Plus some good reads from around the web.
Fans of The Accumulator’s articles on passive investing know how hard it can be for UK investors to find information about the various cost components of index tracking funds.
Fund managers can get equally frustrated – at least when it comes to the stats that make them look good!
Now the company behind the fundamental-tracking Munro Fund has created its own resource of statistics to tackle the problem head-on.
Its new website of tracker stats is called Smart-Beta.
The company explains its motivation as follows:
There are now a number of funds, usually described as index or tracker funds, that provide investors with a mechanism to capture the beta of the market in a simple and inexpensive manner. There are also a few funds that seek to deliver the market returns in a different , and arguably better, way than using market capitalisation to determine portfolio construction. It is becoming common practice to describe these as smart-beta funds.
Because these funds use a mix of structures, typically ETFs and OEICS it is hard to find data to make comparisons in one place. It is also difficult to find all the data you need to make a full and proper comparison. It is not much use identifying a low cost fund if the minimum investment is a much larger amount than you wish to invest.
This site has been set up to help address this problem.
The information on Smart-Beta is culled from Bloomberg. Fundamental Tracking Investment Management Limited, the company behind the Munro Fund and Smart-Beta, says data on the site is not comprehensive, and should only be used as a starting point for further research.
It does add though that “every effort has been made to ensure it’s up-to-date”.
I’m sure some of you passive investing bloodhounds will let the rest of know if you think it’s useful or not!
From the money blogs
- Time arbitrage: Investing vs. speculation – Investing Caffeine
- Asset allocation and risk tolerance – Oblivious Investor
- Do stocks always outperform (in the long run)? – The Psy-Fi blog
- How to become an even better investor – UK Value Investor
- How much of one investment is too much? – Can I retire yet?
- Killing your $1,000 grocery bill – Mr Money Mustache
- Retiring early is not all about money – Simple Living in Suffolk
- The costly joys of maintaining old cars – Len Penzo
- 5 ways to save on petrol – Totally Money
Product of the week: Amazon is finally launching Kindle Touch
Mainstream media money
- Warren Buffett’s $50 billion decision – Forbes
- The alternative Buffett [ignoring his early hedge fund!] – Fool.com
- Oil prices: Gulf keeping it to themselves – The Economist
- Peston: Did the Bank of England cause the boom and bust? – BBC
- Swedroe: What investors can learn from Norway – CBS
- Over-60s: Did they ever have it so good? – FT
- Short-term bonuses drive best buy cash ISAs – FT
- Pension (annuity) levels edge up after gilt rise – FT
- It makes sense to be a dividend bore – FT
- London set for decade of buy-to-let growth – FT
- Is it time to go big in Japan? – Telegraph
- NewBuy mortgage scheme in crisis – Telegraph
- The total value of UK property, by town – Guardian
- NS&I: Interest lost over maturing bond mix-up – Independent
Like these links? Subscribe to get them every week.
Thank you for excellent info on Smart-Beta Site. Lots of very useful data and intelligible explanation of the terms used in the trade. Moneyvator is proving to be very well worth reading.
> the lack of touch is a bit medieval
Eeeuww, can’t get my head round all this iTouch fetishisation. It’s hard enough to stop the urge to grab people by the throat who point at the screen at work making grubby little grease-marks without doing it to a Kindle. It’s hard enough to keep people’s mitts off the screen as it is 😉 What’s with this regression to a tactile world?
Japan, eh? Somewhere I recall reading an article likening investing in Japan to the military adage ‘Never march on Moscow’.
There’s some really interesting numbers on the SmartBeta site.
a) Operating Cost Charge to Fund
E.g.
VANGUARD UK EQUITY INDEX-I 0.95%
HSBC ALL-SHARE INDEX-ACC 0.36%
Why’s this? Because of the fund size?
b) Tracking Error
E.g.
HSBC ALL-SHARE INDEX-ACC 4.453
No Vanguard here. These all look really high and much higher than advertised (by a factor of almost 10x).
c) Beta
“The beta of the market is always referred to as 1.0 so a fund with a beta of 0.95 is considered to be 5% less risky than the market, so a the lower the beta the less risky the fund.”
