The Illusion of Cheap Beta from ETFs. There is a Solution. Tel Aviv Institutional Investment Conference 2012. Tim Matthews. Senior Fund Manager, QEP Investment Team. March 2012. www.schroders.co.il. For professional investors or advisers only. Not for distribution.
The Illusion of Cheap Beta from ETFs
There is a Solution
Tel Aviv Institutional Investment Conference 2012
Senior Fund Manager, QEP Investment Team
For professional investors or advisers only. Not for distribution.
Market Cap weighted Index Funds (and Passive ETFs)
The positives and negatives
Market Cap weights follow momentum
Back the winners of yesterday and losers of tomorrow
Japanese stock market bubble
of the late 1980s
44% of MSCI World is comprised of Japanese stocks here
36% of MSCI World is comprised of tech stocks here
Source: Schroders, MSCI
Significant opportunities exist outside of the index
Source: Schroders, MSCI. MSCI index constituents as at 31st January 2012.
MSCI AC World >2,400 stocks 45 countries
MSCI World >1,600 stocks 24 countries
All global stocks > 15,000 stocks > 50 countries
Source: Schroders, MSCI as at 31st January 2012
Market Cap weighted indices will always be biased to the biggest stocks
MSCI World by size
Schroders global universe by number
Source: Schroders, MSCI. MSCI World as at 31st January 2012
Big doesn’t mean better so why concentrate to mega/large cap stocks?
Backing the largest stocks has underperformed
Backing yesterday’s winners not necessarily a smart strategy
Underperformance of largest stocks
Source: Robert D. Arnott. FAJ March/ April 2005
Diversification can increase returns (not reduce them!)
Focus on Value and Quality
Alternatives to Passive
The pros and cons of market cap-weight index solutions revisited
Passive IndexAlternative Solution
A strategic approach to investing
Start with the fundamentals: Quality of business and stock valuations
Quant advantage:Portfolio construction maximises the opportunity across a global universe of over 15,000 stocks
Decisions taken by the Portfolio Manager:Emphasis on understanding the current environment & forward-looking research
So does this work in practice?
An enhanced-index approach as an example
Relative Performance – Gross of Fees in USD
Relative Return = +1.3% p.a.
Tracking Error = 1.1%
Information Ratio = 1.2
Source: Schroders. Schroder QEP Global Core composite compared with MSCI World NDR. Past performance is no guarantee of future results.. * since inception 31 January 2000.
How does it look over the longer term?
Compounding of returns adds value to the long-term investor
Performance Since Inception (%)
Source: Schroders. Schroder QEP Global Core Composite compared with MSCI World NDR in USD from 31 January 2000 to 30 December 2011. Assumes TER of 51bps.
A Superior Alternative to ETFs
…with index plus rather than index minus performance
Source: Bloomberg as at 29th February 2012 with total returns in USD net of fees. Schroder ISF Global Core C Share Class (BB ticker: SCHGLEC) – TER 51bps. Fund inception date: 30th September 2001. iShares MSCI World (BB ticker: IDWR) – TER 50bps, Lyxor ETF MSCI World (BB ticker: LYWLD) – TER 45bps
What are the key return drivers?
Rebalancing versus momentum
Source: Schroders, Worldscope, QEP. The Equally weighted index and “Length of company name” indices were both calculated using the same universe as the Fundamental Index (simulated by QEP) Developed 1000 index and rebalanced in March of each year with stocks either weighted equally or weighted by the length of the company name (companies with longer names were assigned higher weights). All returns are local (gross).
What are the key return drivers?
Quality performs when risk aversion is rising
Monthly win rate higher in times of market stress
Source: Schroders, QEP. Live performance has been included from November 2007 to October 2010 onwards prior to this simulated results are shown back to 1988. They are the result of quantitative back-testing which are based on a number of assumptions. There are a number of limitations on the retroactive reconstruction of any performance results based on simulations and simulated results must be considered as no more than approximate representation of the strategy’s potential performance.
QEP Global Equity Funds
A proven track record
Returns of QEP Global Equity Funds versus index and ETF
Source: MSCI, Schroders as at 31st January 2012. Cumulative and annualised returns, calculated net of fees, USD. Benchmark is MSCI World Net Dividends Reinvested
A range of solutions for different types of client
Source: Schroders as at 30th September 2011
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