Global small-cap index tracker = large US bias?

masonic

JohnRo wrote: »

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.

Well, if you are just looking for a satellite with a bit of spice to go alongside your Vanguard Lifestrategy fund, then the Vanguard Global Small Cap fund is cheap, simple and if you are happy to allocate to the smaller companies in proportion to each countries overall market cap, then you can't go far wrong. If, however, you want less than 60% of your smaller companies to be listed in the US, or you want a little more than 8% of them to be UK-based, or you want more than 2% exposure to developed Asia, then you either have to lump it or add more funds to boost your exposure to the desired regions, at which point much of the advantage of the Vanguard fund is negated.

JohnRo

Exact opposite, a substantial 30% allocation. I want the steady security of the diversity this offers with exposure to that section of the equity market without the volatility. They aren't small companies anyway, in the fledgling sense. The fund selects non tiny established companies already up and running with good liquidity and, all being well, accelerating towards being inelligible for inclusion.

I don't hold a great deal of faith in regional allocations at the best of times when it comes to where companies do business, even if the point of sale is in the US itself that doesn't necessarily mean it's a domestic US trade.

fwor

Thanks for the replies.

I agree that separate regional holdings would be the ideal solution (assuming I could come up with my own regional weightings based on logic rather than "making it up") but I think I'm below the threshold - with only £10k to invest in global small cap at the moment - where it's economical to do so.

I take the point that the US allocation encompasses trade that is global and not just domestic US - though if markets in the US take a downturn I doubt that anyone will notice the distinction that much, and everything will drop together...

InvestInPoker wrote: »

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.

Although essentially committed to a passive portfolio, I'm thinking the same way - anyone have further active global small cap fund recommendations to consider? The Baillie Gifford GDF referred to above had one meteoric year, but I'm not sure about the long term for that one...

InvestInPoker

Marlborough do a couple of ok looking ones I have thought about - all UK exposure however and I am wanting more global. I could mix and match a few different funds if I decide against just increasing the amount I have in the vanguard tracker though.

TCA

I hold Aberdeen Asian Smaller Companies Investment Trust. I'd like some exposure to UK and European small cap, but holding off for the moment.

masonic

In terms of active small cap funds, I hold one of the Marlborough UK ones (Micro), along with Scottish Oriental Smaller Companies Investment Trust.

grey_gym_sock

alternatively-weighted (i.e. not market-cap-weighted) indexes do exist.

e.g. equal weighted. an example, for global small caps, is:

iShares MSCI World Size Factor ETF (IWFS) ... TER 0.3% ... this happens to hold 37% in the USA, 22% in japan, ... see http://www.ishares.com/uk/intermediaries/en/products/270057/ishares-msci-world-size-factor-ucits-etf ... note this is a very new ETF (and i don't hold it).

there are also fundamentally-weighted indexes, i.e. in which the amount of money they invest in each share is proportional to the company's profits, or turnover, or book value, or cash flow, or dividends, or some combination of the above. however, i don't know of any fund/ETF using this for global small cap. (the various "FTSE RAFI" indexes are all fundamentally weighted.)

fwor

Thanks - that's interesting. If I'm understanding the fund objectives correctly it seems to be a mid-cap fund which effectively places greatest emphasis on the smallest constituent companies in the index? So the smallest of the mids rather than the largest of the small?

Sadly I don't have the expertise to figure out whether that's a good strategy in investment terms, but it seems to have - I guess as an unintended consequence of the weighting - the smaller US equities allocation that I'm after (I think...).

