A Scottish Tracker would be lumpy and bumpy

Friday, Nov 09 2012 by
3
A Scottish Tracker would be lumpy and bumpy

The prospect of Scottish independence raises a number of issues, one of which would be the merits of a passive fund to track Scottish companies. There are many uncertainties to be resolved affecting Scottish companies such as currency, banking supervision and regulatory regime. Nonetheless, working on the premise that existing listed Scottish companies (as defined by the Scotsman’s Scottish Share Index) retain their domicile in Scotland post-independence, what would the index look like? And does it represent an attractive investment proposition and a means of gaining exposure to traditional strengths such as whisky, financial services and the energy sector?

From the outset the index, calculated using market capitalisation and valued at £64bn, would suffer from overexposure to a limited number of companies because the universe of 33 stocks is quite small. Royal Bank of Scotland (RBS) would presently represent 40% of the index weighted by market value. This is despite the fact the share price has fallen 95% or so from its peak. Adding Standard Life (9% of the index), Aberdeen Asset Management (5%) and Alliance Trust (3%) and F&C (1%) would further increase the dominance of the financial sector to almost half the index. The next biggest would be SSE, the gas and electricity utility, at 18%, followed by the engineering companies Aggreko and Weir, at 7% and 5% respectively. Replicating such an index through an OEIC would be impossible given the constraints on the maximum holdings size to limit concentration.

Given the dominance of a handful of companies in the Scottish index, a passive fund tracking the index would have given a very volatile ride. FTIM carried out some simple back-testing on the index over a 10 year period, rebalancing the index by market value at the beginning of every year. From the start of 2002 to the start of 2012 the index would have fallen 30%, dragged down by the performance of HBoS and RBS which made up over two-thirds of the index for the first 6 years. This year it would have staged a bit of a recovery as RBS has risen sharply, jumping 24% by the beginning of November.

Using market capitalisation to track markets has a number of problems so a fundamental process may be better with a relatively small collection of stocks. Indeed, this seems to be case. Using dividends gave a better capital return of 7%…

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Disclaimer:  

Past performance is not a guide to future returns. The value of investments and the income from them may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. For risks relating to specific products, please refer to the relevant documentation for that product.


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The Royal Bank of Scotland Group plc (RBS) is a banking and financial services company. The Company provides a range of products and services to personal, commercial, corporate and institutional customers, through its subsidiaries, The Royal Bank of Scotland plc and National Westminster Bank Plc (NatWest), as well as through other brands, including Ulster Bank and Coutts. The Company's segments include Personal & Business Banking (PBB), Commercial & Private Banking (CPB), NatWest Markets (NWM), Capital Resolution, Williams & Glyn (W&G), and Central items & other. The Company's products and services include banking and risk management, such as payments, insurance and liquidity management; personal lending, including personal loans and credit cards; deposits, such as current accounts and savings accounts; investments, such as portfolio management and unitized funds; commercial lending, including business lending, and capital markets, including rates, currencies and financing. more »

LSE Price
251.3p
Change
-0.4%
Mkt Cap (£m)
29,881
P/E (fwd)
11.1
Yield (fwd)
n/a

The Weir Group PLC is a United Kingdom-based company, which is engaged in engineering businesses. The Company's business operates through three segments: Minerals, Oil & Gas, and Flow Control. The Minerals segment is engaged in the provision of slurry handling equipment and associated aftermarket support for abrasive high wear applications used in the mining and oil sands markets. The Oil & Gas segment provides products and service solutions to upstream, production, transportation, refining and related industries. The Flow Control segment designs and manufactures valves and pumps, as well as providing specialist support services to the global power generation, industrial and oil and gas sectors. Its product offerings include pumps, valves, crushers, wellhead, rubber, hydro cyclones, screening equipment, and oil and gas safety products. Its brands include Warman, GEHO, Linatex, Vulco, Cavex, Enduron, Trio, SPM, Mathena, Novatech, Gabbioneta, Hopkinsons, Sarasin-RBSD and Blakeborough. more »

LSE Price
1876p
Change
-2.0%
Mkt Cap (£m)
4,276
P/E (fwd)
18.3
Yield (fwd)
2.5

Standard Life plc is a United Kingdom-based investment company. The Company operates through four segments, which include Standard Life Investments, Pensions and Savings, India and China, and Other. The Standard Life Investments segment provides a range of investment products for individuals and institutional customers through various investment vehicles. The Pensions and Savings provide a range of long-term savings and investment products to individual and corporate customers in the United Kingdom, Germany, Austria and Ireland. The businesses included in India and China offer a range of insurance and savings products and comprise its life insurance associate in India, its life insurance joint venture in China, and operations in Hong Kong. Its Other segment primarily includes the corporate center and related activities. The Company offers products and services through two channels, which include retail and workplace. more »

LSE Price
434.3p
Change
1.0%
Mkt Cap (£m)
8,512
P/E (fwd)
14.8
Yield (fwd)
5.2



  Is Royal Bank of Scotland fundamentally strong or weak? Find out More »


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About Rob Davies

Rob Davies

Rob Davies is the Fund Manager of VT Smart Dividend UK Fund, formerly The Munro Fund.. He worked as a professional geologist in Antarctica and Australia before joining the City as a mining analyst.  From 1999 to 2001 he was a writer at The Motley Fool and in 2002 he joined the Private Client Department of Clydesdale Bank as Senior Investment Analyst where he was responsible for writing and maintaining investment policy, selecting securities and portfolio creation. His experience of the stock market as an equity research analyst, personal finance writer and portfolio construction manager has given him a unique background to draw on in crafting this investment process which he now runs at VT Smart Dividend UK Fund, previously known as The Munro Fund. more »

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