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 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 a chance to capture the value premium, via a so-called ‘smart beta’ strategy known as fundamental indexing.

• The value premium offers investors the chance to amp up returns.

• Fundamental indexing theoretically fixes some of the problems of market cap indexing, particularly the tendency to load up on overvalued equities.

• UK passive value funds 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.

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 due to costs. (Presumably that’s why PSRW and PSRM switched to a synthetic 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 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

1. Developed world equities including the UK, but not emerging markets. [↩]

Good reads from around the Web.

I wrote a big introductory musing article about the state of the world as usual this morning, but it’s so long that I’ve decided to save it for a future post in its own right.

It was riffing on this post by David Schwartz in the Financial Times about high yield shares (that’s a search result – click the article near the top).

So you can go read that to get prepped up. 🙂

Look on the bright side – less homework for you before you get to dive into this week’s links!

[continue reading…]

The 5:2 fasting diet is all the rage. And as a fan of the occasional bout of nil by mouth, I’m not surprised.

Sensible fasting can throw the reset switch on conditions such as Hungry Hippo-itus, whereby a cheeky slice of cake in January has become a daily muffin ritual by May.

Fasting also delivers results quick, which is great provided you don’t let it become an eating disorder. If you want to stay slim and sexy on the cheap, you should try it.

What the 5:2 diet does is turn fasting into a routine for long-term weight loss.

According to the BBC documentary that popularized intermittent fasting, if you limit yourself to 500 to 600 calories for two days a week, you can eat whatever you like for the rest of the time and still lose weight.

Early scientific research suggests it might also be good for your immune system, your blood sugar levels – even your brain.

We’ll see about that, but books on the diet are already topping the bestseller lists, and more and more people at dinner parties are stuffing themselves with cake while telling me between mouthfuls that they only had a salad the night before.

I haven’t noticed many thinner people when squeezing onto London tubes, but I live in hope.

Lessons from the 5:2 diet

I think there are three main reasons why the 5:2 diet has struck a chord:

• You don’t have to go without anything you like.

• You don’t have to think about what you’re doing all the time.

• It can quickly deliver results.

It’s a very pragmatic diet. In an ideal world, none of us would put on an extra kilo or eat cheesecake. In reality we do, and the 5:2 diet offers a way of dealing with it.

Are there any lessons for us as investors?

You and I both know the best approach to investing is careful budgeting and saving into passive index products for 30 to 40 years – all within tax shelters such as ISAs and pensions.

But we also know most people don’t save enough, that they buy active funds and trade stocks, and that CNBC exists and so do the temptations of Apple products and foreign holidays.

So within that mindset – that is, making an imperfect world a little better – here’s how the strengths of the 5:2 diet might be applied by investors – or would-be investors – who stray from the path.

You don’t have to go without anything you like

5:2 investing would acknowledge a few truths about human beings and money.

These include the big one that we like spending money now, rather doing without to spend it in the future – whether because of the time value of money, or because we struggle to envisage our future selves.

A quick and dirty 5:2 style response might be these two rules:

1) You must automatically transfer a fixed amount of your salary into your long-term savings each month.

2) You must never go into debt.

Why is this helpful? Because it automates your long-term saving, and enables you to spend what’s left over however you like.

Let’s say you’re 30-years old and you bring home £3,000 a month. If you set up a direct debit to transfer £500 a month from your account into an ISA or pension, you could do what you like with the remaining £2,500.

An iPad? A weekend break to Amsterdam? No guilt trips, just so long as you follow rule one AND you don’t break rule two, and never go into debt. Just let the after-savings money accumulate in your current account, and spend it as you see fit.

5:2 diet and active investing

Here’s another truth. Many people prefer to invest in managed funds or to buy their own stocks, rather than purely passive invest – even some who know better.

Personally, I’m a sucker for a portfolio of shares, and even I buy the odd investment trust on a discount.

So what might 5:2 investing have to say about this?

Well, perhaps you could divide your savings pot into sevenths. You could run 5/7ths of it passively, and maybe put 2/7ths in active funds (I wouldn’t!) or individual shares (I do).

Better yet, you could divide your monthly contributions into sevenths, and pipe the larger portion to your passive strategies, and the rest to your stock picking account. This way you won’t subsidize bad stock picks with your growing pot of passive money.

I believe most people will do better investing entirely in passive index funds, but equally I admit investing would never have captured my imagination – let alone got me blogging – if I only bought index funds.

If you’re like me, this might put a limit on your dark side.

You don’t have to think about what you’re doing all the time

While I am sufficiently obsessed with investing to devote as much as 50% of my net income to funding new investments – and half my free time to writing this blog, and you’re obsessed enough to read it – more people are in the opposite camp.

Most people come to investing as eagerly as Dracula goes to the dentist.

A constant fear of mine is that Monevator makes investing much more complicated than it needs to be for the average person to get far superior results.

The average person isn’t in slightly too-expensive index funds, or paying too much capital gains tax.

