fund

UK gilts lead the way in latest FE Passive Crown rebalance


BlackRock's iShares top group table

BlackRock’s iShares top group table

UK gilts are the asset class with the highest percentage of 5 FE Passive Crowns in the data provider’s latest rebalance looking at the passive sector.

Almost half of UK gilts funds (46%) have received the highest accolade of five Crowns in the bi-annual rebalance, followed by a third of both North American (31%) and emerging market equities (30%).

Meanwhile, no Index-linked Gilts or Sterling Corporate Bond funds achieved 5 Crowns for a second rebalance in a row.

The ratings – which looked at 290 passive funds – are designed to check how well a passive fund is doing its job at tracking its benchmark over three years.

Funds are ranked objectively and transparently using a quantitative methodology in which funds are ranked between one and five FE Passive Crowns. 

Quilter and RLAM join top firms with most Five Crown rated funds in latest FE rebalance

Oliver Clarke-Williams, portfolio manager at FE, said: “The success of UK gilts can largely be explained by the fact that they are highly liquid and easy to replicate. Similarly, as the largest equities market, North American Equities are the most efficient making them easier to reproduce.

“More surprising is that there are so many five Crown rated emerging markets funds as it is generally seen as quite a difficult market to copy.”

At group level, Blackrock’s iShares retains the top spot with 23 five FE Passive Crown rated funds compared with 22 six months ago, while Vanguard has maintained its second place position with 11 funds with the highest rating, having achieved 12 in the previous rebalance.

New entries

Meanwhile, eight new funds were rated for the first time having now met the three-year performance history requirement. Of these, the Xtrackers Russell 2000 UCITS ETF soared to a five FE Passive Crown Rating.

Clarke-Williams added: “Too much of the active/passive debate has been focused on the ability of active managers, whilst passive funds have been considered more or less equal.

“The dispersion in quality among passive funds is almost as great as it is among active funds and poor tracking and high charges can cause major underperformance that most people wouldn’t consider possible. It is important to put as much effort into identifying a good passive fund, as a poor choice can be just as destructive to wealth. 

“What the ratings show is that past tracking ability of a passive fund can be used as a guide to how well that group will track an index in the future.” 

Methodology

FE rates around 290 passive funds available for sale in the UK, which between them track around 60 indices. Only funds with a three-year track record qualify for a rating.

Furthermore, FE will only rate funds whose benchmarks reflect the main types of investment that a UK investor would be interested in. So, a number of passive funds that track commodities indices, leveraged and reverse trackers, as well as “smart beta” products, are excluded. 

FE uses three components when calculating the FE Passive Crown Rating. Tracking difference is the most influential component, followed by tracking error and fund size.

• Tracking difference, which calculates the annualised relative performance of a fund compared to the underlying index. For example, if a fund returns 10 per cent over 12 months and an index returns 12 per cent, the tracking difference is two per cent.

• Tracking error, which calculates the volatility of the difference of the returns between a fund and its benchmark. For example, a fund that perfectly replicates the performance of its underlying index every day over a 12-month period, its tracking error will be zero. However, if a fund deviates from its index on a regular basis it will have a higher tracking error, even if the tracking difference after 12 months is zero.

• Fund size. While this is not typically discussed when comparing tracker funds, FE sees it as important.

FE Passive Crown rating rebalance

About the author

Jayna is senior reporter and investment trust correspondent at Investment Week. She joined the publication in August 2015 after graduating with an MA in Multimedia Journalism from the University of Kent.

Jayna holds the NCTJ diploma and has experience in print, online and broadcast journalism. She is responsible for the Investment Week monthly podcast.

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