As you say, very new, but Interactive Investor certainly lists it.

grey_gym_sock

fwor wrote: »

If I'm understanding the fund objectives correctly it seems to be a mid-cap fund which effectively places greatest emphasis on the smallest constituent companies in the index? So the smallest of the mids rather than the largest of the small?

yes, the method is to take all the companies they've identified as mid-cap, and invest an equal amount of money in each 1. this tends to emphasize the smaller mid-caps, because there are more smaller mid-caps than bigger mid-caps. (contrast that with a cap-weighted mid-cap index, which tends to put the lion's share of the money in the bigger mid-caps.)

however, note that different indexes use different definitions of mid-cap. 1 person's small-cap may be another person's mid-cap. some might say that the vanguard global small-cap fund is more like a mid-cap fund.

to put numbers on this, you could try looking at morningstar's figures for "average market cap". so for vanguard global small-cap, it's $2,190m (see http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000005OPT&tab=3 ). unfortunately, they don't yet have a figure up for the ishares world size factor ETF. that would be a reasonable way to compare how "small" the funds are.

1 disadvantage of equal-weighting is that it will incur higher transaction charges, because after they start with the same amount invested in each company, some shares will go up, others down, and so at some point they will have to rebalance to get back to equal weightings. i don't know how often they will do this. cap-weighting is simpler, because they start by buying the same percentage of the available shares in each company in the index, and no changes are required just because share prices go up or down (there are only changes when companies enter or leave the index, or for some corporate actions). and TERs don't include transaction costs.

it seems to have - I guess as an unintended consequence of the weighting - the smaller US equities allocation that I'm after

yes, that is accidental - and it may change over time.

while i'm quite intrigued by this ETF, the vanguard fund is the more straightforward approach. and there's no need to try to be too clever in investing - it can be counter-productive ...

bowlhead99

grey_gym_sock wrote: »

while i'm quite intrigued by this ETF, the vanguard fund is the more straightforward approach. and there's no need to try to be too clever in investing - it can be counter-productive ...

There is a lot to be said for KISS and broad exposure. While I use some index funds to get coverage of some areas I generally prefer the more active ones for a lot of sectors.

I don't see a need to invest more in Apple than in Microsoft just because the former has a higher valuation, and the same goes for companies at the mid and small end of the table - arguably the smaller they are, the less perfect the market information and piling blindly into one over another (relatively) just because it happens to be physically bigger is maybe not as good a rationale as actually having someone read the accounts and understand the business before deploying your funds.

That said, the US market for example certainly has a lot better coverage than mid and small caps in other less developed parts of the world so it can be hard for active managers to add so much as in some sectors and you will still get broad success with indexes in the good times.

I like the idea of equal weight indexes but while on paper they outperform cap-weighted over a long time period (because more money is going into smaller companies) it is hard to find them in practice. As you suggested, equal weight is tricky because if you buy 2000 companies then the very next day they will not be equally weighted and you have to buy and sell to true them up. Those costs don't appear on a pure mathematical index but are very real. Also in the smallcap domain, if you want to put £10m into a £200m company it is rather trickier than putting £10m into a £2000m company, so equal everything is hard to accomplish

I held some Vanguard global smallcap for a while in one of my portfolios alongside my VLS (even though I am not a massive fan of the principle, it was cheap and easy to generally 'get some more smallcap' that way). I trimmed it back in the latter part of 2013 after a 'good run' while leaving more in the active funds in different regions, and then later sold out entirely to give me one less thing to monitor. The timing was probably more luck than judgement of course. But since that point I haven't held a smallcap index so I am back to practicing relatively more of what I preach - active management for less-perfect markets.

Of course, while I might be a fan in principle of having UK smallcap and Europe smallcap and Jap smallcap and EM and US smallcap dedicated funds, so that each manager has a specialist team looking at the opportunities rather than trying to do it all from one desk in London or New York; it can be crazy to run 5+ funds in small portfolio. Also if you are adding monthly your choice of platform may make the costs prohibitive with lots of funds or ITs, which can skew your preferences.

Something like a global tracker to build up an exposure is completely fine IMHO, it's just once that balance builds up to X thousand you might stop and consider what the various options are for that size of holding, and re-evaluate what's in the market - even if you are still adding monthly to the tracker. All IMHO.