Between 1956 and 2011, the value premium has been worth an extra 3.5% in the UK1. That’s an annualised return – so that’s 3.5% on top of what you’d have wrung out of the FTSE All-Share, every year.
That’s the kind of come hither talk that pumps my assets, so I’ve scoured the fund universe for a way to get a piece of the action like a SETI telescope searching for intelligent life.
And lo, though I encountered plenty of slimy, betentacled hostiles, I’ve also made contact with more passive friendlies than I had previously believed possible.
The value premium for UK investors
We’ve discussed what the value premium can do for passive investors before. In this post, I’m going to survey the index funds and ETFs that UK investors can use to tap into it.
These funds invest in companies tattooed with the mark of value. Their equities are either undervalued or perceived to be riddled with risk. Either way their price is depressed enough that juicy returns can follow if fortune smiles.
By selecting these funds for our portfolio, we’re essentially hoisting our sail to capture those value winds. But we do so in the knowledge that the wind blows fitfully. There can be long periods where we trail the market because the winds don’t come.
Oh yeah, and before we go on, we need to admit that value investing is an active strategy.
Value funds have to decide on the rules that govern which firms they will choose to buy from the pick ‘n’ mix of all available equities. Inevitably these rules require more interpretation, compared to a tracker that simply scoops equities according to their market cap.
But that’s okay, passive investing isn’t an excuse to turn your brain off and it does often require more active decision-making than is routinely acknowledged.
Moreover, you can buy value funds from firms operating according to clear methodologies grounded in academic research – as opposed to financial Wizard of Oz characters proclaiming their preternatural ability to beat the market.
Now I’ve chased away the lily-livered with my torturous preamble, let’s get down to it. UK investors have four flavours of value fund to choose from (not counting hooking up with an international broker to access the myriad options in the US).
1. Dividend weighted funds
Equities that pay out high dividends in comparison to their price have value characteristics. However, a high dividend to price (D/P) ratio is the weakest form of value and has historically been outperformed by other measures such as book to price (often known as book-to-market).
It’s also worth considering that the price of equity income and dividend funds has jumped over the last few years, as bond yields have plummeted and income hungry investors have turned to equities.
That’s likely to lower the returns of dividend trackers in the future. All the same, they must be included in any UK survey of value funds.
2. Fundamental funds
Trackers that follow fundamental indices invest in the broad market (e.g. the FTSE All-Share) but don’t weight their components by the traditional method of market cap.2
Instead, fundamental trackers select equities according to health indicators such as profits, sales, and book value.
By investing in a fundamental tracker, you buy into a broad market fund with a stronger value signal than usual, without the issues of turnover and excessive concentration that can afflict other value approaches. The PowerShares FTSE RAFI ETF series is the brand champion in this arena.
3. Value factor funds
Value trackers follow an index of equities that rank highly for one or more value factors such as earnings to price, cashflow to price, price to book, and dividends to price.
This is similar to the fundamental approach except that the value tracker is ‘value concentrate’ as opposed to ‘value flavoured’. In other words, it comprises equities that represent the value subset of the market, rather than the entire market weighted in favour of equities with value tendencies.
Then there’s Dimensional Fund Advisors (DFA).
Dimensional are a fund shop who specialise in value. Their funds are extensively used by passive luminaries such as William Bernstein, Larry Swedroe, and Rick Ferri.
However, DFA funds are not index funds. They use a single factor – high book-to-market (price) – to select their equities, but they don’t follow an index.
This enables the firm to trade advantageously, keep costs low, and offer the widest range of value funds available in the UK.
Sadly, DFA funds are only available through approved financial advisors. Monevator specialises in DIY investing but, all the same, if you can find an advisor who’ll offer DFA funds for a reasonable fee then it’s an option worth considering.
4. Active funds
The advent of clean class options means that a few actively managed funds, with a value remit, are relatively affordable now that the commission price puffery has been stripped out.
