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September | Issue 7Income InveStor
Passive income strategies unpicked
Opening the door to income investing
Head to head: active vs passive
Trackers or ETFs: which are best?
Income
Income
Income
Income
Income
Income
September | Issue 7Income InveStor
Passive investment on the riseNo-one likes handing over a chunk of their
investment returns if they can avoid it. Which
is one of the reasons why ‘passive’ funds –
those that track a market rather than relying
on a manager to try and beat it – have enjoyed
such popularity in recent years.
Income investment hasn’t been immune to this trend. As yield
becomes that much harder to find, some investors have been
reticent to give any of it away to the typically higher charges
employed by ‘active’ fund managers.
But are these passive options – in the form of exchange-traded
and tracker funds – any good? That’s the question we set out
to answer with this edition of Income Investor. We’ve surveyed
the passive income market, which can be a confusing place,
and had a poke around some of the offerings.
I was surprised by the results. Some passive equity income Daniel Grote, Editor
welcome contentS
strategies, for example, differ markedly, despite ostensibly tracking
the same market. You can find out more about this in chapter one.
The crucial question for most income investors will be: do active
managers earn their extra money, or is it best to pick a passive
and lower your costs? In chapter two, we’ve set up a few
head-to-heads between active and passive strategies to try
and answer this question.
And finally, if you have decided to put money in a passive, you’ll
need to decide what sort of fund you will use: an ETF or a tracker.
We weigh up the relative merits of each in chapter three.
Do active managers earn their extra money, or is it best to pick a passive and lower your costs?
September | Issue 7Income InveStor
Trackers or ETFs?A guide to help you decide which
option is best
Active vs passive Do active income
mangers earn their
keep or is cheap
and cheerful best?
Passive income strategies under the microscopeWe poke around
some of the
offerings
thIS ISSue
September | Issue 7Income InveStor
Passive income strategies under the microscopeBy Daniel Grote
contentS
September | Issue 7Income InveStor
contentSPaSSIve Income StrateGIeS
Passive investment is on the rise,
and income seekers are joining large
swathes of investors in opting for
a low-cost, index-tracking approach
to their portfolios.
Sales of ‘tracker’ funds, which simply
follow an index rather than relying on a fund
manager to pick particular stocks, have
ballooned, reaching a record £532 million
in the UK in July. There is now £82.6 billion
held in these funds in the UK – a decade
ago this figure stood at just £16.8 billion.
One pound in every £10 held in a fund
in the UK is now in a tracker.
For exchange-traded funds (ETFs) – the
other option available to passive investors –
it’s been a similar story. While it’s difficult
to pinpoint UK flows into these investments,
globally they have experienced huge growth.
Around $2.5 trillion (£1.5 trillion) sits in
ETFs worldwide, up from $417 billion
10 years ago.
Passive investment enthusiasts usually rely
on two main arguments to make their case.
First, they say, on average active managers
underperform the market. Second, passive
funds cost less than active ones. We’ll be
examining how these arguments stack
up for income investors in this edition.
Passive investments can also appear
seductively simple. Instead of all the
research involved in finding the right
manager to back, and the worrying
later over whether you have made
the right decision, the passive investor
simply has to pick which index
they want to track.
Unfortunately, it isn’t quite as simple as
that, as the options available for the passive
income investor show. We’ve pitted two
of the biggest passive equity income funds
head to head to show how ostensibly similar
funds can behave in very different ways. •••
‘Sales of “tracker” funds, which simply follow an index rather than relying on a fund manager to pick particular stocks, have ballooned. One pound in every £10 held in a fund in the UK is now in a tracker.’
September | Issue 7Income InveStor
tracker funDS are on the rISe…
0
20
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20142013201220112010200920082007200620052004
£17
£23£28 £29
£23
£31
£41£43
£59
£74
£83
Ass
ets
held
in U
K tr
acke
r fu
nds
(£ b
illion
s)
SOurcE: INvESTmENT mANAgEmENT ASSOcIATION
contentSPaSSIve Income StrateGIeS
September | Issue 7Income InveStor
…anD So are etfS
SOurcE: ETFgI.cOm
2014201320122011201020092008200720062005
$417
$580
$807$716
$1041
$1313 $1355
$1754
$2254
$2470
0
500
1000
1500
2000
2500
Ass
ets
held
in E
TFs
glob
ally
($ b
illion
s)
contentSPaSSIve Income StrateGIeS
September | Issue 7Income InveStor
contentSPaSSIve Income StrateGIeS
The iShares UK Dividend Ucits ETF
(IUKD), which houses £720 million of
assets, and the £584 million Vanguard
FTSE UK Equity Income tracker fund are
two of the most popular passive funds used
by equity income investors.