This is perhaps misleading, at least in terms of how it’s phrased. For those who want trackers, surely a beta of 1 is the goal? As you wish to capture the market risk – no more, no less. If you aim for beta < 1 then you do not want to track and are into active strategies (effectively).
The Vanguard UK Equity Income index is an example of this where this is systematic screening in play. So, I can well imagine the beta of 0.78 is accurate relative to say the FTSE100 but if the beta was that far off the actual income index it is tracking, then something is badly wrong with the fund.
Also, why are most of the beta values so close to 1 yet the TER/tracking errors are much much higher?
It seems that risk, which surely is the most important characteristic of a fund after past performance, is defined in various misleading ways. Here it is defined in terms of beta, which admittedly contributes a little, but only a little, to what the ordinary investor understands as risk. On the other hand, FE Trustnet has recently introduced a measure called Risk Score which is based on volatility, which makes no sense at all. The best measure of risk is the term called Maximum Loss, but no one seems to use it. Confusion prevails and not only in the mind of laymen.
I notice that IUKD (top 50 UK high yielding shares ETF) has been a very poor capital performing ETF from 2007. Is IUKD that worthwhile as it seems to turnover the high yielding stocks very frequently and although it yields 4+% it is still nursing massive capital losses from 2007?
@Ian — IUKD is certainly better thought of as a pretty risky value/recovery play IMHO than how it was originally touted — which was as an ETF you’d buy for income. If I recall correctly, it did fine on back testing, then launched into the maelstrom and went awry. I suspect it’ll post some crazy gain some year or another.
Big thanks for the TotallyMoney mention in an excellent list of links.
I was just about to comment that the screamingly obvious of the “5 ways to save on petrol” isn’t mentioned – don’t take the car at all! 🙂
Really, that should be the very first option. We’re now getting more than a month out of each tank, which is financially equivalent to some colleagues having fuel at 35p a litre!
Hi everyone — Regarding the various metrics on the Smart-Beta site, I’m hoping that The Accumulator will be able to add some views on this. As alluded to in his recent posts, he’s eating cream teas somewhere up a hillside, so we’ll have to wait for that.
@Dave — Agree completely. I’ve been car-less since I was 18, which has mainly been possible because I’ve lived in big cities all my adult life (mainly London) and to be fair has been assisted now and then by others having cars and carrying the can. I should do a post on this sometime. (Obviously London costs do weigh on this saving!)
@Harri — You’re welcome.
The total cost of ownership differs from the Annual Managemet Charge and the TER because it includes dealing costs. Sometimes these are split out but are often not. You can get a feel for that by looking at the portfolio turnover.
The TCO is calculated by dividing cost by the average size of the fund. When they are growing rapidly the average figure may not be a good reperesentation of the time weighted size of the fund over the period.
Why do fund houses give most prominence to the AMC, which is of no interest at all to the investor, rarely mention the TER and never the TCO? Is it not to mislead the customer? and if so why does the FSA allow such low standards of behaviour, reminiscent of second hand car dealers operating under road bridges?
Franco, good question, can you address that that to the FSA?
AMC is what the manager charges the fund for its services. The TER includes some costs, such as audit fees but the TCO is only known after the period when all costs, including dealing are known. In addition there is a lack of clarity of income from stock lending. In some cases this seems to be added to revenue in other cases it is netted off against costs. In any event it should be disclosed.
Costs are only part of the problem. Just as important for ETFs is the couterparty risk and the costs of providing collateral.
Well done Rob on drawing all this data together and trying to provide a better picture for retail investors.
The main thing it shows me is what a nightmare it is trying to make a meaningful comparison across funds given the lack of standardised industry practice.
The problem is there are so many gaps in this data, it makes it very hard to know whether it can be trusted.