You can use MorningStar’s style box to help you track down likely candidates, although I’ve only found two that I’d trust to stay on style.
A value fund hitlist for UK passive investors
Lordy, have I finally got to the point?
Here’s my selection organised by asset class:
| Global Value Funds | Approach | Style3 | OCF (%)4 |
| Dimensional International Value Fund | Value factor | Large Value | 0.57 |
| PowerShares FTSE RAFI Dvlpd 1000 ETF | Fundamental | Large Value | 0.5 |
| PowerShares FTSE RAFI All-World 3000 ETF | Fundamental | Large Value | 0.5 |
| DBX Stoxx Global Select Dividend 100 ETF | Dividend | Large Value | 0.5 |
| Dimensional Global Targeted Value Fund | Value factor | Small Value | 0.66 |
| Dimensional Multi-Factor Equity Fund | Value factor | Mid Value | 0.62 |
- Note: Global usually means developed world.
- Although the All-World fund does include emerging markets.
- Only the DFA International Value fund excludes the UK.
- The DFA Multi-Factor fund is a 100% equity fund of funds.
| US Value Funds | Approach | Style | OCF (%) |
| UBS (Irl) ETF – MSCI USA Value I-dis | Value factor | Large Value | 0.23 |
| PowerShares FTSE RAFI US 1000 ETF | Fundamental | Large Value | 0.39 |
| SPDR S&P US Dividend Aristocrats ETF | Dividend | Large Value | 0.35 |
| Vanguard U.S. Fundamental Value Invr Inc | Active fund | Large Value | 0.95 |
- Strange but true – Vanguard dabbles with active fund management. Here it has sub-contracted to a deep value specialist, Pzena Investment Management.
| European Value Funds | Approach | Style | OCF (%) |
| Dimensional European Value Fund | Value factor | Large Value | 0.57 |
| PowerShares FTSE RAFI Europe ETF | Fundamental | Large Value | 0.5 |
| SPDR S&P Euro Dividend Aristocrats ETF | Dividend | Large Value | 0.3 |
| iShares EURO STOXX Ttl Mkt Value Large5 | Value factor | Large Value | 0.4 |
| UBS-ETF MSCI EMU Value A | Value factor | Large Value | 0.4 |
- You can roll your own international value allocation out of the US and European options.
- Completists can add the Pacific Rim and Japan. I haven’t checked these out.
| UK Value Funds | Approach | Style | OCF (%) |
| Dimensional UK Value Fund | Value factor | Large Value | 0.54 |
| Dimensional UK Core Equity Fund | Value factor | Large Value | 0.36 |
| PowerShares FTSE RAFI UK 100 ETF | Fundamental | Large Value | 0.5 |
| Valu-Trac Munro UK Dividend Fund Class X | Dividend | Large Value | 1.5 |
| SPDR S&P UK Dividend Aristocrats ETF | Dividend | Large Value | 0.3 |
| Vanguard FTSE U.K. Equity Income Index | Dividend | Large Value | 0.25 |
| Aberforth UK Small Companies | Active fund | Small Value | 0.85 |
- The DFA UK Core fund is a broad market fund that tilts towards value.
- The DFA Value fund specialises in value equities.
- The Munro fund is a dividend focussed fundamental fund. i.e. It doesn’t select equities according to their market cap. Recently acquired by Maven Capital.
- The Aberforth Smaller Companies fund has a near identical (but slightly cheaper) investment trust twin.
| Emerging Markets Value Funds | Approach | Style | OCF (%) |
| Dimensional Emerging Markets Value Fund | Value factor | Large Value | 0.72 |
| PowerShares FTSE RAFI Emerging Mkts ETF6 | Fundamental | Large Value | 0.65 |
| iShares DJ Emg Mkts Select Dividend ETF7 | Dividend | Large Value | 0.65 |
| Dimensional Emerging Mkts Targeted Value8 | Value factor | Mid Value | 0.97 |
All table data researched in April 2013.