No, the average person is bewildered or ignorant, isn’t saving anything much at all, puts most of any money they do save into expensive managed funds, and never opens a stocks and share ISA.

For them, super simple is best.

I wrote some years ago that a new investor might simply split their savings between a UK tracker fund and a cash deposit account. A straight 50/50 division.

I don’t suggest they worry about bonds or other asset classes until they’ve done this for a few years and got used to the savings habit – and to the stock market wobbling.

It’s what I tell my friends to do when they ask for advice.1

Of course, I also point them to our posts on diversified ETF portfolios, but few read them. But if I can just get them automatically investing every month into a tracker fund, while buffering the volatility with cash, I know I’ve helped.

We can re-run that two-step automatic savings strategy here, too.

I’m naturally frugal, but I’ve never done a full-on budget in my life. Automatically saving every month means you don’t need to.

It can quickly deliver results

People applaud the 5:2 diet because they see the weight come off quickly.

When you go without food twice a week, you create a calorie deficit. You also temper down your appetite and shrink your stomach, so you don’t pig out as much as you might expect on the other five days.

This is in contrast to worthy plans where you eat only whole grains for 12 months, or ditch carbohydrates for only meat and vegetables, or ignore dieting altogether in favour of cycling naked sipping cold water at 6am in the morning.

All hard work, whereas the 5:2 diet is relatively easy and delivers results quick.

Sadly, there’s not many ways that this part of the 5:2 model can be safely moved to investing – at least not when it comes to returns.

Nearly anything you do to try to get results quickly from your investments is likely to cause more harm than good, whether it’s day trading, spreadbetting, or chasing hot funds.

I’d make one exception, though, and that’s if you have a company pension that offers matching employer contributions. Here you can get results overnight.

A matching contribution is like getting an instant 100% return on your money! You invest £500 and your employer matches it. You’ve doubled your money at a stroke. The only other place you can do that is Las Vegas.

Such pensions are a no-brainer, and if your company offers one, bite its arm off.

More 5:2 style approaches to wealth

Aside from good returns, there are two other crucial pieces to getting richer:

• Make more money.

• Spend less than you earn.

Boosting your income is an under-covered topic in personal finance circles, especially here in the UK. Perhaps it’s because we find talking about our salaries vulgar, or maybe investing for the long-term just attracts a more Spartan crowd.

I for one now believe I’ve made life harder for myself by not pursuing a higher income back in my 20s and early 30s.

I did okay income wise – I was hardly a beach bum – but given what I’ve achieved with my portfolio on what I did earn, I can’t help wondering where I’d be if I’d socked away another £10,000 to £20,000 a year for a decade or so.

Whether it’s by boosting your salary or creating a new side income, getting more money through the door can only help you reach financial freedom sooner – provided you save it of course.

And that brings us to spending less than you earn. (Here UK financial bloggers are definitely on message).

Unlike trying to make an extra 10% from your investments, cutting what you spend by 10% will quickly boost your bottom line in a safe way.

Better still, the first cuts are the hardest. Just as a 5:2 dieter doesn’t fear the fast days once they’ve become routine, you will find more ways to reduce your expenditure once you’ve got rid of the big items like excessive shoe buying or a new car habit.

If you’re in debt, then getting out of debt will deliver the biggest bang for your buck of all. Trying to get richer while paying someone else interest on your debt is like trying to lose weight by eating all the ice cream in the freezer first.

Take radical action – remember that all non-mortgage debt is an emergency!

Not an excuse to binge on bad investments

As I said at the start, I’m not suggesting running some of your money actively or using just a UK tracker fund instead of a global portfolio or keeping 50% of your savings in cash is the optimal route to wealth.

Far from it! But this isn’t an article about perfection.

In an ideal world, nobody would have a beer belly or flabby thighs. We would all eat well and exercise. The 5:2 diet exists because we don’t.

Similarly, these 5:2 investing ideas might help some people get on the right track. Blending your own smoothies or running a marathon can come later.

One caveat. There is some evidence that the 5:2 diet might actually be even better for us than normal eating, because the fast days may activate our bodies’ repair mechanisms. It could be we’re built to go without, and we literally have it too good.

The jury is still out on that. In contrast it’s pretty unequivocal about investing.

Yes, some active investors will beat the market. Yes, you’d have done better if you’d invested all your money with Antony Bolton or Warren Buffett.

But your chances of beating the market or finding the next Bolton or Buffett are very small – and anyway you don’t need to do so in order to achieve your financial aims.

There’s no suggestion here that anything but regular – dare I say boring – investing into tracker funds is the optimal way to go.

And so there’s no point being a 5:2 investor with flaws if you can be a perfectly passive one.

Rats, there goes the investing bestseller!

1. (I have more recently tried sending some to Vanguard’s LifeStrategy funds, but it doesn’t work as well. We know it’s very simple, but they see it as complicated! [↩]