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ESBGMV Index targets the minimum variance multi-asset portfolio for GBP-based investors. Systematic asset class adjustments offer insight to traditional and ETF-based investors. Compared to 4q17, the index's biggest switches as at 1q18 have been from European High Yield Bonds and UK Equity to European Aggregate Bonds and Gold. Risk-based indices are different to factor-based indices, as they focus on the interaction between securities, not the characteristics within securities. Put simply, it's an alternative, systematic approach to asset allocation and risk management. The Elston Multi-Asset Min Volatility Index (ESBGMV) launched in 2014 represents the minimum variance multi-asset portfolio for GBP investors. As it takes a systematic approach, it's always interesting to see the asset-class switches that this methodology triggers via its monthly readjustments. Comparing the index composition from 4q17 to 1q18, the biggest switches have been cutting back Europe...

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...

After equal measures of anticipation and fear, Vanguard has finally unveiled its D2C offer for the UK retail market.  Advisers should celebrate.  Sounds contradictory? Not at all. What’s being offered Firstly, a quick look at what is being offered.  Vanguard is offering direct access to its funds through with the option of holding them through an ISA or JISA, with a SIPP to follow. Of most of interest (or rather for most ease), from a consumer perspective, will be the “do it for me” type of asset allocation funds that provide an entire portfolio management solution within a single fund.  Specifically, the target risk funds, known as the Vanguard LifeStrategy funds, (with a fixed allocation to equity, e.g. 60% equity), and the target date funds, known as the Vanguard Target Retirement Funds (with a target date to match expected retirement date). For these portfolio management funds, the OCF is, for example, 0.22% (the Vanguard LifeStrategy 6...

Commerzbank launches a certificate that tracks Elston’s multi-asset Minimum Volatility Index to provide a “Liquid Alternative” investment strategy The index was launched in December 2014 and has a two year track record The strategy has delivered on its target of providing diversified, differentiated returns with minimised portfolio volatility MEDIA RELEASE 3 rd March 2017 ETF specialist Elston Consulting announces today that is has successfully licensed its Elston Strategic Beta Global Minimum Volatility index (ticker ESBGMV) to Commerzbank for the creation of an investable certificate that tracks this innovative index.  The certificate is issued with an initial notional of £10m. Whereas most Min Volatility indices relate to a single asset class such as Global Equities, Elston’s approach was to launch an index that targeted the minimum volatility portfolio created from a globally diversified range of asset classes represented by low cost iShares® exchange ...

Whilst advisers and investments are comfortable and familiar with the simple term “funds” (has anyone heard of an “CIS (Collective Investment Scheme) Conference” or being an “AUT (Authorised Unit Trust) investor”?  There is much less familiarity with the once-institutional and now pervasive ETFs (Exchange Trade Funds).  That lack of familiarity means that for some reason that particular TLA has stuck. Claer Barrett in FT Weekend’s FT Money section tries to demystify the jargon  – but ends up makes thing sound more complicated than they need to be. Advisers wanting to check or brush up on the difference between an ETP, ETF, ETN and ETC could do well to invest 2 hours of their time to earn accredited CPD (Continuous Professional Development) from the roadshow being run by Copia Capital Management to get a solid understanding of this increasingly popular and pervasive investment vehicle. As for civilians – customers and investors – it's actually quite simpl...

John Authers’ Long View article in the FT this weekend addresses market timing.  While he claims that just passive investors are such bad timers, we would go further: most are. Attempts to time the market (choosing the right moment to buy or sell into risk assets) are a mug’s game.  Great for brokerages that delight in investors’ fees levied to senselessly overtrade.  Bad for investor’s portfolio outcomes.  Despite the annual survey by Dalbar that investors’ attempts to time the market is really bad for their portfolio, people – including some portfolio managers – still try and have a go. The problem is that in timing the market, we become slaves to our behavioural biases around entry points, and the noise around market sentiment.  An investor fearing Brexit might have – out of emotion – sold everything to cash stocked up on gold sovereigns and run for the hills whilst tracing Irish ancestry.  The smart thing was to acknowledge sterling weakn...

2016 outcomes for our multi-asset Max Sharpe and Min Volatility did what they say on the tin. Dynamic risk-based strategies can provide low correlation differentiated returns to provide a low-cost, liquid alternative to traditional "Alternatives" A quant-based approach to alternative investing is likely to be cheaper and smarter than hedge funds which are vulnerable to manager's behavioural and emotional biases Smart beta strategies are “smart” because they take a scientific, quantitative and objective approach to investing by combining a range of index-tracking ETFs with different market risk or “beta” exposures. In contrast to the opacity of hedge funds, dynamic allocation “smart beta” investment strategies should do what they say on the tin. Elston runs a number of diversified multi-asset investment strategies, two of which have been offered as indices for asset owners and investment managers to benchmark against or track. Chart 1: Risk and R...

- Growth rates cut compared to pre-referendum estimates - Inflation estimates raised on weaker sterling, but possibly not far enough - Focused spending on infrastructure and innovation is welcome Growth estimates cut UK GDP’s growth rate has been downgraded relative to pre-referendum expectations, with a cut from 2.2% to 1.4% for 2017E and from 2.1% to 1.7% for 2018E. Inflation estimates raised Following post-referendum sterling weakness, estimates for UK inflation were increased from 1.6% to 2.3% for 2017E and from 2.0% to 2.5% for 2018E.    This compares to 2.4% and 2.8% for 2017E and 2018E respectively for UK swap breakeven rates. Rising interest rate environment With higher inflation expectations there is upward pressure on Bank Rates after a protracted “lower for longer” regime. Spending focus: infrastructure and innovation   The government spending plans shows clearly defined cous – with budget to increase infrastructu...