Remember, a fundamental tracker takes the place of a broad-based market cap fund in your portfolio, and adds a value accent to that asset class.
If you choose any other value approach then keep your core funds but split off a percentage of that asset’s allocation for the value fund.
Take a look at Tim Hale’s Global Style Tilts portfolio or look up William Bernstein’s Four Corner’s portfolio for portfolio ideas.
Also bear in mind that there is no strict definition of value investing. Research your own choices to ensure you understand how they work. Different approaches will bear different fruit and we have no way of forecasting which will prove to be the juiciest.
Perfection is academic
And now, for my final off-putting caveat: No value fund will capture the full value premium as defined by the academics.
That would involve going long value equities and shorting growth equities, which as passive investors we have no truck with, especially as we’d only use it to run over our own feet.
So think of your value fund like a sardine net. You’ll catch some of the shoal but not the whole lot. Some days (or years) you won’t catch anything, but when you do it will make for a nice, tasty lunch.
Take it steady,
The Accumulator
- According to research by Dimensional Fund Advisors. [↩]
- i.e. With the market cap method, if a company is worth 10% of the index then it makes up 10% of the tracker. [↩]
- As per MorningStar classifications [↩]
- Or TER. Learn more about the difference [↩]
- Full name: iShares EURO STOXX Total Market Value Large ETF [↩]
- Full name: PowerShares FTSE RAFI Emerging Markets ETF [↩]
- Full name: iShares Dow Jones Emerging Markets Select Dividend ETF [↩]
- Full name: Dimensional Emerging Markets Targeted Value Fund [↩]
Comments on this entry are closed.
Great article with some excellent research. It’s the kind of article that I would buy a weekend paper for if it was in their Money sections instead of the regurgitated semi-sponsored ramblings that all too often appear.
I have a Sippdeal account (SIPPs, trading and ISAs) and so was interested that it might be possible to purchase Dimensional funds via this route. I just placed a dummy order for the UK Core Equity Value fund for £1000 and it was accepted despite the min. £100k investment you mentioned being shown on their factsheet. Once I’ve done some more research I may purchase one of these funds – if I do, I’ll report back to confirm if the orders go through.
Great post.
I have actually written my masters thesis on the DFA investment style 8 years ago….
A SIPPdeal client as well.
I guess the question at this stage is market-timing driven. Is it the right time to load on funds in this over-valued market or stay in cash?
Another excellent post!
If you don’t mind me asking, how much of your stock allocation do you plan to tilt toward value?
Just had a quick look at the main holdings of the UK funds on Morningstar. Some appear to have concentrated holdings in some stocks which would overlap with a FTSE 100 or All Share Tracker. For instance the Munro fund has over 9% in Vodafone,
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000000KX5&tab=3
RAFI has 9% in HSBC
http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0000A291&tab=3
And the Dimensional and Vanguard funds seem to show the same familiar big FTSE names.
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR04V81&tab=3
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0000000JZ&tab=3
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000003YD1&tab=3
While the SPDR S&P UK Dividend Aristocrats has very different holdings despite being classed as UK Large-Cap Value.
http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0000VNTM&tab=3
And the Aberforth UK Small Companies obviously looks very different as you would expect from a small companies fund.
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR04C7Q&tab=3
So Aberforth and the Dividend Aristocrats would seem to offer more diversification to a portfolio.
Thanks all!
@ Jimmy – thanks for that update. Very encouraging that the dummy transaction worked. If this does work for real then it really is very exciting for passive investors.
@ Tony – would be very interested to hear more about your conclusions on DFA.
Of course, market-timing speculation is exactly what a passive investor like me doesn’t indulge in. For what it’s worth, P/E ratios don’t look mad and cash is being eaten alive by inflation anyway.
@ rjack – I’m around 18% in value and similar in small cap. I’ll be upping my value quotient as I don’t have any exposure to emerging market value yet.
