Tracking error hits passives
A Financial Express study highlights major discrepancies between the performance of UK indices and funds that are supposed to be following them.
By Lora Coventry, Senior Reporter, Financial Express
Tuesday April 05, 2011
Investors are missing out on up to 5 per cent a year on returns from passive funds, as tracking error hits earnings.
A study from Financial Express
shows investors who put cash into a FTSE 100 tracker a year ago could have realised returns of anywhere between 5.82 per cent and 11.52 per cent, depending on the vehicle they had chosen. Those returns factor in charges.
FTSE 100 tracker funds over 1-yr
Source: Financial Express Analytics
Phil Reid, HSBC’s head of UK external distribution, said: "Tracking error is a key indicator of how well a manager is doing his job. Performance also depends on issues such as how closely the fund is tracking its index; physical replication will mean a tighter tracking, for example."
The data also shows large differences between those funds’ charges; Halifax’s UK FTSE 100 Index Tracking fund, the worst-performing FTSE 100 tracker, has a total expense ratio (TER) of 1.52 per cent, while the second-best performer, HSBC FTSE 100 Index
, charges 0.27 per cent TER.
The FTSE 100 index returned 9.07 per cent in the year.
The same pattern is true of funds tracking the FTSE All Share – although the values are less extreme. The Vanguard FTSE UK Equity Index gave the highest returns, with 9.12 per cent over a year, while the Halifax FTSE All Share Index tracker returned the least, with 7.39 per cent.
Vanguard has the lowest TER of the All Share trackers with 0.15 per cent, while Halifax was the most expensive, charging 1.5 per cent.
The FTSE All Share returned 9.2 per cent over the past 12 months.
The Halifax FTSE 100 Tracker and the Halifax FTSE All Share Tracker were part of a fund transition from Insight to SWIP that took place last year. Halifax was not available for comment.
HSBC’s FTSE All Share Index Tracker and F&C’s vehicle that follows the same index both returned just over 8 per cent in the period, charging 0.27 per cent and 0.44 per cent respectively.
AWD Chase de Vere’s Patrick Connolly says outperformance within a tracker fund can also be cause for concern.
"The performance of all investment funds is important. However, if you have selected a passive investment then the key is how accurately it tracks the relevant index that it is supposed to be following."
"If a fund significantly outperforms the index, this suggests that its tracking techniques may not be very accurate and so there is a possibility that it could significantly underperform at some point in the future."
"It is important to understand that one tracker fund is not necessarily like another and they may charge different amounts and try to achieve their goals in different ways."
"We prefer to use experienced passive managers such as Legal & General who typically use full replication of the index and so reduce the risk of divergence away from their benchmark significantly."