Global Tracker Funds

bowlhead99

MonroeM wrote: »

Please excuse my ignorance but does that mean that basically there is no real difference between the two indexes if you are investing in a tracker?

There's no real difference between MSCI ACWI and FTSE All World.

There's a difference between those two on the one hand and FTSE World on the other. FTSE World is missing China, India, Russia and some other emerging markets.

There's a difference between those two on the one hand and MSCI World on the other. MSCI World is missing all emerging markets.

There's a difference between FTSE World on one hand and MSCI World on the other. As FTSE World has some emerging markets like Brazil and South Africa and Mexico while MSCI doesn't have any.

The difference in gross performance in a calendar year between having all the emerging markets and only having the advanced emerging markets (e.g. FTSE All World vs FTSE World) can be over 2%. The difference between having all the emerging markets and not having any emerging markets (e.g. FTSE All World or MSCI ACWI, vs MSCI World), can be even greater.

So the gross performance differences between trackers that are tracking different things, can well exceed the fee differences between trackers that are tracking different things.

MonroeM

bowlhead99 wrote: »

There's no real difference between MSCI ACWI and FTSE All World.

There's a difference between those two on the one hand and FTSE World on the other. FTSE World is missing China, India, Russia and some other emerging markets.

There's a difference between those two on the one hand and MSCI World on the other. MSCI World is missing all emerging markets.

There's a difference between FTSE World on one hand and MSCI World on the other. As FTSE World has some emerging markets like Brazil and South Africa and Mexico while MSCI doesn't have any.

The difference in gross performance in a calendar year between having all the emerging markets and only having the advanced emerging markets (e.g. FTSE All World vs FTSE World) can be over 2%. The difference between having all the emerging markets and not having any emerging markets (e.g. FTSE All World or MSCI ACWI, vs MSCI World), can be even greater.

So the gross performance differences between trackers that are tracking different things, can well exceed the fee differences between trackers that are tracking different things.

Thank you that explains it perfectly.

MPN

bowlhead99 wrote: »

There's no real difference between MSCI ACWI and FTSE All World.

There's a difference between those two on the one hand and FTSE World on the other. FTSE World is missing China, India, Russia and some other emerging markets.

There's a difference between those two on the one hand and MSCI World on the other. MSCI World is missing all emerging markets.

There's a difference between FTSE World on one hand and MSCI World on the other. As FTSE World has some emerging markets like Brazil and South Africa and Mexico while MSCI doesn't have any.

The difference in gross performance in a calendar year between having all the emerging markets and only having the advanced emerging markets (e.g. FTSE All World vs FTSE World) can be over 2%. The difference between having all the emerging markets and not having any emerging markets (e.g. FTSE All World or MSCI ACWI, vs MSCI World), can be even greater.

So the gross performance differences between trackers that are tracking different things, can well exceed the fee differences between trackers that are tracking different things.

So in your opinion would you prefer to go with a tracker that included or excluded the EM?

bowlhead99

MPN wrote: »

So in your opinion would you prefer to go with a tracker that included or excluded the EM?

I cannot imagine why someone who was risk tolerant enough to happily invest in a 100% equity fund where the regional allocations of that fund are determined passively by an index, would want to exclude from their asset mix the less-developed markets in whose countries several billion people live.

Personally however I prefer to take my emerging market exposure via active funds, as the whole 'buy a tracker' argument to which some subscribe is predicated on the fact that 'the market' is inherently efficient, information flows are perfect etc etc. In markets which are less developed, that argument is inherently less robust.

grey_gym_sock

bowlhead99 wrote: »

I cannot imagine why someone who was risk tolerant enough to happily invest in a 100% equity fund where the regional allocations of that fund are determined passively by an index, would want to exclude from their asset mix the less-developed markets in whose countries several billion people live.

because of weak legal protection for shareholders, and poor corporate governance.

the theory of a cap-weighted tracker is to own the same percentage of the shares in all available businesses that it's possible to own a piece of. but, if the legal protections etc for shareholders aren't reasonably strong, then you don't really own a piece of the business in the same way.

