The £540m Vanguard FTSE UK Equity Income fund is one of the few trackers with a style bias that is available to investors in the IMA unit trust and OEIC universe. It aims to replicate the performance of the FTSE UK Equity Income index, which as its name suggests, has a bias toward dividend paying UK companies – one of the most popular areas of the market with investors at present.
Since the fund was launched in June 2009 it has returned more than the FTSE All Share and the average UK Equity Income fund with returns of 119.92 per cent, and is also ahead of both over a three year period.
Performance of tracker and indices since 22 June 2009
Source: FE Analytics
Whilst it has underperformed compared to actively managed funds such as Unicorn UK Income, Standard Life Investments UK Equity Income Unconstrained and Royal London UK Equity Income, it has beaten 65 of 79 actively managed UK Equity Income funds with a long enough track record since inception, putting it in the sector’s top-quartile.
Some of the high profile names it has outperformed over this period include the five-crown rated Invesco Perpetual Income & Growth fund, Threadneedle UK Equity Income, Aberdeen UK Equity Income and Artemis Income.
It has beaten Mark Barnett’s Invesco Perpetual Income portfolio, which he has recently taken over from Neil Woodford, as well.
Performance of funds, sector and benchmark since 22 June 2009
Source: FE Analytics
It has also demonstrated outperformance in a bear market – a common criticism of tracker funds is that they only perform in up markets – with a top quartile return of 2011.
The Vanguard fund made 2.87 per cent in 2011, the tenth best return in the sector over this period out of 82 funds.
The fund has tracked the FTSE UK Equity Income index with an error of just 0.13 per cent over a three-year period, with an annualised volatility score of 12.9 per cent. The sector has a lower average volatility score of 12.42 per cent.
However, the fund has a top quartile score for max-drawn of 11.92 per cent, over three years, compared to the sector’s 15.48 per cent.
The fund holds approximately a third of the 350 companies in the FTSE All Share index, with the largest holdings in companies such as AstraZeneca, BAT, HSBC, BP and GlaxoSmithKline.
Source: FE Analytics
Investors can access the five crown-rated tracker via platforms for an ongoing charges figure (OCF) of just 0.25 per cent – significantly lower than the average cost of actively managed funds in the sector.
Given the popularity of income-focused funds, the strong relative performance of a tracker calls into question the point of holding a more expensive actively managed fund.
Trackers with a style bias are gaining more and more traction with fund houses, particularly in the ETF market. ‘Smart beta’ funds attempt to bridge the gap between active and passive funds by ‘tilting’ exposure to stocks believed to stand a greater chance of outperforming the wider index.
The Vanguard tracker, for example, favours stocks that have a quality bias and strong track record of paying dividends. On a very loose basis, this style can be attributed to the likes of Woodford and Threadneedle’s Harrison, though because the tracker’s holdings are fixed and run by a computer rather than an individual, the costs are significantly lower, giving it an automatic head start.
Smart beta is expected to grow in the coming years, with more and more specific indices and trackers in the pipeline.
Rob Morgan, investment analyst at Charles Stanley Direct, believes investors should be wary of smart beta funds due to their relatively new status in the investment world.
“For those who normally invest in passives, smart beta funds could be useful because at the very least, if it is underperforming you will know why, because the strategy is clearly defined,” he said.
“However, investors need to understand they are relatively new and untested over the long-term.”
“Smart beta needs to prove itself as there is not enough data to go on at the moment, and see if it is actually going to work.”
He adds that smart beta strategies have a potential major weakness.
“As they try to identify a long-term structural trend from what has happened in the past, nobody knows whether this trend will continue in the future,” he explained.
“Just because something has happened in the past doesn’t mean it is going to happen in the future. It could well underperform.”
“It can be risky to assume that a certain trend will continue forever and some smart beta strategies seem to suggest that.”
“Another problem with smart beta is that it doesn’t really look at relative value between sectors, which active managers can do,” he added.
Ben Willis, head of research at Whitechurch, agrees.
“Smart beta can be a little too smart. With trackers we just want something simple that will track an asset class or a region,” he said.
