Posted inEmerging MarketsEquities

EM trackers surprise in FE passive ratings

A decorative, gilded crown on a wrought iron fence outside London's National Portrait Gallery with a wood panel door in the background.
More than a quarter of emerging market trackers have landed the top five-crown rating in the latest FE Analytics rebalance despite being widely considered a difficult area of the market to track.
Seven out of 24 emerging market trackers were awarded the top rating from the fund research agency, representing 29% of the funds analysed. It was the same success rate as for North American equity index trackers.

FE looked at 292 passive funds in its latest bi-annual crown rating rebalance and ranked them according to how well each fund tracked its benchmark over three years.

UK gilts emerged as the asset class with the highest number of five-crown ratings, representing 38% of funds analysed, although this was a drop from 48% in July. No corporate bond funds received the top accolade, the third time in succession that the asset class has failed to make the grade.

Property and GEM trackers surprise

Portfolio manager at FE, Oliver Clarke-Williams said it was not surprising that passive North American equity funds tended to track their benchmarks well due to the size and efficiency of the market.

“More surprising is that there are so many five crown-rated property and emerging market tracker funds as these are generally seen as quite difficult markets to replicate.” Thirty percent of property funds received the top rating.

Both GEM and Property categories had a higher proportion of five-crown ratings than funds tracking UK equities (22%), European equities (21%), Japanese equities (17%) and global equities (13%).

Clarke-Williams added: “Corporate bond funds have generally struggled to achieve a five FE passive crown rating. This is perhaps not surprising when considering how difficult some of these indices are to track.

“Not only are they often made up of hundreds of securities but because they are traded over the counter rather than on an exchange like equities, buying and selling is much more difficult.”

Blackrock increases lead over Vanguard

At a group level, Blackrock (iShares) retained the top spot with 25 five FE passive crown rated funds compared with 23 last time around in July, while Vanguard retains second place with 10, having achieved 11 in the previous rebalance.

The rebalance also saw six funds rated for the first time as they met the three-year performance history requirement. Credit Suisse CSIF Equity EMUXtrackers soared to a five-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.”

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Sonia Rach

Sonia joined Last Word Media and the investment industry in 2017 as a reporter, having spent 3 years in HR journalism. While her role consisted of writing about HR related topics such as employee benefits,...

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