MPN

bowlhead99 wrote: »

I cannot imagine why someone who was risk tolerant enough to happily invest in a 100% equity fund where the regional allocations of that fund are determined passively by an index, would want to exclude from their asset mix the less-developed markets in whose countries several billion people live.

Personally however I prefer to take my emerging market exposure via active funds, as the whole 'buy a tracker' argument to which some subscribe is predicated on the fact that 'the market' is inherently efficient, information flows are perfect etc etc. In markets which are less developed, that argument is inherently less robust.

Yes, I agree that there is absolutely no point in having an all world tracker that did not include all EM.

However, I feel the active route at this stage is beyond me on the experience and knowledge level so a tracker is the best for me. Also, maybe even the active fund managers do not always have the beneficial insight into the behaviour of these markets surely it's all a bit risky?

StellaN

MPN wrote: »

Yes, I agree that there is absolutely no point in having an all world tracker that did not include all EM.

However, I feel the active route at this stage is beyond me on the experience and knowledge level so a tracker is the best for me. Also, maybe even the active fund managers do not always have the beneficial insight into the behaviour of these markets surely it's all a bit risky?

I have just invested in an all world tracker that includes EM, however I'm more concerned with the bonds I've invested in because I purely chose them to spread the risk. I think the global property tracker should be ok but it's only a very limited part of my portfolio.

koru

bowlhead99 wrote: »

Personally however I prefer to take my emerging market exposure via active funds, as the whole 'buy a tracker' argument to which some subscribe is predicated on the fact that 'the market' is inherently efficient, information flows are perfect etc etc. In markets which are less developed, that argument is inherently less robust.

In theory, this ought to be true. In practice, I was surprised to see an analysis a while ago that suggested it isn't true.

It showed that the percentage of actively managed funds that persistently outperformed the relevant index was [STRIKE]lower[/STRIKE]higher for UK equity funds than for EM funds. (By persistent, I mean for several years on the trot. Can't remember exactly how long. Any fund can outperform for a year or two, but that's no use unless you can predict when they will lose their apparent "touch" and switch before they start to underperform.)

bowlhead99

koru wrote: »

bowlhead99 wrote: »

Personally however I prefer to take my emerging market exposure via active funds, as the whole 'buy a tracker' argument to which some subscribe is predicated on the fact that 'the market' is inherently efficient, information flows are perfect etc etc. In markets which are less developed, that argument is inherently less robust.

In theory, this ought to be true. In practice, I was surprised to see an analysis a while ago that suggested it isn't true.

It showed that the percentage of actively managed funds that persistently outperformed the relevant index was lower for UK equity funds than for EM funds. (By persistent, I mean for several years on the trot. Can't remember exactly how long. Any fund can outperform for a year or two, but that's no use unless you can predict when they will lose their apparent "touch" and switch before they start to underperform.)

Not sure if you're saying something different from what you meant to write?

By saying, "the percentage of actively managed funds that persistently outperformed the relevant index was lower for UK equity funds than for EM funds"...you seem to be saying that per the study, the proportion of UK managers persistently beating their index is relatively low, while the proportion of EM funds persistently beating their index is relatively higher. This is in line with my comments - you could be OK to buy a tracker in a developed market but it would be less wise to do that in an emerging one, because there are a greater proportion of persistently outperforming managers available instead. So why does that suggest that it "isn't true" that one should get a tracker in developed markets and avoid a tracker in emerging?

Maybe you just mistyped the above and meant to say that there are a good number of persistent UK outperformers. That could be the case as the benchmark index here in the UK is concentrated to certain industry sectors and so could underperform a more balanced mix for long periods. But I don't think that's what you were meaning.

