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Mike Deverell’s three passive funds for ISA investors

04 March 2015

Equilibrium’s Mike Deverell tells FE Trustnet why investors should consider spending less time trying to find the best active managers and pay more attention to passives.

By Lauren Mason,

Reporter, FE Trustnet

Recently, the funds industry has focused a lot of attention on ‘active share’, claiming that the metric can help truly active managers come to the fore. However, this does not mean that the active versus passive debate has come to an end.

Some investors, such as Equilibrium’s Mike Deverell, argue that passive funds should have a place in every portfolio. He’s not alone in this view – last year, for example, Warren Buffett said that most investors would be better off with a passive fund.   

Deverell (pictured), who currently has about 20 per cent of his portfolio in passive funds, said: “Finding those good active funds takes a lot of time and effort. It’s time-consuming to review them properly. Unless private investors have got a lot of time to be spending on their portfolios, then most of the time they should use more passives with maybe a few selected active funds around them.”

He explained: “Sometimes conditions are more favourable for active funds and sometimes you’re better just to buy an index.”

While it’s important to know how your investments work, Deverell believes that the active/passive debate can easily detract from more important factors at hand.

He added: “My view is that the main focus should always be on asset allocation, this makes the most difference to returns. If you’ve only got a limited amount of time to be able to spend on making decisions then you’ve got to be focusing more on asset allocation rather than fund selection.”

In light of this, Deverell has chosen three passive funds for his ISA this season.

 
Vanguard FTSE UK Equity Income Index

His first choice is the Vanguard FTSE UK Equity Income Index fund, which has a tracking error of 3.81 per cent over five years.

Deverell said: “It’s a very low cost way of getting an equity income-style fund. Performance has been pretty good since launch and in fact, although it’s only been going since 2009, I know when Vanguard launched the fund, they got FTSE to create this index for them.”

Performance of fund vs sector since launch

 

Source: FE Analytics

“So, when we first got this fund a few years ago, we actually got back-tested data for the industry going back to 2000 and it generally is fairly consistent in terms of the fact it behaves like a true equity income fund.”


He added that the fund produces a high level of income – an investment of £10,000 at launch would have paid out £4,400 – and shows the behaviour that is desirable in a passive fund: “If a market dips you tend to expect it to fall a little bit less [than the index], and it’s done a good job of keeping up with the market when it rises, so I think since launch it’s done really well.”

Vanguard FTSE UK Equity Income Index has an ongoing charges figure (OCF) of 0.22 per cent and yields 4.14 per cent.

 
Vanguard US Equity Index

The second passive fund in Deverell’s portfolio is Vanguard US Equity Index. While he is not overly keen on the US at the moment and is slightly underweight on the country, Deverell believes that passive funds are the ideal way to invest in the US market.

Performance of fund vs sector since launch

 

Source: FE Analytics

He explained: “We’ve tried several times to find a decent, actively-managed US fund and there seems to be very little consistency in that sector.”

“I’m not going to speculate why active funds tend not to do that well in the US, but we definitely prefer having passive funds there. The good thing about the Vanguard fund is that it’s very low cost, and it also tracks a slightly wider index than some passives.”

The Vanguard US Equity Index fund, which has a tracking error of 4.35 over five years, is based on the S&P Total Market index, which is broader that the S&P 500, which most investors view as the US market, and consists of almost 4,000 stocks.

Deverell said: “It’s a broader market so you’ve got a bit more small cap in there rather than just those mega caps driving all the returns.”


The fund compares well with its average rival in the IA North America sector, returning a top-quintile 104.2 0 per cent over five years against a peer group gain of 85.86 per cent.

Vanguard US Equity Index has a 0.10 per cent OCF.


Vanguard Emerging Markets Stock Index

The final tracker in his portfolio is the Vanguard Emerging Markets Stock Index fund although within Equilibrium’s emerging markets portfolio, Deverell does hold some Chinese and Asian active funds.

Performance of fund vs sector since launch

 

Source: FE Analytics

“However, for the wider global emerging market space, we’ve looked historically there’s just not been that many emerging market funds that consistently beat the index,” he added.

“So, if we can’t find one that we have high conviction in, we’ll always go for a passive alternative instead.”

The $6.8bn fund has a tracking error rating of just 2.82 over five years. It tracks the MSCI Emerging Markets Index, which means 22.3 per cent is in China, 15 per cent is in Korea and 12.7 percent is in Taiwan.

Vanguard Emerging Markets Stock Index has a clean OCF of 0.27 per cent.

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