Little article here from Somerset Webb on value:
http://www.moneyweek.com/investment-advice/how-to-invest/strategies/beat-the-market-with-smart-beta-63515
Has a different ETF here I’ve never heard of too.
Just like to echo the above effusive comments lauding this fascinating article. However, a quick trawl on Trustnet re the UK value funds does not show very promising performance so far except for the Vanguard FTSE UK Equity Income Index. (I did not check the Aberforth fund because it is an active fund).
@Geo,
I did look at the Somerset Webb article and First Trust United Kingdom AlphaDEX looked interesting since First Trust seem to have a decent track record in the US with this type of fund. I’ll wait and see.
@The Accumulator,
I’ve repeated read the description (on Motley Fool, I think) about how the customised index tracked by the Vanguard UK Equity Income is constructed and am still unsure whether holdings are weighted by market cap. I don’t understand how that ties in with the description of the order in which shares are added to the index.
As a more general comment, we have to be aware that there is a tendency for mechanical investment techniques which appear to outperform the market to cease to be effective shortly after they become widely commented upon! Two which I haven’t heard much of recently are:
– Michael O’Higgins techniques
– The Coppock Indicator
Congratulations on your post! Looking forward to the follow ups on Size, Volatility, etc.
BTW, anyone found:
1. Europe Small Cap Value index? That’s probably asking too much is it?
2. All World Small Cap Value index.
Grumpy Old Paul,
I found the following chart of O’Higgins Dogs of the Dow method –
http://www.canadianbusiness.com/wp-content/uploads/2012/05/ecf96fc448d39eaaa875c38bff62.png
It doesn’t appear to have had great relative performance in the American market after 2006 – except in 2010 and especially 2011.
Here’s two recent short article about some of his other strategies targeting “absolute return” asset class allocations.
http://www.canadianbusiness.com/investing/michael-ohigginss-absolute-return-strategy-tries-to-beat-the-market/
http://m.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/index-investing/dogs-of-the-dow-inventors-latest-bet-the-dogs-of-the-world/article10024152/?service=mobile
Bob. 🙂
Does anybody know how to upload those little “avatar” pictures that some of the posters here have?
Thanks.
Bob. 🙂
@Bob you need to register with https://en.gravatar.com/ , using the same email address you use when commenting on this site…
@ Grumpy – Value was negative 4 out of 5 years from 2007 – 2012 so I expect those funds don’t look too clever on Trustnet.
That’s the risk of investing in value. You can trail the market for a long time. It was negative for 12 years between 1988 and 2000.
You’re also quite right to point out Value may not persist into the future, or at the same strength as it did historically.
However the premium has been shown to exist for as far back as reliable data exists (let’s say 1926 in the US) and in all global markets bar Italy, if memory serves. So I’m in, but as ever you’re making a risk – reward trade-off.
@ Andy – There will be some overlap because any broad index tracker will contain growth and value funds. A value factor fund like DFA UK Value tries to strain out the growth equities and keep the value ones.
I would expect particularly large overlap with the fundamental funds – they are broad index trackers except they weight by fundamental measures (e.g. sales to price or divis to price) rather than market cap. That distinction gives them their value tilt. So I would replace my FTSE All Share tracker with the RAFI UK 100 ETF, for example, if I settled on that method of tilting to value.
Same goes for the DFA UK Core and the Vanguard Equity income funds.
Of course, you could go for a weaker value tilt by splitting your UK equity allocation between both.
You’re right that Aberforth would give more diversification because you’re tilting to small cap and value as well as getting your beta from a broad market fund. It just adds more risk which you can always manage by reducing your equity exposure and adding in more bonds.
I haven’t investigated the mechanics of the Dividend Aristocrat ETFs yet.
Splitting UK equity allocation for a weaker tilt value seems an interesting choice given the current market climate. Great research and insight here.
