How to rate a passive fund

May 13, 2015 admin

13.04.2015

 

 

 

 

 

 

 

How to rate a passive fund?

 

How to rate a passive fund is a guest post by financial journalist Adam Lewis

 

Passive funds have been making the headlines again in recent weeks with the launch of FE Trustnet’s Passive Crown Ratings system.

 

In the past, asides from cost, there has never really a way of judging the merits of index tracking funds alongside each other and as such it is no great surprise that the only price war that has been taking place has been fought by the passive providers.

 

While the result of this battle has been great for the end consumer, a focus simply on costs does mask that the quality of trackers on offer vary considerably and many investors might not grasp this. For example I can but a cheap pack of batteries in a pound shop, but will these outlast more the more expensive brands? Highly highly unlikely.

 

So where else can investors look to if they want to research an asset class, which continues to surge in popularity? According to the Investment Association passive funds raked in net sales of £938m in March, the highest amount ever, while funds under management for the sector stood at £100.9bn at the end of March.

 

This means tracker funds now demand an 11.5% overall share of industry FUM, yet unlike their active competitors, there still remains little tools to judge one passive fund versus another. To address this FE Trustnet last month launched an extensive of their active Crown Rating system,  which instead of looking at costs, focuses on an index fund’s tracking difference, tracking error and fund size and scores them accordingly. It is also the only service around that ranks ETFs and mutual funds alongside each other and at launch nearly 230 funds were rated.

 

So what were the results? Well firstly they were quite encouraging. Of the 229 funds rated  55, or nearly a quarter, scored the maximum possible five crowns. Quick methodology: the number of Crowns a fund receives is determined by an absolute score across the three components, with tracking difference ranking highest in terms of importance and fund size having the lowest impact.

 

At the other end of the scale 32 funds (14%) were awarded the lowest possible 1 Passive Crown, highlighting the quality difference on offer to retail investors.

 

But the main question on all your lips is who did well and who bombed?

 

Topping the rankings from an absolute group perspective was iShares. Of its 34 passive funds available for being rated, 13 scooped 5 Passive Crowns, however six only scored 1 Passive Crown. Meanwhile seven of Vanguard’s 12 funds rated were given 5 Passive Crowns, with only one scoring the lowest possible Crown rating.

 

Looking at the difference in quality, the top rated 5 Passive Crown rated fund – the Scottish Mutual UK All Share Index – had a tracking difference with the FTSE All-Share of 0.06%, compared with the 1 Passive Crown rated Virgin UK Index Tracking fund which had a tracking difference of 1.29%. A difference of over 1% per year.

 

FE Trustnet are not the only provider who assess passive funds, Morningstar and Raynor Spencer Mills also rate funds in the sector, but to date FE rates the most products and is the only one which ranks trackers and ETFs alongside each other. That aside is it is a great leap forward in terms of transparency and for a sector which up until recently seemed solely focused on ‘cheaper is better’.

 

Indeed unlike active funds, where the rules state ‘past performance can be no guarantee of future performance’ within the passive space the argument could be made that the reverse is true. Given the repeatable processes used within the funds and that they track, it could be argued that a glimpse of what a 5 Crown rated fund has done in the past could easily be used as a guide as to how they will perform in the future. However I cannot see the regulator sanctioning that in the marketing material.

 

adam lieis

 

 

 

 

 

Adam Lewis is a freelance journalist and content director at Matrix Solutions.

He has worked as a financial journalist for over 14 years, the last 10 which were at Centaur where he lately edited Fund Strategy magazine for three years till February 2015. He has won five awards for journalism excellence, including AIC Trade Journalist of the Year (2002 and 2008) and IMA Specialist Reporter of the Year (2005).

This is a guest post and the views here do not necessarily concur with those of Investment Quorum. In fact it is very often the case that we may be largely in disagreement but we respect the opinions and views of others and value their contribution to the debate.  Guest posts may appeal more to some than others and may often have an industry or sector knowledge expectation. 

 

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The post How to rate a passive fund appeared first on Investment Quorum.

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