Anyway I'll try and explain my comment. My contention was that the idea that someone should just buy a tracker is something that assumes that markets are well developed, efficient, and everyone has perfect information. You can't really get an edge, so just buy the market. Plenty of people suggest doing that, and it might be a decent and cheap solution in some markets.

Whereas in undeveloped markets, the case to do that is not as strong: information flows are less than perfect and the market is less efficient than it is in somewhere like the US.

Imagine you want to invest in China or Nigeria. Sitting at your desk in the UK, you can't get a lot of information written in English, oodles of free research reports and blogs full of opinion etc just by googling the companies, like you can for a US listed company. Information does not flow instantaneously and hyper-efficiently among all market participants at once.

So Fund Manager A has an experienced local research team on the ground in those emerging market countries, who have read everything ever published by the company and in the public domain, and they also speak to suppliers and customers and meet with management and get a sense of its prospects and what the fair value of equity in that company should be, based on a solid understanding of local economic factors, regulations and rival listed and unlisted businesses. He charges 1.5% a year to pay for his research team; he avoids investing in equities that appear overvalued based on their realistic growth prospects, and those with dodgy corporate governance and nepotism, and those with the biggest histories of missed market guidance.

Fund Manager B doesn't bother with any of that malarkey. He does a desktop review of the available companies in the market from his office in Europe, and basically just goes with a portfolio similar to the cap-weighted index, avoiding any big judgement calls on the major market constituents apart from a few tweaks based on gut feel to give him something to talk about in the quarterly report. He also charges close to 1.5% but he keeps you invested in all the crappy companies in the market index that one shouldn't touch with a bargepole due to the fact that they have dodgy governance, and are only a major part of the index based on their sheer scale, making less and less profit each year.

But Fund Manager B knows that he can get away without exceptional performance, because investors will still throw money hand over fist at emerging markets and keep supporting his mandate to pursue an active strategy. Investors know the GDP growth rates in a number of EM countries are higher than some developed markets and they feel that EM generally is going to do well over the coming decades and they suffer from 'fear of missing out' on stellar growth, so will pay over the odds in pursuit of gains. If the active EM manager throws money into EM companies, even haphazardly, he may get bigger long term gains than the typical developed markets, and people will stupidly keep paying him his 1.5% even though his gross performance is no better than the index.

Fund Manager C is a regional tracker, which charges 0.5% and gets broadly similar gross returns as Fund Manager B, so it outperforms B by 1%, though it substantially lags Fund Manager A because there is a lot of crap in the index which it doesn't have the mandate to avoid.

So at the end of the decade, B has done 8% annualised (115%), and C did 9% annualised (136%) and A has done 12% annualised (210%).

If you are a smart investor, it is possible to reject the tracker C because you wish to avoid all the crap in the index. And avoid the Active manager B which does not have any persistent outperformance as it is not doing a good job of avoiding all the crap in the index. Perhaps there is also managers D, E, F, G, H who are also underperforming C, just like B does. The sensible thing to do is buy A, if you can identify it.

Ardent fans of passive investing might apply the 'tracker is best' mentality when looking at the Chinese or Nigerian fund market just like they do in the more developed markets. They might say there is no point trying to beat the index, as they can see that most active managers do not beat the index in that market; and as such if you pick one at random you will probably not beat the index, so why not just go with the index. However, people selecting an active strategy would say, why would you pick one at random? Just go with the one from a fund house with a good track record of persistent outperformance which has not had a recent manager change.

grey_gym_sock

bowlhead: that all sounds quite plausible, but then what of the example of templeton emerging markets investment trust? a few years ago, it seemed obvious that they were Fund Manager A (in your terminology). they seemed to be experts in emerging market investing, with a performance record to match. and then the performance went off the boil, and they've trailed the (allegedly easily beaten) indexes.

there are other managers with recent outperformance, of course. but could the same happen to them?

if it could, is a lot of successful active management down to luck? or, to put it more politely, down to having a strategy that works in some market conditions but not in others? (which means the same thing as luck )