A Vanguard tracker has emerged as one of the two most consistent IA Global funds of the past decade after beating the MSCI World index – the most common benchmark in the sector – in eight of the past 10 calendar years.
The fund, Vanguard FTSE Developed World ex-UK Equity Index, shares the honour with Merian Global Equity.
Performance of funds vs sector and index
Source: FE Analytics
Of the 174 funds in the sector with a track record long enough to be included in the study, another 12 managed to beat the MSCI World index in seven of the past 10 calendar years.
The MSCI World is one of the most difficult indices for active managers to outperform, due to the high weighting to the ultra-efficient US market. As at the end of December last year, the period at which the study ends, the world’s largest economy accounted for 63.33 per cent of the index.
Yet even taking this into account, a tracker fund would generally only be expected to perform in line with the chosen index, rather than consistently outperform it.
One of the main reasons that Vanguard FTSE Developed World ex-UK Equity Index has been able to consistently outperform the MSCI World is that it focuses on a slightly different index, which excludes the UK.
The home market has lagged behind its global equivalent over the 10-year period in question – the FTSE All Share made 118.28 per cent from 1 January 2010 to 31 December 2019, compared with 201.24 per cent from the MSCI World index. While the UK market only makes up about 5.5 per cent of the MSCI World, the tracker only beat the index by a marginal amount in each of its eight successful years. Its largest relative outperformance came in 2016, when it made 29.33 per cent compared with 28.24 per cent from the index.
Performance of indices over 10yrs
Source: FE Analytics
Vanguard also boosts performance by stock lending, whereby a third party borrows a limited amount of its holdings, in exchange for a fee. However, the FE Investments team pointed out that the group typically won’t lend more than 3 per cent of the portfolio, meaning the performance impact is minimal.
Over the 10-year period in question, Vanguard FTSE Developed World ex-UK Equity Index made 210.69 per cent, compared with gains of 148.79 per cent from the IA Global sector.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The £6bn fund has ongoing charges of 0.14 per cent.
It is worth noting that while the MSCI World has significantly outperformed the IA Global sector over the long term, it has underperformed in the recent crash, down 21.84 per cent this year with a maximum drawdown of 26.7 per cent compared with figures of 18.6 and 22.6 per cent respectively from the average fund.
Merian Global Equity is headed up by Ian Heslop, Amadeo Alentorn and Mike Servent.
The fund is run using a systematic process that uses rules and risk controls to make trading decisions in a methodical way. The team at Square Mile Investment Consulting & Research said the fact that investment decisions are based on a level of quantitative analysis naturally helps the managers remove certain behavioural biases and allows them to be dispassionate about where the portfolio is invested.
“In practice, the managers aim to spread the fund's risk and return potential across five investment categories, with the amount allocated to each based upon their analysis of present and future market conditions,” the team said.
“Broadly speaking we would expect this fund to outperform the MSCI World Index during periods of market growth as well as when markets are being driven by fundamentals. Whilst it is important to be aware that it may well underperform during market inflection points, a natural weakness for more quantitatively driven strategies, we believe that investors will be well served over a full market cycle.”
Merian Global Equity made 288.14 per cent over the 10-year period in question.
The £852m fund has ongoing charges of 1 per cent.
However, a number of platforms have removed some Merian funds from their best-buy lists after Jupiter announced its acquisition of the group last month.
Among the funds that beat the index in seven of the past 10 calendar years are Baillie Gifford Global Discovery, Fidelity Global Consumer Industries, Rathbone Global Opportunities and Morgan Stanley Global Brands.