Vinculum - new style 'tracker'

westy22

An interesting concept http://www.thisismoney.co.uk/money/investing/article-2067289/Vinculum-Bold-new-fund-charge-fees-beats-market.html

I'm not sure that I fully agree with the concept but it is an interesting new take on tracking an index

SnowMan

I'm all for active investment funds being accountable through their charges for underperformance (or for over-performance) but this isn't the way to go about it. Very much marketing over substance.

I am going to set up an investment company. At the end of the year I am going to place all the money invested on red in a casino.

I will charge a 20% performance fee on any gain over the FTSE all share over the year and charge a 0.25% admin fee on top.

You can't lose; you will either pay the same charges as a tracker or else you will outperform a tracker.

Any takers?

westy22

Snowman - I share your reservations and would need to read a lot more detail before I formed a firm opinion. However, I can also see some merit in the concept. We are all arguing for greater transparency in costs and greater accountability for performance and this type of fund may offer that. If performance is poor or average then the fund is a low-cost tracker of the MSCI World TR Index; on the other hand, if performance is better than that Index then you will be receiving 80% of that outperformance. It's a bit like an each-way bet on the horses but without double the stake.

What really strikes me is that contrary to the much quoted 'past performance should be ignored...' this fund is saying that investment will be based purely on the last 5 years performance and the concept that 'good companies continue to do good things' - of course, that ignores the fact that sometimes good companies have decisions imposed upon them by world trends, government legislation etc.

qpop

I must say it looks like a convenient excuse to underperform - "Well, sure, we were 4th quartile, but it's not like you paid us to be a top quartile fund"

gadgetmind

All they have to do is choose a selection of assets that doesn't correlate with the index, cream the fees in the quarters when they "outperform", and retire to a beach.

Q: Will their long-term performance, after fees, beat the index?
A: Probably not, and it doesn't have to; they get their money from being uncorrelated not on performance.

koru

I agree with gadgetmind. No mention of a high water mark provision, so the fund manager gets paid a performance fee each quarter that the fund outperforms the benchmark, even if this outperformance is simply regaining the ground lost by underperformance in previous periods.

To give a simple example, let's assume the benchmark rises by 2% in each of four consecutive quarters. The cumulative return is about 8.2% (1.02x1.02x1.02x1.02). And let's assume the fund loses 13% in the first quarter and then rises by 7.5% in each of the next three quarters. The cumulative return is about 6.6%, so over a year the fund has delivered underperformance of 1.6%. Nevertheless, the fund manager gets a performance fee in three of the four quarters. The "outperformance" is 7-2=5% per quarter, so the fund manager gets 20% of this, which is 1.0% per quarter. So, the fund manager earns 3%, plus the 0.25% to cover its costs. After performance fee the punter has a net return of 6.6-3.25=3.35%, but could have earned 8.2% in a simple tracker (or, assuming TER of 0.3%, a net return of 7.9%).

saveonarola

westy22 wrote: »

If performance is poor or average then the fund is a low-cost tracker of the MSCI World TR Index

If a tracker does its job, its performance should never be poor, only average. This isn't a tracker in any sense of the word. The index is merely a benchmark for determining the fees, not what the investor gets back.

temagami

Hmmm … this looks like quite a smart piece of marketing.

If the strategy is being described accurately in the articles and is implemented correctly, the odds are that this will outperform the index handily over the long run, so he will probably collect his performance fee. It doesn't look like he's suggesting a momentum approach based on how stocks have performed in the past, but rather one based on how the business has performed - and there are quite a few studies suggesting that high quality companies deliver better returns over time (for an example of one - my summary because I can't find the full note posted online).

As a manager, having gone with a strategy that's likely to outperform the broad market yet should be relatively low cost to implement to minimise your expenses, you then maximise your chance of collecting the performance fee by putting the fees in your favour through having no hurdle rate or high watermark for performance. You then convince investors you're giving them a good deal by charging a low fixed fee (even though you will regularly collect the performance fee) … and profit.

