Quality Value ETF

aroominyork

Having been with Fundsmith since I started DIYing in 2017, I’m losing patience. I still think quality is worth holding, but with markets now less predictable than the one way street largely powered by QE, Fundsmith's concentrated do-nothing style feels a little less appropriate. Fundsmith (the Stewardship/Sustainable flavour) represents 8-9% of my equities. One option is to move it into my core global index fund, but I would still like some quality – just less concentrated. I also wouldn’t mind a little value in my portfolio… and then I came across WQDS – iShares’ World Quality Dividend ETF, which Morningstar’s style grid places firmly in the value box. 

While quality value feels like having your cake and eating it, maybe there is nothing inherently inconsistent with a company having quality characteristics, paying a dividend rather than ploughing everything back into the company uber growth-style, and having value pricing (rather than Fundsmith’s “don’t overpay”). I’m not sure if I’m trying to convince myself about something I would later stare at and wonder why I bought it, so I’d appreciate others’ views.

InvesterJones

Handily, MSCI publish a white paper on their methodology behind the index which this tracks: https://www.msci.com/indexes/documents/methodology/5_MSCI_High_Dividend_Yield_Advanced_Select_Indexes_Methodology_20240418.pdf

In short, take the world index, apply a dividend yield screen, apply dividend growth screen, quality screen (returns, earnings variability, debt), 1year performance screen and finally an ESG screen.

You're still paying a quality premium compared to high yielding funds without a quality screen - so it's not as high yielding/value as otherwise could be, which over the long term, may impact returns. It also has to be said the yield screening is pretty mild compared to a dedicated high yield fund - you just have to pay out something, and not be in the bottom 5% for your sector. Hence why you still end up with growth stocks like Nvidia in there.

But as a way to get a little bit of quality and avoiding shoot for the moon (high growth) stocks, sure. However I'm not sure what it's going to bring if you've already got a core global - you're paying more to slightly tilt to quality-ish and it's likely going to correlate highly anyway.

aroominyork

InvesterJones said:

You're still paying a quality premium compared to high yielding funds without a quality screen - so it's not as high yielding/value as otherwise could be, which over the long term, may impact returns. 

Except there are no equity income index funds - nor ETFs so far as I can see - so you have to pay for active management. Is that correct?

InvesterJones said:

It also has to be said the yield screening is pretty mild compared to a dedicated high yield fund - you just have to pay out something, and not be in the bottom 5% for your sector. Hence why you still end up with growth stocks like Nvidia in there.

Its distribution yield is about 2.5%, similar to Fidelity Global Dividend (which I think is is an excellent fund and good comparator) so the yield holds up. Anyway, it's the value element that interests me, though as you said it's not adding huge diversification and I doubt I'll buy it. It is more the chat that interests me about quality and value rolled into one.

InvesterJones

aroominyork said:

InvesterJones said:

You're still paying a quality premium compared to high yielding funds without a quality screen - so it's not as high yielding/value as otherwise could be, which over the long term, may impact returns. 

Except there are no equity income index funds - nor ETFs so far as I can see - so you have to pay for active management. Is that correct?

By income do you mean value/high yield? If so, I don't think that's correct. There are a quite few value factor indexes (FTSE All-World High Dividend Yield Index, MSCI World Enhanced Value Index, MSCI World Value Select Index) & ETFs.

edit: sorry misread, you were looking for index funds, not indexes, for ETFs try things like VHYL, IWVG etc. 

poseidon1

I too had lost patience with Fundsmith after holding 6-7 years and finally pulled the plug last year.

Since i retained a significant exposure to American tech stocks via SMT and Monks Investment Trusts, decided to split Fundsmith proceeds across a couple of active funds with some US value exposure ,  and now that the UK was having its period in the sun,  a Uk centric fund.

Chose Artemis Global Income and Man Income Professional, respectively, both of which have a decent 5 year performance together with welcome income yields of over 2.5% and 5.2% respectively. One of my other issues with Fundsmith was the low dividends ( whilst awaiting growth), so the current replacements had this previous lack of income very much in mind.

Johnnyboy11

Fundsmith Equity down 8.5% in the past 12 months, ouch!

Five year total return 25% v's RPI at 38%, double ouch!!

Looking forward to watching Terry's annual shareholder address later this month…

aroominyork

I pulled the Fundsmith plug last summer. I didn't buy any large cap replacement but in October Monevator convinced me to buy small cap value AVSG which has started nicely with +15% in four months. Anyone who bought it six months earlier is looking at +50%.

Johnnyboy11

I pulled the plug a year earlier and moved the funds into VWRP, which was also a good move. I still track Fundsmith Equity, but just out of curiousity.

Bostonerimus1

If you bought Fundsmith because of it's philosophy and management team, why would you sell after a few years of poor returns? You don't necessarily sell the "dogs", have you considered rebalancing and buying more Fundsmith?

masonic

https://forums.moneysavingexpert.com/discussion/comment/81881626#Comment_81881626

I suspect many will have bought because of belief that an experienced management team are able to capture market upside during the good times while doing what they do. When that illusion is shattered, they may begin to question whether the same team can be relied upon to protect them from the worst of the bad times, and so the investment case is reduced to one of horses for courses.

aroominyork

https://forums.moneysavingexpert.com/discussion/comment/81881626#Comment_81881626

Until recently growth has outperformed for a good few years. Unless you have been investing for decades you might think it’s an easy street to making money. Only when the market changes course do you realise that growth/quality might not always win out. Then you start watching Terry’s annual meeting and reading his letters and feel he seems to be poking around in the dark more than he used to. You then wonder whether it’s worth paying c.1% in the hope the market will soon face his way again. And then you listen to Bostonerimus1 saying “just hold low cost index funds” and wonder whether he was on to something.