Advisers need to approach fund managers themselves to get clear and accurate data for assessing different passive funds, as it is impossible to compare them in a meaningful manner, according to Fidelity and the Lang Cat.
Speaking at a passive and tracker reports launch yesterday (11 March), Fidelity Worldwide’s associate product director for index funds Jason Humphrey said that if passive funds are valued at different points in time, as they often are, it is impossible to compare them meaningfully.
He said that the majority of the UK values funds at midday, but standard indices value at market close.
“We’ve got a mismatch to contend with - that can be a source of perceived tracking difference and can have a pronounced illusory effect, either in the funds favour or against it, but the point is it’s not real and doesn’t reflect a loss of money or poor manager skill.
“That doesn’t leave advisers in a terribly good place, because the only way for them to make an accurate assessment of tracking difference is to go out and contact each individual manager within the universe they look at, which is a complicated and time consuming process.
Platform consultant Mark Polson said the work that the Lang Cat has done generally suggests advisers are picking passives for a range of reasons, but that for all of these circumstances the uniting factor was that they have found something which is “easy to pick and easy to describe to their clients”.
“The problem is that it’s nowhere near that simple and passive funds are just as complicated as anything else.
“The danger is that passive funds are more complicated than they are popularly believed to be; there is too big a gap between the perception of what they do and what they actually do.”
Mr Polson said he found a “woeful lack of understanding” of what goes into fund costs, much of which is not advisers’ fault, because the industry is not as transparent as it should be. “I’m not speaking for Fidelity, but the Investment Association’s proposals on how we try to get a complete cost, don’t help very much.”
In terms of performance measurement, Fidelity suggested a performance measurement summary checklist, which included understanding the fund’s valuation point relative to that of the index.
In comparing the different trackers funds, the firm stated that advisers should ensure valuation timings are the same and check fund valuation policy, request manager performance NAVs and check for appropriate index variants.
The firm also recommended that advisers analyse costs and how they impact performance measurement, with any up-front costs needing to be factored in.
ruth.gillbe@ft.com