Perhaps I'm being overly harsh and cynical … but on the fact of it, there's no need to charge hedge fund style fees for this. You can pretty easily construct a global high quality index using a fundamental indexing approach and simply track that for a normal tracker fee - in fact, I'm surprised that nobody has yet come out with a global high quality ETF along these lines. Or given the way that quality seems to be disproportionately concentrated in a couple of sectors, an MSCI World Consumer Staples tracker might well do the same job.

gadgetmind

temagami wrote: »

high quality companies deliver better returns over time

This is what's know as value investing, and there are suggestions that buying shares based on value, perhaps with a few other filtering criteria thrown in, does exhibit a premium.

However -
1) There are other names for value investing, which include "high yield", and "high income", but Tim Hale calls it "Value (less financially healthy) Companies". Their price to book is low because their share price is low, and this is also why their yield is often high. Why is the price low? What does the market know that you don't? You're taking a gamble that EMH is wrong.

2) Back-testing of this stock-picking method is difficult. Just because someone can show you some criteria that can be shown to have worked in the past, doesn't mean it will work in the future. Humans are great at seeing patterns where there aren't any. I'm sure I could provide you with a simple algorithm that would give a win/lose answer for every UK lottery win to date. Of course, it would tell you nothing about next week ...

3) There are value/yield ETFs such as IUKD. Back-testing showed that IUKD's strategy would delivery BIG TIME! It crashed and burnt.

4) Vanguard now has a UK high-income tracker called "FTSE UK Equity Income". It uses an automatic stock-picking approach based around yield, but which caps investment at (from memory) 5% per share and 10% per sector. Back-testing shows that it works ...

5) The High-Yield Portfolio (HYP) approach described by Bland on the Motley Fool is very similar. Go for yield, but not too much, then check for dividend history, gearing, dividend cover, market cap, pension liability, unexloded bombs, etc. I hold a modest HYP myself, which I expect to deliver tears, smiles, thrills and spills, and I don't have to pay 20% of any capital increase.

temagami

This is what's know as value investing

No, quite the opposite. Yes, there is some evidence that value investing strategies outperform that market over the long run, but what this fund seems to be claiming it will use as its strategy and what I was referring to specifically was a strategy of investing in the best quality companies, almost regardless of value.

Quality could be defined by a number of metrics, but essentially something that weighs consistency, profitability, balance sheet strength and so on. It's very distinct from value, which as you say often leads to invest in companies that are less financially healthy.

Value definitely has a tendency to blow up badly at the worst of times. Quality conversely has generally got you through the worst better than anything else. Jeremy Grantham did a good piece about this a while ago - second section of this (see in particular chart 5 on page 8 of the second section).

Quality often leads you towards a specific type of firm - essentially relatively conservative ones with dominant positions in markets that are usually not too subject to changing tastes and with a high degree of industry concentration (quasi-monopolies/monopolistic competition situations). There is some overlap with value in that these firms often appear to be cheap on some metrics (possibly because they're seen as boring) but it's definitely not the same thing.

As an example of what I mean, compare the very different sector allocation of the Invesco PowerShares S&P500 Quality ETF with the sector allocation of the SPDR S&P500 Value ETF. That's not a recommendation of the PowerShares ETF - I haven't looked at it in any detail and I don't know exactly what index methodology it uses - but you can see it's certainly not producing the same portfolio tilt as a value index.

gadgetmind

gadgetmind wrote: »

T
4) Vanguard now has a UK high-income tracker called "FTSE UK Equity Income". It uses an automatic stock-picking approach based around yield, but which caps investment at (from memory) 5% per share and 10% per sector. Back-testing shows that it works ...

This quote describes it better.

"The funds track established indices, with one exception: the Vanguard Equity Income fund, which tracks a new index, called UK Equity Income by Vanguard but High Dividend Yield by FTSE. The FTSE series already includes the FTSE UK Dividend Plus index, which is tracked by i-shares FTSE UK Dividend+ (IUKD). The dismal performance of this index and fund - down 55% over two years to end-June, and even more as at Marsh 2009 - was the reason Vanguard commissioned FTSE to create a new one. Both indices are based on forecast dividends; they buy shares in companies with the highest yields based on their forecast dividends. But whereas the Dividend Plus Index allocates capital to shares in proportion to their dividend yield, the High Dividend Yield index takes the FTSE 350 Index, ranks stocks on their yield on forecast dividend, and keeps adding stocks in proportion to their market capitalisation until the market capitalisation of all the stocks in the fund reaches 50% of that of all eligible stocks. This is subject to a 5% maximum in any one company and a 25% maximum in any sector."