Index-tracking funds from the likes of iShares, Amundi and Vanguard have been celebrated in the new FE Passive Fund Awards, which aims to recognise the best products in this growing part of the market.
According to the latest figures from the Investment Association, there is now £109.2bn of retail money in tracker funds – representing a 10.7 per cent share of total industry funds under management. In the same month of 2010, this figure was just £29.5bn.
Furthermore, ETF research and consultancy firm ETFGI shows that the European exchange-traded fund (ETF) and exchange-traded product industry now has record assets under management of $530bn spread across 21 countries.
In recognition of this growing presence, the FE Passive Fund Rating service was launched one year ago as part of FE’s goal of creating more transparency in the passive funds industry. The service allows index trackers and ETFs to be rated alongside each other for the first time.
The ratings assess funds on three criteria: tracking difference, tracking error and fund size. After funds have been analysed using this quantitative methodology, they are awarded between one and five Passive Crowns which reflects their ability to track their respective indices.
Following on from this, FE has now launched the industry’s first pure passive fund awards. They are judged using the same three criteria as the ratings; in order to score top marks across them, funds need to have tracking difference of less than 0.75 per cent, tracking error equal to or less than 0.5 per cent and a fund size of over £100m.
Source: FE
Mika-John Southworth, director at FE, said: “In the course of collecting data on over 3,000 passive funds we recognise the valuable role passives play in helping investors construct cost effective portfolios.”
“Although the rise in the number of passive funds is impressive, there is a stark difference in performance between the best and worst passive funds. We appreciate of the lengths that some asset managers go to provide the most effective and lowest cost investment options, therefore we felt that it was right to recognise these participants with their own awards.”
As the table on the previous page shows, Scottish Mutual UK All Share Index takes the top spot in the UK equity category, which is the most popular among UK investors.
The £191.5m has an FE Passive Fund Rating of five, the maximum possible, and is overseen by John Kelly, head of client investment at Scottish Mutual Investment Management.
Over the past three years the fund has actually outperformed the FTSE All Share after making an 11.20 per cent total return. The index is up 10.73 per cent over this time.
Performance of fund vs index over 3yrs
Source: FE Analytics
Scottish Mutual UK All Share Index has an ongoing charges figure (OCF) of 0.08 per cent.
iShares was the biggest winner in the awards after three of its EFTs - iShares MSCI Japan UCITS ETF Inc, iShares UK Gilts 0-5yr UCITS ETF and iShares £ Index-linked Gilts UCITS ETF – took home the prize in their respective categories.
All three ETFs are among the largest of their sectors and each holds an FE Passive Fund Rating of five. Over the past three years, both bond products’ total returns have been within 1 percentage point of their underlying indices, while the Japanese equity product has lagged by around 2 percentage points.
iShares MSCI Japan UCITS ETF Inc has a 0.59 per cent OCF, iShares UK Gilts 0-5yr UCITS ETF’s is 0.20 per cent and iShares £ Index-linked Gilts UCITS ETF charges 0.25 per cent.
Amundi also came out well in the awards, with its Amundi Index Equity Euro and Amundi ETF MSCI USA products picking up first places for European and North American equities.
Matthieu Guignard, global head of product development and capital markets for Amundi ETF, Indexing & Smart Beta, said: “We’re delighted to have been nominated by FE – especially as they seek to select funds for their quality of replication. Maintaining low levels of tracking error and tracking difference is core to providing clients with efficient and reliable investment tool.”
The US fund has done a particularly good job in tracking its benchmark, with its 43.94 per cent total return over the past three years being just 17 basis points behind the MSCI USA index.
Performance of fund vs index over 3yrs
Source: FE Analytics
Amundi Index Equity Euro has a 0.42 per cent OCF while Amundi ETF MSCI USA charges 0.28 per cent.
Offering guidance on what to look for when assessing passive funds, FE Research head of ratings Oliver Clarke-Williams says that there is a lot more to consider than just costs, which is often one of the most attractive features of passives.
“Tracking error is a good indicator of how well a fund is tracking its respective index, but should not be the only thing assessed when considering a passive and its performance. It’s important to take tracking difference, cost and fund size into consideration,” he said.
“Tracking difference is important in that it shows how different the performance has been over time relative to the respective index it is tracking. It can be used together with fund size to give an indication regarding how expensive/efficient the fund is.”
“Although it is not typically discussed when comparing tracker funds, we take fund size into consideration because it is generally desirable for a fund to have a certain level of scale to be an economic proposition. Funds are therefore rewarded for being larger.”
