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Finding and evaluating tracking error
Comments
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InvestInPoker wrote: »This fund is not lagging or suffering from any bad error at all. The fact it has returned £1328 instead of the index's £1320 over 2 years suggests there is a small error - even though it has resulted in a small upside here, it could equally have been a small downside. However no fund will be absolutely perfect and I think this tracker is a suitable choice for anyone wishing to follow the MSCI World index.
I agree £1000 being within £8 of its index 2 years on doesn't sound too bad. Thing is, I have £80,000 invested so the variance would be £640 which seems a lot. As you say it could equally have been a downside. If the Morningstar figures are to be believed, in the YTD it is 0.9% down (the AMC is 0.18%, so actual tracking error of 0.72%). That seems like a lot. Over a year, I'll lose £576 just to tracking error.
Monevator say this about tracking error:There’s no point choosing a fund with a Total Expense Ratio (TER) 0.2% cheaper than its rivals, if its returns consistently lag the same benchmark by an extra 0.5%.
So I wonder if landing £8 within its index over 2 years was more of a fluke than anything and if this fund is an awful tracker? As usual, I'm probably missing something!!0 -
Please ask fidelity themselves for clarification on those figures. I am not sure about them either. The article you linked says errors of 2% and higher are "bad".
This tracker fund is not awful by any stretch of the imagination infact it seems quite cheap and doing its job well. That said, there might be better ones following the same index.
You can eyeball the graph of this fund vs the actual index better here
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000SRPN&tab=13
Please close down the two Global graphs and leave just the fidelity tracker and the msci world index. There is definitely some small movement either side but nothing drastic and it seems to be doing its job well.0 -
Here is quite a good comparison of UK trackers and their errors. Fidelity's UK index is included.
http://www.telegraph.co.uk/finance/personalfinance/investing/10580063/The-500000-fund-investors-failed-by-trackers.html
And alsoSo I wonder if landing £8 within its index over 2 years was more of a fluke than anything
I don't think so, although there might be slightly better tracker funds out there if you look at the graphs and choose any random point to stop the amounts will be very close.0 -
Thanks InvestInPoker. I should've continued reading that Monevator article to reach the bit about 2% and higher being classed as bad.
The graph you provided is the sort of detail I was looking for and does seem to be tracking pretty well. I think my next step is to find the fund's peers and see how they're doing.0 -
I don't know what one would consider bad really, but looking at e.g. Vanguard's UK equity index vs the FTSE all-share, it's a much tighter hug than the Fidelity fund.
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000003YCZ&tab=13
Obviously this is a different index on a more limited geography, therefore perhaps easier to track. Sadly I can't convince Morningstar to compare the Vanguard developed world ex-UK fund to its index to see in more detail.0 -
'We don't need to be smarter than the rest; we need to be more disciplined than the rest.' - WB0
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The Vanguard funds usually appear to track tighter / perform better for indexes containing UK assets because of their philosophy of charging a "dilution levy" on new subscribers into the fund, which means the fund gets some extra cash in the door to help it cover stamp figures and other consequential costs of new joiners. So over time the NAV gets a bit of a helping hand compared to a Fidelity or HSBC equivalent, paid for by those new investors.
It is an equitable method as far as I'm concerned but it will definitely help their apparent tracking error.
As far as I understand it, they are also not averse to stock lending which might be considered a bit of a gamble even though it can boost the returns over a true buy and hold physical tracker.
I think if a tracker fund perpetually lags the index by more than the expense ratio that you signed up to accept, you need to consider how good they are at doing their job. A tracker fund won't literally hold a bit of all 10000 companies in the world index as some are simply not worth bothering with for the immaterial effect on returns. There will be some shortcuts; you just need to assess how good they are at following their stated objective.
If their efforts to follow the index give a broadly similar result as the index (as long as the difference is not always a negative result), then it is fine.
You use a tracker to get cheap and broad exposure to a market. If the most famous "market" index for that sector delivers 10% and your broad tracker fund sometimes gets 9.5 and sometimes 10.5, it is not a real issue. There is a difference in asset mix but if the return is similar and you still have your £80k exposed to equities in that part of the market, so you have not got a wrong result. Who is to say the MSCI return is "right" for anybody?
Because the decision to construct the index out of £200 of Apple Inc to every £1 of ABCD Inc is in a sense an arbitrary decision. £199:1 could be just as useful for experiencing the range of returns offered by U.S. corporates, even though your eggs are not as much in the Apple basket.0 -
Be wary of historical comparisons. They're claiming that to be a comparison over 10 years but then take no account of significant changes in charges by some providers, but not others, over that period which makes the comparisons fairly meaningless.InvestInPoker wrote: »Here is quite a good comparison of UK trackers and their errors. Fidelity's UK index is included.
http://www.telegraph.co.uk/finance/p...-trackers.html
For example, HSBC slashed the AMC of all their trackers in June 2009 as a response to Vanguard entering the market. The AMC for their bundled All share tracker was halved to 0.25% and for the FTSE 100 tracker and others was cut by three quarters from 1.00% to 0.25% (and cut again of course for unbundled funds following RDR).
It's current and future charges that are significant for returns, not what they once were.0 -
Exactly! That chart compares the Vanguard fund against MSCI World NR (which it hugs pretty tightly) but it is supposed to track the FTSE Developed Ex-UK index which I can't find on Morningstar's tools. Maybe they're the same? I don't know what MSCI World NR means.0 -
bowlhead99 wrote: »I think if a tracker fund perpetually lags the index by more than the expense ratio that you signed up to accept, you need to consider how good they are at doing their job.
The Fidelity fund in the OP is quite young but has lagged its index by more than the charge of 0.18% most of the way, as far as I can tell. Maybe it's too early to tell how they're doing but the match isn't as close as your post asks for... but did it have higher charges until recently perhaps?0
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