Global small-cap index tracker = large US bias?

fwor · 30 January 2015 at 3:43PM

The title may be a bit obscure, but what I mean is this:

I'm currently in the process of re-working my investments to get rid of the ones with high management charges. I've shifted most but I'm left with one that I have some affection for. I'm not sure that there is any place for that in investments, but this one (Invesco Perpetual Global Smaller Cos Acc - PE06) has performed well in recent years.

I'd quite like to move the funds from it into an index tracker, and the obvious choice (because I already hold it in small amounts) would be Vanguard Global SmallCap Acc - I2X3 - but the thing I don't like about that is that it has a very high bias towards US shares - roughly 60%, compared with only about 32% for the Invesco fund.

So, the question: Are all global smallcap index trackers likely to have a similar US "bias", or are there other indices that are more evenly distributed around the world?

le_loup · 30 January 2015 at 3:56PM

Bias?
It's the relative size of the market.

fwor · 30 January 2015 at 4:14PM

le_loup wrote: »

Bias?
It's the relative size of the market.

True - that's why I put the "bias" in quotes. But I'm assuming that the relative positions of each of the companies in an index depends on how the index is defined. For all I know there may be other ways to define an index, based on something other than "size".

What I wanted to understand was whether there are other types of index that would lead to less of an emphasis on the US. If the answer is "no" then that's Ok.

If that's the case then I will probably just take the funds out of the Invesco fund and put them back into the clean version of the same fund (accepting that a AMC of .75% is the price I have to pay for that decision).

Kendall80 · 31 January 2015 at 12:44AM

Im not sure if it helps with the US leanings but have you considered using an active fund as your small cap play? The Baillie Gifford global discovery fund for instance while not precisely analogous has greatly outperformed the small-cap tracker. Easily accounting for the small extra on the OCF.

Many of my global funds are weighted towards the US - the benefit as I see it being I don't require a specific US fund.

collingbone614 · 31 January 2015 at 1:27AM

If you want to base the allocation of your investment on another method besides market capitalisation, that is ok. It will be assumed that you have a decent rationale detailing your belief that markets are not efficient. It will be assumed that you have a better alternative - possibly a geographical or population size-based methodology. I trust that you will be able to articulate your choices and that you aren't just making it up as you go along. When you come up with a better idea than market-capitalisation, please post it here..

fwor · 31 January 2015 at 2:11AM

All I've done is look at the allocation by region of my existing Global Small Cap fund (US equities 32%) and the allocation of the Vanguard Global Small Cap fund (US equities 60%) and seen that they are different, by a long way.

Presumably the Invesco fund managers themselves have a methodology that causes this difference, but they aren't likely to tell me, so I don't know if they are "making it up as they go along". But I suspect that they are not, and that they actually do have a rationale behind their allocations.

I was aware that some indices are based upon market capitalisation, but it occurred to me that there may also be indices that are not.

You seem to be saying that ~all~ indices are based upon market capitalisation. If that is correct then I have the answer I need - in that case the only options would appear to be to "roll my own" by combining regional funds or by selecting an active fund with the characteristics that I'm after - though with the latter there is nothing to prevent the fund managers from changing the allocation as they wish, at any time in the future.

I should stress that at no point was I suggesting that I have a "better alternative" to market capitalisation. I was simply looking to find out if any alternatives already exist.

Generali · 31 January 2015 at 2:51AM

fwor wrote: »

I should stress that at no point was I suggesting that I have a "better alternative" to market capitalisation. I was simply looking to find out if any alternatives already exist.

Most famously there's the Dow Jones Industrial Average ('The Dow Jones Index') which is an unweighted average of prices effectively. The Finnish stock market index used to be weighted by market cap with a limit to the maximum weight as Nokia would have been such a massive part of the index that the index would have been a Nokia tracker in effect!

There's no rule to say that indicese have to be weighted by market cap. You can get firms like Goldman Sachs to make you up a custom index and they will weight it using a number of metrics. For example you could have an Equity Income fund index weighted by yield.

An index is just a statistical way of representing the change in a group of nunbers. You can weight it or not as you see fit.

masonic · 31 January 2015 at 7:50AM

fwor wrote: »

What I wanted to understand was whether there are other types of index that would lead to less of an emphasis on the US. If the answer is "no" then that's Ok.

If that's the case then I will probably just take the funds out of the Invesco fund and put them back into the clean version of the same fund (accepting that a AMC of .75% is the price I have to pay for that decision).

I use separate regional small cap holdings. You can get exposure to US small cap equities through an ETF like ISP6 (TER 0.4%) if you have a sufficient amount to invest to negate the trading fee. I tend to go active for small companies elsewhere, but you could add a FTSE 250 tracker, and use active funds with small cap exposure only for Europe and developed Asia (I tend to assume emerging markets give you exposure to relatively small companies already). That may give you something that's cheaper than one big managed fund and you'll have the flexibility to set the regional weightings according your own views.

JohnRo · 31 January 2015 at 12:25PM

I use separate regional small cap holdings.

I sold all mine and went with the vanguard tracker, huge diversification, hassle free rebalancing, low charges, no "star manager" and/or soft closure disruptions etc.

All things considered the Vanguard tracker has a lot going for it even if it doesn't deliver chart topping performance over a specific time period.

TCA · 31 January 2015 at 12:52PM

omnirife wrote: »

I trust that you will be able to articulate your choices and that you aren't just making it up as you go along. When you come up with a better idea than market-capitalisation, please post it here..

Can you please articulate what's so good about a small cap fund that tracks an index based on the size/market cap of companies. What's the point of wanting small company exposure, but choosing to invest in only the biggest small companies?

Or are you just making it up as you go along?......

InvestInPoker · 31 January 2015 at 12:56PM

JohnRo wrote: »

I sold all mine and went with the vanguard tracker, huge diversification, hassle free rebalancing, low charges, no "star manager" and/or soft closure disruptions etc.

All things considered the Vanguard tracker has a lot going for it even if it doesn't deliver chart topping performance over a specific time period.

Yeah this fits in with my thinking as well really.

Going to make a decent increase on my smaller companies allocation this year but have not picked out how I am going to do it. The vast majority of my investments are passive and I already have a sum in the vanguard global small cap tracker.

I could convince myself to take an active fund in this area if I felt the performance over a long time period previous justified it AND I could be sure the manager I had selected was staying with the fund for the long haul. I can't really convince myself of this at the moment so I think I will just be increasing the money I have with the vanguard tracker.

Global small-cap index tracker = large US bias?

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