For example, iShares FTSE UK Dividend Plus (IUKD) has a PTR over 100% yet seemingly no trading costs. As none of the ETFs listed show any trading costs, I’m assuming that the information isn’t available to you from ETF firms, rather than because they don’t trade. Doesn’t that render the Total Cost figures meaningless? Also, do these costs include the swap management fees incurred by synthetic ETFs?
It would be great – if and when you develop this project – if SmartBeta could explain the problematic data points as you begin to here: http://boards.fool.co.uk/smart-beta-12524189.aspx?sort=whole
Same goes for missing info in the fund information sections, yield sections and you should just scrap the misleading minimum contribution section. Presenting minimum contrib info like that casts the whole project in a bad light.
Also, what should investors make of a negative PTR? Is a negative PTR as bad as a positive one the further the number deviates from zero?
The tracking error info is shocking and it really is great to see this information brought together. But you mention on Motley Fool that the tracking error info is unsatisfactory due to methodology proliferation. How big a pinch of salt should we take these numbers with? Are certain funds cutting their own throats by being more transparent than others?
It’s also fascinating to see the performance difference between comparable funds like the All-Share mob. Since 2007 the F&C FTSE All-Share has returned – 7.51% vs +7.65% from the SW All-Share tracker. Astounding.
Anyway, apologies for all the questions Rob, but knowing how to use this data is the crucial next step. Thanks again for going to the effort in the first place.
TA,
It is great that the data has generated these questions, keep them coming.
You are correct that ETF providers do not detail trading, or swap costs just one figure for the fees charged to the fund. I think these cost should be shown and it is up to the investing public to make that case.
Despite some warm words on the topic from Peter Smith of the FSA it is clear it has no plans to force the issue.
http://www.efinancialnews.com/story/2012-03-27/fsa-non-probe-raises-issues-over-fund-fees
Missing data is a problem, but we hope to add more data over time and increase the explanation. We also plan to add a Corporate Governance tab. Minimum size is important if you want to avoid platform fees. Yield data will help for those seeking to use trackers as an alternative to annuities.
Tracking error is a another real problem, especially with funds that have their own indices, but at least it should get people to ask questions.
The differences in performances are really quite surprisng since they are, in theory, in the same asset class. I think partial replication is the issue here.
Negative PTR arises when funds shrink. We made out best efforts for the Lyxor funds but we could not get even this data for DBX. More worrying is that the Lyxor 100 holds hardly any UK shares.
Good point about the risk of transparency backfiring on those that provide more information. That is a risk we are prepared to take, partly because it is the only way to get the data out there. The main stream press don’t want to do it. In our case the TER is high but simply because the AUM is low, hopefully people will understand that.
Anyway, lots more to do but every journey starts with a single step.
Would a disclosure on corporate governance make a difference to anyones’s investment decisions?
We are thinking of adding a tab to the smart-beta site to indicate if the fund has signed up to the Stewardship code and whether it votes it shares.
If that information is not going to be acted on then there is no point in including. Some feedback would be appreciated.
Sorry, Rob. Missed this. It would if I knew what material difference good corporate governance made and if there was a reliable standard to measure funds by. I haven’t heard of the Stewardship code you’ve just mentioned, and am instantly minded of the proliferation of ‘green’ labels that festoon consumer products to give the appearance of eco-friendly compliance despite the fact that many of them are slightly um, made up.
Yes, some might say it is in the same vein as “may contain nuts” labelling on bags of peanuts.
It is a good effort, but not mandatory, more details here.
http://www.frc.org.uk/corporate/investorgovernance.cfm
We have just submitted our thoughts on CG to the Kay Review on Corporate Governance and also notified Barclays Bank that we have voged against its Remuneration Report. That again is advisory though the bank has said it is changing its rewards system after objections from investors, so maybe it does do some good.
Our view is that with a PTR of 3% our holding period is 66 years which is far longer than the tenure of any CEO. Therefore we have a keen interest in the long term viability of the company and stuff like PPI misselling is bad news and hurts shareholders.
We think it is easier to find a new CEO of Barclays than it is it get £87 billion of equity capital so we want a seat on the board to make sure that equity is protected.