Vanguard UK Equity Income is my best performing fund of the last year, it has trounced the FTSE All Share, beaten a Developed World Ex-UK tracker and annihilated an Emerging Markets tracker. That indicates that despite strong stockmarket gains there has been no 2009-style dash for trash this year.
Btw I think there is a max 5% weighting cap per company for Vanguard UK Equity Income.
A surprise for me is how my Index-Linked Gilts fund has gone up during the last month. That is pointing to increased inflation
expectations, and they have been creeping up regardless of stockmarket direction (the two are negatively correlated most of the time).
@SemiPassive,
I’ve had a similar experience to you and wish that we’d had access to the products, platforms and information now available a long time ago!
I wonder if the performance of the Vanguard Income fund is partly because of a “dash for income”. That fund also has a 25% sector cap but how it would have feared during 2008, the year before it was launched, is an interesting question.
Index linked gilts also recently jumped around 4% in one day (if memory serves me correctly) when the decision to retain the existing method of calculating RPI was announced.
@Bob
Many thanks. I don’t suppose there are any UK funds using any of O’Higgins’ strategies. We may never know!
@The Accumulator
Whilst we have to accept the long term statistics relating to value investing, how many people would actually stick to their guns for 5-10 years when their value tilted portfolio appeared not to be performing ?
Accordingly, many (but not all investors) might be better served with an approach with which they are more likely to persevere. Psychology rears its head again!
@Grumpy Old Paul
I think the potential under performance and not getting itch/scared feet is very important – its realising maybe that these strategies are only for a time period of 20+ years?
Also Although there is a potential 3.5 premium if we only have 20% invested here (which according to Tim Hale is too much even – he say 5% i think) the benefit is only 0.7% on the total portfolio and that’s based on getting the maximum potential, never mind the potential additional costs.
All this complexity does make me think that Mr Ferri just has it right to KISS it and just go 60/40, rebalance and get on wiht life 😉
Hehe
(Excuse if the maths is not spot on;))
Hi, an excellent post. I’ve been mulling over these ‘fancy’ trackers for a while now. Essentially (imo) these are just alternative algorithm-based investment strategies which are designed to outperform conventional market cap trackers. I’m aware of research that suggests that just about any other selection criteria (including randomly selected equal weights) can be shown to outperform market cap in backtesting, and its thought that this is because these alternative selection strategies capture more of the small cap and value premia – so that would support the development of these alternative mechanical stock selection strategies. However, do any of these funds have long enough performance histories to establish whether they do in fact outperform the best of breed conventional tracker (after costs?) That seems the minimum that passive investors aiming for a rational and evidence based strategy should require…(having said that, I do have small positions in the vanguard income fund and SPDR European Div Aristocrats)
@ Geo – You’re right to point out that you won’t capture the full gain and that it is a long term game. Rick Ferri is a strong value proponent. He says his firm can bag you 1% a year with a value tilt. But he does say that won’t be every year or even every decade.
You can see a version of his personal portfolio here (he’s got more than 15% in value plus small cap on top): http://www.bogleheads.org/forum/viewtopic.php?f=10&t=58709&sid=2ffa178f41bf6b6f692057df562dc1d7#p797885
Tim Hale suggests a range of portfolios – the strongest value tilt is 15% with another 15% in small cap.
Larry Swedroe advocates a barbell portfolio with a very strong small-value allocation (30%) that he balances against a much bigger short-term bond component (the rest). The idea is to earn the market return but lower volatility with the engorged bond element.
I think Grumpy is right when he suggests that the psychology of the investor is critical. In principle, I think an allocation to value is similar to the equities / bonds dialogue. Historically, value trumps the broad market. But there’s no guarantee that will happen in my investment lifetime. So then the conversation becomes “Do I need to take the risk?” and “Can I handle the risk?” I’m not suggesting this decision is as important as the equity-bond split, just that the process is similar. Knowledge is a big comfort to me in these situations. If I know that value can lag for years then I don’t worry about the fact that my reputed big-hitting funds aren’t doing anything. I just gotta hang in there until the wind changes.