Both funds are trying to do the same thing:
derive income from the large and medium-
sized companies in the FTSE 350. But the
way they go about it, and the results they
deliver, differ markedly.
The iShares ETF lost a whopping 60%
throughout 2007 and 2008, as the credit
crunch began to bite. Unfortunately, the
Vanguard fund only launched in the summer
of 2009, so it isn’t possible to compare the
two funds over that period.
However, since its launch, the Vanguard
fund has delivered a capital return of 73.9%,
during which time the iShares ETF returned
57.5%. And had you invested £1,000
in mid-2009, you would have received
£358.71 in income from the Vanguard fund,
and £335.14 from the iShares ETF.
Different approaches
The reason for the divergence in
performance of these ostensibly similar
funds is down to the differences in the
indices they track. The iShares ETF follows
the FTSE UK Dividend+ index, which
is composed of the 50 highest yielding
stocks on the FTSE 350 based on one-
year forecast dividend yield, and excluding
investment trusts. Stocks are then weighted
according to that yield, rather than their
market capitalisation. So energy provider
SSE, for example, which has a market cap
of £14.2 billion, placing it outside the UK’s
30 biggest stocks, has the biggest weighting
in the index due to its 6.3% yield.
Vanguard didn’t like the look of that index
when they were looking to launch an equity
income fund, so asked FTSE to build a new
one. The FTSE UK Equity Income index is
constructed by ranking the stocks in the
FTSE 350 by their forecast annual dividend
yield. Starting from the top, these stocks are
then placed into the index, until the market
capitalisation of all the companies makes
up half that of the FTSE 350. •••
Fund face-off: iShares UK Dividend vs Vanguard FTSE UK Equity Income
September | Issue 7Income InveStor
contentSPaSSIve Income StrateGIeS
Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014
0
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50
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iShares
UK
Dividend
Vanguard
FTSE UK Equity
Income Index
£358.71£335.14
Vanguard FTSE UK Equity Income Index iShares UK Dividend Income (£1,000 invested)
Cap
ital g
row
th (%
)
Different approaches
produce different returns
September | Issue 7Income InveStor
contentSPaSSIve Income StrateGIeS
Investment trusts are also excluded, and
there are also some other rules to preserve
diversification: a single company cannot make
up more than 5% of the index, nor can a
single sector account for more than a quarter.
But the crucial difference from the FTSE UK
Dividend+ index is that stocks are weighted
according to market capitalisation rather
than yield, and it is this feature that is mostly
responsible for the differing performances
of the two funds.
Of course, just because the Vanguard fund
has beaten the iShares ETF on both counts
– income and capital return – over its lifetime,
doesn’t mean there aren’t times when the
iShares ETF won’t have the upper hand.
But Mike Deverell, partner at Cheshire-based
advice firm Equilibrium Asset Management
and a Citywire Money columnist, said he was
much more comfortable with the Vanguard
approach, and uses the fund for his clients.
‘The first thing we did was to run back-
tested data on the index,’ he said. ‘It was
generally really consistent – the Vanguard
fund acts like an equity income fund.’
The iShares ETF, by contrast, has proved
more volatile, largely due to the index’s
weighting according to yield. This can lead
it to a concentration in certain sectors, as the
index lacks the FTSE UK Equity Income’s
restrictions on sector weightings. The focus
on yield, with no eye to market capitalisation,
also means stocks topping the yield tables
due to their falling share price get more
of a look in.
