Passive road is almost as rocky as an active one

Passive road is almost as rocky as an active one

Passives are a simple way to get exposure to markets without all the pressure of trying to understand a fund manager’s special way of selecting stocks, right?

All you need to do is decide how much of your portfolio you want exposed to which markets, and away you go. So much easier than the hassle of trying to pick the best stock selector.

Sure, there is the hurdle of cost, but companies seem to be falling over themselves to make sure their tracker is the cheapest out there – so can it be that difficult?

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Well, a report from consultancy The Lang Cat and Fidelity seems to suggest that yes, it is that difficult.

Perhaps the biggest problem advisers will have when assessing which passive fund to pick is their ability to accurately analyse how closely products track their intended markets.

Data providers, it seems, do not yet have access to all the data necessary to show precisely whether tracker funds are doing their job or not. This is measured by tracking difference, which can be affected by various factors including costs, taxes, whether index futures have been used to get exposure, or the time of trading.

For instance, Fidelity says Morningstar does not provide data for the FTSE All-Share Mid Day Total Return index, the benchmark tracked by the Fidelity Index UK fund. The reason it uses this index is because its fund, like many others, values its holdings at midday, even though the underlying market value is set at its close at 4.30pm.

It seems a lot of UK trackers take midday as their valuation time in spite of the discrepancy against the market close. I did ask why everyone didn’t just move their valuation time to 4.30pm, but the ‘it has always been that way’ argument and cost seem to be the biggest barriers.

The upshot is, if you want to know how accurately a tracker fund follows its benchmark index, you are going to have to go to each fund provider and get the PNAV – that’s the performance net asset value, in case you’re not down with the lingo. Fidelity says this provides a “truer comparison” because it involves a recalculation of the fund’s assets using closing prices.

Of course, it won’t be good enough to just check one or two, because if the regulator knocks on your door asking how you arrived at your decision to choose tracker fund A, then you would not reliably be able to say all others had been ruled out. And don’t forget, if two funds value themselves at different times, this too can affect performance comparisons.

And although I earlier suggested the cost hurdle was an easy one to jump, it could also catch an adviser out. Is there an up-front fee to be paid, as is the clearly stated case with Vanguard funds, or is there a ‘bid’ price and an ‘offer’ price, as is the case at BlackRock?