@ vanguardfan – you’ll get 5 year reads on many of them, but you’ll struggle to do better than that. Looking at the US versions may be a better bet. 5 years is scarcely enough data and value hasn’t had a good 5 years anyway. 10 years starts to give you an idea but then few passive products have been around that long.
The problem is how do you determine if a few years of underperformance is evidence of a problem or simply the outcome of a period when the strategy underperforms the market, which is entirely normal? It would be like concluding that equities must always underperform bonds just because they had for 10 years. When in all likelihood that’s the very moment the asset class goes off like a rocket as it mean reverts.
The rational and evidence is based in the academic research allied to funds that have the mechanics to capture the premium, operated by firms with a reputation for delivering useful products to investors.
I wonder if it’s possible to get longer term data on a value index. You could then compare that index against the broad market to check outperformance. Then track your value fund against its value index to see how much tracking error there is. If the value index outperformed the market by say, 1% a year, over the long term, and the value fund deviated from its benchmark by less than that over 5 years, then that would provide some comfort.
Great article by William Bernstein on the trials of value: http://www.efficientfrontier.com/ef/404/personal.htm
A couple of unrelated points about a couple of the funds.
PSRU is a synthetic ETF I think. I am perhaps a bit over cautious but after ETF securities gave me a worrying few days when their counterparty (AIG possibly) collapsed I would never put substantial sums into synthetic ETFs.
The Aberforth fund appears to have a bid offer spread of 1.9% so it isn’t quite as cheap as it seems. The investment trust version is geared and has a fairly volatile discount / premium – this may not put some people off I guess. Finally the fund is around 2/3 FTSE 250 1/3 small cap so not as small as other funds.
I would like to take a bit of a value tilt but would prefer to wait until there are better choices – perhaps Vanguard UK will catch up with their main US firm soon?
Great and very helpful post by the way. Thanks!
Hi PI,
Yes, I’ve been waiting for Vanguard to release a proper value range over here too, but time just keeps ticking by.
The DFA range is excellent, but, assuming you can invest on a DIY basis with Sippdeal, you’ll have to shell out £9.95 per trade, so I won’t be drip-feeding monthly. I’ll save up a largeish sum and lob it all in at once to reduce the impact of the fee.
Right now, the Powershare ETFs are the simplest and cheapest route to go, I think. I do invest in synthetic ETFs when physical isn’t available. The truth is that physical ETFs (and funds) that engage in stock-lending are vulnerable to counter-party busts too.
You’re right about the large spread on the Aberforth fund but I’m not particularly concerned about that as a long-term investor, especially as I can’t see a viable alternative. I also haven’t found a UK small cap fund with a low(ish) fee that doesn’t overlap significantly with the FTSE 250. What works for me about Aberforth is that it’s small value, so I’m getting two premiums for my trouble.
I think the drift of the comments on this thread show that investing in value in the UK is not a no-brainer. There isn’t a snag-free path to take. For passive investors, it’s like levelling up. The rewards are potentially greater but so are the complexities and the risk.
I am with you on Dimensional Fund Advisors but not very optimistic about the SIPP deal arrangement.
A few months ago DFA emailed me to say that I had to go through a financial advisor. I made enquiries with one advisor and they wanted 1% of all my portfolio. I didn’t look around to see if I could find an advisor who would do it for a one-off fee.
Please let us know how you get on with SIPP deal. I suppose it is just possible that DFA have changed there approach in response to RDR?
Great research. Looks like SIPPDeal would charge £50 pa custody fee for holding Dimensional. As long as you have a decent sized holding (and don’t pay lots of £9.95 transaction fees), seems like the first viable Dimensional option for a DIY investor who does not want to pay a big fee to an advisor.
Some of the Dimensional UK funds have a 0.5% initial charge, which I assume is to cover stamp duty and other churning costs, like Vanguard. Strangely, the income units have no charge, which is a puzzle.
