fees. On that day, VWRP was £78.61 a share, so I would have bought 105.49 shares (£8,293/78.61). Now, at the end of April, I see that VWRP is priced at £78.98, so those 105.49 shares are worth £8,331, as a benchmark to compare against.

Actual numbers: between March & April, I contributed £8,870 to my ISA – I actually bought £8,740 of stocks plus £15 of cash, with another £73 going to fees and £42 to stamp duty. As of the end of April, that’s worth £8,787. So I’m up £32 (0.4%) ignoring fees, down £83 with fees. If I’d bought the same £8,755 (actual invested + cash, after fees) in VWRP, I’d have £8,823, up 0.8%, or a whole £36 more than I actually have. So, definitely not the same as VWRP, but this is a short comparison period, I’m not panicking about VWRP returns being twice what I have, yet.

Graphically, two months looks very exciting – not so much, it’s dominated by my April contributions, but this should get more interesting over the months.

Observations

I’ve been spending too much time watching my account, purely out of curiosity (not doing any frequent trading!). No surprise, on any given day, the 18 stocks I own are all over the place, some up, some down. But these are all big companies – over a fairly quiet few weeks, most of them are up or down a few percent in a day, not radical swings.

We can certainly see differences in performance – the best performers are up 6-8% so far, the worst down 5%. But what I’m really curious about is whether the portfolio as a whole is a reasonably close approximation of the FTSE 100 – far too early to see that.

Here’s my summary of overall performance across the 18 stocks:

I’ve also signed up for press releases and such from all of the companies. I will say, it’s interesting to learn more about some of these giants of the UK market – some are household names, others less obvious. For example, before this experiment started I had no idea Primark was owned by a company that would sound like primarily a food manufacturer (Associated British Foods – they do also make food!).

3 thoughts on “S&S ISA Experiment – May 2021 Update

  1. I’ve been running a few portfolios of mostly FTSE 100 individual shares, with the oldest having been invested for almost 10 years now. It’s remarkable how closely the total return has tracked the performance of the FTSE All Share with dividends reinvested. My preferred performance metric is the money-weighted return, or “internal rate of return” using the XIRR function in Excel. I then use the CPHI index (available from the ONS) to calculate the annualised rate of inflation over the same period of investment. I then subtract that from the nominal annualised return. This gives me a kind of real annual rate of return including all charges, dividends, etc. I can then compare that to the annualised performance of a tracker such as iShares Core FTSE 100 Acc or SPDR FTSE All Share Acc. Given the size of my portfolio I finally decided to invest in a license of the Sharepad investment analysis software as well. This unfortunately does not calculate the IRR, but it does do a pound-for-pound comparison of investing (i.e. buying or selling at the same time) in a comparable tracker over the life of the portfolio. Overall, the results show a few things:

    – Overall volatility and performance is very similar to the index.
    – The portfolio can diverge from the index, positive and negative, but over multiple years it tends to return to the overall return of the index.
    – The total failure of a single share (Carillion in my case) can hurt hard, but individual stand-out performers can help cancel out the failures.
    – Things get complicated if a company does a “corporate action” such as merger, demerger, consolidation, share split, etc. It can mess with the way you calculate performance and complicates the reporting of any future sale (on your US tax return).
    – I desperately try to avoid timing the market, but automatically “topping up” an under-allocated sector when it was out of favour has often resulted in good long term results. At the same time, you should never get too excited by one share or sector doing really well, because it will often fall right back for no apparent reason.
    – You need to have the stomach for some terrible drawdowns. The worst drawdown over this period has obviously been the pandemic. At this point my portfolio fell to the equivalent of zero total return (before inflation) over the prior 5 years. i.e. I would have been better off using a cash savings account. However, the portfolio has since recovered such that the lifetime annual rate of return is now 6.9% nominal (5.1% real). This beats the FTSE 100 by 1.0% a year.
    – Over the last 5-10 years (and more) the FTSE 100 has badly underperformed the US and global markets. I try not to dwell on this too much. I think the UK is “good value” at the moment. The US and global indices are heavily influenced by a handful of tech stocks, which the UK simply has nothing to compare to. I think getting into tech now, just because it has done so well, would be a risky move. I already have a large allocation to international (especially emerging markets and Japan) in my SIPP, so I’m not concerned about the home bias of my ISAs.
    – Whilst it can be very interesting to watch the performance of the portfolio and individual shares over time, it’s really not recommended! The market always moves before you are able to respond to any news. Good results can result in share falls and vice versa. Individual shares naturally fall on ex-dividend dates, especially those with a high yield, so don’t panic. The human brain is trained to look for patterns, but that way lies insanity if you stare at the FTSE 100 for too long!

    By the way, a useful resource for when reporting dividends and trades in USD, is the daily historical exchange rates provided by the US treasury:
    https://www.federalreserve.gov/releases/h10/hist/dat00_uk.htm

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    1. I’ll probably get more into rates of return once I have a little more data – interesting to hear your results, those all make sense and generally align with my expectations. Good advice on not looking too often – I’ve gotten good at that in my index funds, and I expect it will come with my ISA.

      I had just started investing in 2008 when it seemed like the world was ending, and managed to ride that one out, coming back stronger with monthly investments along the way. March 2020 felt different – everybody was panicking, but by the time that happened, it would have been silly to sell at such a big loss. There was so much uncertainty around, it felt like riding it out was the only sensible option, which did turn out to be true. Still a lot of uncertainty today, with uncertain reopenings, third waves, threats of inflation, weird unemployment/furlough, etc. But it’s so much all together, trying to make sense of any one element of the uncertainty is kind of pointless – so again, I’m planning to stay the course, stick to my asset allocation and monthly investments, and see where it goes.

      I’d agree the UK seems like good value, so I’ve deliberately got a small home bias. I own plenty of Apple, Microsoft, Alphabet, etc. through index funds, and don’t need to tilt toward tech any more than the entire market is already tilted that way! Individually, all of my accounts have bizarre asset allocations, but when I add them all together, it makes sense – mostly market cap based, with a small tilt towards both UK and to US mid/small cap, and 10% bonds. I can sleep at night with that!

      Thanks for the exchange rate link – to date I’ve been using the HMRC average monthly rates for my US taxes and daily rates for UK, but daily appeals as more exact. Seems like as long as you’re consistent, it doesn’t really matter, it’ll average out in the end.

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