elstonviews

UK regulator forced a number of asset management firms to pay £34m compensation to customers for “closet indexing” Closet indexing means funds are presented as higher cost active, but actually just hug their benchmarks We estimate there is €0.4 to €1tr of assets in “closet index” funds in Europe, depending on what criteria are applied.  Either way, fund houses have been warned “Mutton dressed as lamb” is a derogatory old saying of something or someone that’s dressed up to look better than it is.  In olden days, some dodgy butchers would dress mutton up to look like lamb to get a higher price.  I’ve got nothing against mutton.  It offers good value for money and does a nutritious job.  But I don’t want to be given one thing when sold another. Some “active” funds that actually hug an index is another form of misrepresentation.   And this month, the UK regulator got tough forcing a number of fund houses to pay £34m compensation to custome...

Investment strategists were concerned about a correction in 2018 – it was a matter of when, not if Volatility spike and rising correlations limits the effectiveness of asset-based diversification. How risk-based diversification can help in periods of market stress A well flagged correction There was near consensus amongst investment managers in their 2018 outlook as regards the risk of a market correction.  Equity markets had climbed relentlessly higher in 2017 with little red ink and eerily low volatility. The fact that equity volatility had converged with bond volatility illustrates the limitations of an asset-based approach to diversified multi-asset investing. Of course, it was not to last.  It was a question of “when, not if” equity volatility mean reverted.  And now we at least know when “when” was. Fig.1 VIX spikes as equity volatility comes back into play. Source: bloomberg.com What was the trigger? A potential trigger was identified as above...

In the search for yield, UK Equity Income is a key component of client portfolios. There are a number of London-listed UK Equity Income ETFs to choose from, each tracking a different index methodology. This report looks at the best performing UK Equity Income indices in absolute and risk-adjusted terms for GBP investors. UK Equity Income Indices Investors have a choice of UK Equity Income index strategies, each with different risk-return characteristics, weightings methodologies and factor tilts. These difference influence the performance of each index strategy (all figures below are on a total return basis for GBP investors). Best performing for 2017 The best performing strategies for UK Equity Income in 2017 were: +12.3% total return of the MSCI UK Select Quality Yield index (tracked by BMO MSCI UK Income Leaders ETF (LON:ZILK))  +8.7% total return of the FTSE 350 ex Investment Trust Qual/Vol/Yield Factor 5% Capped Index (tracked by Lyxor FTSE UK Quality Low Vol ...

We look at the different factor versions of World Equity indices to see which factors won in 2017. World Equity Momentum factor delivered highest 1Y total return at +20.57% World Equity Momentum factor delivered highest 1Y risk-adjused return with Sharpe ratio of 1.94 Focus on market cap indices is a choice, not an obligation A market cap weighted approach has well known drawbacks: it biases larger companies, regardless of efficiency and is "procyclical" - buying larger amounts of more expensively valued companies. This is a critique of "passive investing". We don't believe there's such a thing as passive investing. There is index investing and non-index investing. There is subjective investing and systematic investing. Choice of index, choice of methodology, choice of asset allocation are all active decisions. Index investing simply delivers the desired investment approach in a way that is efficient, transparent and cheap. Factor-based indices ...

Investors were amply rewarded for risk-taking in 2017, with recovering growth, supportive liquidity, prospective tax cuts and lower interest rates all supporting higher valuations. These fundamentals, combined with a significant decline in market volatility led to a strong year for markets with equity markets at record highs Portfolio positioning for asset allocation remains key and we refresh the risk-return characteristics of each asset class for GBP investors. For historic and expected asset class risk-return perspectives, see below. Fig. 1: 1-year historic asset class risk-return for GBP investors Fig. 2: 3-year historic asset class risk-return for GBP investors Fig. 3: 5-year expected asset class risk-return for GBP investors Source: Blackrock Investment Institute, total returns basis (arithmetic) for GBP investors NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  I wrote this artic...

In the search for yield, UK Equity Income is a key component of client portfolios. There are a number of UK Equity Income ETFs to choose from, each tracking a different methodology. This study looks at the different index methodologies’ impact on Sector Allocation for investors that focus on the business cycle. UK Equity Income ETF Choices Investors have a choice of UK Equity Income index strategies, each with different risk-return characteristics, weightings methodologies and factor tilts. Portfolio managers and advisers considering a UK Equity Income ETF should understand the differences of each to inform their selection process. In the first of a series of studies of this key sector, we have done a sector analysis of London-listed UK Equity Income ETFs, to understand their inherent characteristics relative to the UK main equity index, the FTSE 100. For these studies, we have analysed the indices and ETFs detailed in Fig.1. Fig. 1: UK Equity Income Indices & ETFs...