Nice investigation!
On researching the SPDR S&P UK Dividend Aristocrats ETF in a little more detail, their documentation suggests an OCF of 0.3% (see top of page 2 at http://www.spdrseurope.com/library-content/public/SPYG%20GY_key%20investor%20information_en.pdf), whereas the table in your piece quotes 0.62% OCF. Have I missed something critical eg bid/offer spread?
Hi Martyn, no, that was a typo. Thanks for pointing out. Have fixed it.
A reader, Nigel, has kindly emailed us with an update on Dimensional funds via Sippdeal: “Dimensional funds are for clients with advisers only, unless the retail clients set up a relationship with Dimensional directly. The minimum investment stated is correct.”
So that puts the kybosh on that. A real shame. As I understand it, there is no way to set up a direct relationship with Dimensional. You have to go through an adviser. I’m going to edit the article to take this info into account.
Dimensional has popped up on TD Direct.
Don’t know if you’re still reading this thread, but UBS (Irl) ETF – MSCI USA Value I-dis (ISIN IE00B6SY5K09) doesn’t seem to exist any longer. I’m not sure what the best alternative is; perhaps
UBS(IRL)ETF PLC-MSCI USA VALUE (USD) A-DIS (LSE:UC07) which seems to have a 0.2% TER. This ETF seems to be priced in USD, so that means there is a currency risk?
@ Robert – confusingly a fund isn’t necessarily immune to currency risk just because it’s listed in £. You need to know the base currency of the fund. An ETF that’s listed in £ that’s invested in US equities will still be subject to currency risk because its underlying assets are denominated in $.
Not sure if this is useful to anyone but both iShares and dbx-trackers seem to have recently brought out global ‘value’ etfs.
Both are physical etfs, the iShares has around 400 constituents, and the dbx has around 600.
From a quick look the iShares seems perhaps the stronger value option? It tracks the MSCI World Enhanced Value Index, which is based on Forward Price to Earnings (Fwd P/E), Enterprise Value/Operating Cash Flows (EV/CFO) and Price to Book Value (P/B).
In contrast dbx ‘is designed to outperform’ the MSCI World Index by calculating a “value score” for each share, based on a combination of operational yield (OY) and dividend yield (DY) and shares displaying a higher value score.
Although it’s very early days for both funds I’ve been waiting for a decent value option for my portfolio – could the iShares EFT be it? Any thoughts would be much appreciated.
Hi Dave,
Yes, it’s great we’re finally getting a broader choice of value products to choose from. I haven’t had a chance to sit down and delve into them yet but I’m instinctively drawn to the iShares version over the db X-tracker ETF.
The academics ‘discovered’ value and their definitions centre on book-to-market, price to sales, price to cash flow and price-to-dividend (the poor relation). The iShares version seems to share more of those characteristics at face value (ahem) but like I say I haven’t properly looked into it yet.
Thanks Accumulator
I just found another one to put in your basket of things to do an a Friday night…Lyxor UCITS ETF SG Global Value Beta. It tracks the famous ‘SG Global Value Beta Index’ which I’d never heard of, but that’s not saying much. The index seems to be based on the following five factors:
1) Book to Price Factor
2) Earnings to Price Factor
3) One Year forward Earnings to Price Factor
4) EBITDA to Enterprise Value Factor
5) Free Cash Flow to Price Factor
I can’t see how many holdings are in the index, but the fund holds around 200, compared to around 400 for the iShares, and around 100 for the dbx-tracker (I think).
It would be interesting to hear your thoughts on how this compares to the three factor basis for the iShares value calculation? I recently read that the most important aspect for generating the value premium changes over the long-term (i.e. between decades).
Any idea why all these ETFs are popping up at the moment, we seem to have gone from no real options to two reasonable ones and a possible in just three months?
