It’s never a good idea to invest in a product that you don’t understand or can’t get good data on.
And while the ideas behind the Powershares FTSE RAFI ETFs [1] aren’t so hard to grasp, getting a handle on how they’ve performed is like a Soviet show trial in numbers – the truth is hard to find.
Why should you be bothered with the RAFI ETFs? Well, they could offer UK passive investors [2] a chance to capture the value premium [3], via a so-called ‘smart beta’ strategy known as fundamental indexing [4].
- The value premium offers investors the chance to amp up returns.
- Fundamental indexing theoretically fixes some of the problems of market cap indexing [5], particularly the tendency to load up on overvalued equities.
- UK passive value funds [6] are few and far between.
Better still, the RAFI ETFs have been available in the UK for over five years now, so we can pit the claims of fundamental indexing against some hard numbers.
However it turns out that getting Powershares, Bloomberg, Morningstar and Trustnet to agree on the performance data about these ETFs is like hoping for consensus at a UN Climate Change Conference.
[7]
Pick a number, any number
The following table shows the various returns quoted for the Powershares FTSE RAFI Developed 1000 ETF (PSRD).
| Data source | 1-year return % | 3-year return % | 5-year return % |
| Powershares | 16.04 | 7.86 | 6.04 |
| Bloomberg | 26.16 | 6.76 | 6.29 |
| MorningStar | 23.22 | 4.08 | 4.24 |
| Trustnet | 18.5 | 2.8 | 3.4 |
Source as stated
So that’s about as clear as John Prescott then – lots of different numbers that would ideally be the same.
- The figures date from 3 May, except for Powershares which quotes from March 31.
- Bloomberg doesn’t say whether dividends are reinvested. The others all do.
- MorningStar and Trustnet clearly state the returns are annualised. The other two skip the details.
- Powershares’ performance data isn’t available on its retail site. You have to masquerade as a professional client to access such privileged information.
Trustnet’s numbers are clearly off as they’re lower than its figures without dividends reinvested. Trustnet’s net return figures match MorningStar’s total return numbers, bar rounding error, so we’ve at least got some kind of match.
Ultimately, it’s not good enough and I wish Invesco Powershares would present clear, updated, annualised figures on its own website, so that investors can see what these ETFs are really capable of.
Performance anxiety
Inconsistencies also bedevil the other three RAFI ETFs I checked out, namely:
- PSRU – UK equity
- PSRW – All-World including emerging markets
- PSRM – Emerging markets
In the case of PSRW and PSRM, Powershares doesn’t quote performance data for either fund, despite the fact they’ve been available for over five years. Instead it quotes the index performance.
That’s sneaky because the indexes don’t include the fund’s actual costs, which drags down performance like a lead weight.
The RAFI Emerging Markets ETF is known to have suffered significant tracking error [8] due to costs. (Presumably that’s why PSRW and PSRM switched to a synthetic [9] index replication strategy after a couple of years).
A lack of performance transparency is enough to make me give up on a fund there and then. There are already enough potential grey areas and grey hairs associated with investing, without creating extra room for doubt.
But as I said earlier, value funds are hard to come by in the UK. It would be great if I could find strong evidence that these ETFs work, so let’s persevere.
Battle of the value trackers
What I really want to know is that PSRD performs well against other value trackers. I know that value funds can lag the market for many years, so I need reassurance that my value pick isn’t a duffer.
The following index trackers all offer varying takes on the International1 [10] Large Value strategy. The exception is the L&G fund, which is a Large Blend international tracker that acts as a proxy for the market.
How does PSRD match up?
| Fund | 1-year return % | 3-year return % | 5-year return % |
| PSRD – Bloomberg numbers | 26.16 | 6.76 | 6.29 |
| PSRD – MorningStar numbers | 23.22 | 4.08 | 4.24 |
| Dimensional Int Core | 21.6 | 7.6 | 6.9 |
| Dimensional Int Value | 23.6 | 5.2 | 2.8 |
| DBX STOXX Global Select Divi | 24.5 | 10.9 | 5.4 |
| L&G Int Index Trust I | 21.2 | 8.0 | 6.3 |
Source: As stated or Trustnet
On the whole, it hasn’t been a great five years for value equities, so if PSRD performed as per the Bloomberg numbers then I’m interested. Much less so if the MorningStar (and Trustnet) numbers prove true.
I can’t get a clear signal from the numbers though, and the same story repeats itself for the UK RAFI ETF – PSRU – which seems OK by some lights and slothful by others.
The All-World and Emerging Markets ETFs don’t look great by any yardstick over five years, and have clearly suffered at the hands of reality. Perhaps the synthetic approach will turn things around, but the lack of live data on the site is hardly reassuring.
Case not proven
Here’s the problem. Fundamental indexing is something of a novelty act in comparison to tried and tested market cap investing.
In theory, fundamental indexing is the superior strategy over time, but theoretical advantages can be overwhelmed by the costs and the practical difficulties of real-world application.
I need more reassurance, not less, to take the plunge. If I can’t tell whose numbers to trust – and the ETF providers aren’t making matters crystal – then I’m going to err on the side of caution and leave these funds alone.
I dare say that other funds are afflicted by inconsistent data, too. But bold claims have been made for fundamental indexing and so the supporting evidence should be placed squarely in the hands of investors – assuming the evidence is out there.
Take it steady,
The Accumulator
- Developed world equities including the UK, but not emerging markets. [↩ [15]]