Nearly four years ago a new investing concept was launched in the UK. The fact only £2.3m is managed using this technique might indicate that it has failed. However, analysis of the data suggests a different conclusion.
First it is worth understanding what fundamental tracking is, and what its ambitions are. The arguments in favour of passive investing are well rehearsed and well known. It is not so much that EMH works but that the time and effort to beat the index is not repaid by better risk adjusted returns. It argues that you can beat the market, but only by taking excessive risk that now and then turns round and wipe out all the gains. Worse, you never know in advance which particular strategy will be rewarded in the future. What is clear is that there is little persistency of styles from one year to the next. In short, active investing can work, but the time, effort and cost often absorbs all the gains at the gross level and leaves the investor little better off at the net level.
Until four years ago the only alternative was to use an index tracker that simply followed the constituents up and down. Its principal merit was low cost which instantly gave it a head start of 1% or more a year over its active peers. No one pretended it was a very clever solution but it had the merit of beating most of the opposition. There is though a fatal flaw in index funds and one that can only be resolved by making a Faustian pact with hedge funds. Allocating capital by price, as index funds do, means that there is an irresistible pull of money towards the most expensive shares.
The consequences of that were eloquently displayed in the millennium tech bubble when concept stocks popped in and out of indices depending on their popularity with no regard to their underlying profitability. If nothing else the tech bubble demonstrated the veracity of Ben Graham’s aphorism that in the short term the stock market is a voting machine. Anyone who has ever participated in an investment committee or joined an investment club will appreciate that democracy has drawbacks as a method for selecting shares. Essentially, an index fund represents the summation of all the opinions in the market about each and every stock…
Without commenting on your other claims, and again the lack of disclosure that this is your fund and 'analysing' your own fund without declaring your subjectivity is quite disconcerting, the one about being the only fundamental tracker is surely flat out wrong?
Don't Dimensional Funds, Invesco Powershares ETFs and (to a lesser extent in that they use both active and passive) Russell all provide fundamental trackers that are available to UK investors, not to mention others that I'm sure are available elsewhere in the world, particularly the US?