One final question, how long would you wait before buying into these new EFTs, if you were to? I know Tim Hale suggests an ideal of 5 years, but I’d like to shift from my high yield ETFs to what I want to focus on (i.e. value) now that I can.
@Dave and others
I am also interested in the new Value ETFs and would be interested in other people’s views.
One potentially significant point is that the iShares offering doesn’t have reporting status yet (this has an impact on the tax treatment for holdings outside an ISA /SIPP).
I am also a bit concerned that the iShares offering is 36% US and a massive 29% Japan. I guess such deviation from the usual market-cap breakdown is absolutely intrinsic to the out-performance of value investing.
A final concern is that although 0.3% OCR is hardly extortionate (would have seemed like a bargain 3 years ago) there must be higher portfolio turnover costs so it could end up being 4 or 5 times more expensive than the cheapest plain market cap index tracker.
For what it is worth my plan is to wait until the fund has reporting status and give Vanguard a bit of time to come up with a competing fund and then allocate perhaps 10-15% of my portfolio to a Value ETF.
I imagine that the main reason that Value offerings are now appearing is that the market-cap tracker ETF / Fund market is now fairly saturated. And with charges in the 0.1% range margins must be quite tight. iWVL has a TER of 0.3% which even after accounting for higher costs and lower economies of scale leaves more for Blackrock share holders…
I think that value funds are finally turning up in the UK along with momentum funds, quality funds and so on because the ‘Smart Beta’ label has made these funds hot and easy to market in the US. The European market is relatively undeveloped in this respect but low volatility ETFs did well, so it makes sense to ETF providers to ‘innovate’ in this area.
I won’t invest in these ETFs until I’ve had time to satisfy myself that their version of value is reasonable and I think I’ll give it a year so I can see how well they track their index.
Passive Investor makes some good points but absolutely, if you’re going to invest in risk factors, then you will be taking some concentrated positions and deviating from the total market. You have to be able to withstand multi-year underperformance when clever-clever attempts to outperform the market look like plain idiocy with a high price tag.
Standard procedure is to limit allocations to the 10-15% range but it’s worth noting that momentum has been negatively correlated with value so the two together could be a good combo for improving risk adjusted returns.
Are any of the global ETFs available in accumulation units? Or are value funds always distributive (particularly those in the high dividend yield category). I’m having trouble finding anything that doesn’t distribute income.
Thanks!
Hi, most ETFs are distributing but some are available as accumulation products. These are sometimes known as capitalising ETFs. See the ETF provider’s website or factsheet for individual ETFs.
Nearly two years on from the last comment!
I’m considering getting a 5-10% stake in either VVAL or IWVL. The former is slightly cheaper at 0.22% versus 0.3% for the iShares fund, however the latter has far more in assets which I presume equates to greater liquidity?
Also, the iShares has a far larger allocation to Japan: 27% to 9% for the Vanguard offering.
My purpose in buying value is mainly for diversification. Also, I’ve got a 5% holding in VMID I’d like to dump now that the UK has voted for economic self-mutilation with Brexit :), ha ha.
Any thoughts would be most welcome.
Hi Nicholas,
The main thing that will affect any value fund is costs and fundamentals. By fundamentals I mean the ratios by which value is measured e.g. price to book.
According to Morningstar’s fund compare tool, the Vanguard fund wins out across the board: http://tools.morningstar.co.uk/uk/fundcompare/default.aspx?SecurityTokenList=0P0001798Y%5D2%5D0%5DETEXG$XLON%7c0P00014E87%5D2%5D0%5DETEXG$XLON&CurrencyId=GBP&LanguageId=en-GB
I wouldn’t worry too much about the assets. Anecdotally there’s supposed to be some relationship with liquidity but when I’ve explored this in depth it doesn’t seem to stand up according to available research.
Thank you. I’ll get the Vanguard one then. After reading http://monevator.com/how-to-invest-in-small-caps-passively/ I understand the comparison points a bit better now as well.