‘When you’re looking at something
with a high yield, it’s either a nice profitable
company pumping out lots in dividends, or
the price has dropped a lot and the yield as a
percentage has gone up – that’s a riskier place
to look for income,’ said Deverell. ‘Applying
a strict yield factor can be completely
counterproductive. As an income investor,
you’re not just looking for the highest yield;
what you want is a growing yield.’ •••
Mike Deverell
‘Applying a strict yield factor can be completely counterproductive’
mIke Deverell
September | Issue 7Income InveStor
contentSPaSSIve Income StrateGIeS
Adam Laird, passive investment manager
at online stockbroker Hargreaves
Lansdown, agreed there were dangers in
investing in income ETFs tracking indices
weighted according to yield. The iShares
ETF, launched in 2005, was based on an
index less sophisticated than some of the
‘smart beta’ approaches – essentially more
complex indices, slanted towards a particular
investment idea – that have emerged since,
he argued. While funds like IuKD could be
useful for short-term investors looking for
high income, its potential to go heavy in
areas that could be subjected to a dividend
shock meant it was less suitable for the
long-term investor. ‘You really have to watch
closely in order to benefit,’ he added.
Despite the pitfalls of a yield-weighted
index approach, it is a method employed
by a large number of the equity income
and property income ETFs available. Our
table overleaf highlights all the passive
funds in this sector – all ETFs apart from the
vanguard FTSE uK Equity Income tracker
– that have been around long enough to
boast a three-year track record. Half of
them are yield weighted, and of the 11
further funds that have launched since,
there’s still a roughly equal split between
the two approaches. In the table we show
you the income and capital return you
would have received had you invested
£1,000 three years ago.
Read the small print
However, the yield and market cap
distinction is not the only one to bear in
mind when examining indices. A number
on both sides of the divide boast measures
of varying sophistication to try and avert
taking too heavy positions in companies
where the dividend is likely to be cut, or
where the yield has shot artificially high
due to a tumbling share price.
The EuroStoxx Select Dividend indices,
for example, which two of the db
x-trackers ETFs in the table track, will
accept only companies that have grown
their dividend, or kept it stable, over the
past five years, and have paid out in four
of the five. Any company that is added to
the index must pay out no more than 60%
of their earnings as dividends, and there
are also liquidity constraints. companies
are then ranked according to then yield
compared to the average yield in their
domestic market. •••
September | Issue 7Income InveStor
equIty & ProPerty Income PaSSIveS
Income (£)Capital return (£)
Index tracked Cost (%) Weighting
Amundi ETF FTSE uk Dividend Plus 0 1515.86 FTSE uK Dividend Plus cr 0.3 Yield
db x-trackers EuroStoxx Slct Div 30 135.83 1122.49 EurO STOXX Select Dividend 30 cr Eur 0.3 Yield
db x-trackers mScI Ac Asia ExJpn HDY 116.79 1104.35 mScI Ac Asia ex Japan High Dividend Yield Nr 0.65 market cap
db x-trackers STOXX gl Select Div 100 143.39 1212.06 STOXX global Select Dividend 100 cr Eur 0.5 Yield
iShares Asia Pacific Dividend F 154.56 1158.10 Dow Jones Asia Pacific Select Dividend 30 cr 0.59 Yield
iShares Asia Property Yield 114.61 1164.97 FTSE EPrA/NArEIT Developed Asia Dividend+ Nr 0.59 market cap
iShares Developed markets Prop Yld 99.54 1231.50 FTSE EPrA/NArEIT Developed Dividend+ Nr 0.59 market cap
iShares EurO Dividend 146.16 1122.28 EurO STOXX Select Dividend 30 cr Eur 0.4 Yield
iShares European Property Yield 96.26 1092.99FTSE EPrA/NArEIT Developed Europe ex uK Div+
Nr0.4 market cap
iShares uK Dividend 162.93 1306.80 FTSE uK Dividend Plus cr 0.4 Yield
iShares uS Property Yield 100.33 1302.86 FTSE EPrA/NArEIT uS Dividend+ Nr 0.4 market cap
vanguard FTSE uK Equity Income Index gBP 173.49 1304.46 FTSE uK Equity Income cr gBP0.22 (+0.4
purchase cost)market cap
DATA FrOm 31/08/2011 TO 31/08/2014SOurcE: LIPPEr
contentSPaSSIve Income StrateGIeS
September | Issue 7Income InveStor
contentSPaSSIve Income StrateGIeS
So for the db x-trackers EuroStoxx Select
30 Dividend ucits ETF, 30 companies from
the Stoxx Europe 600 Index are picked
according to this methodology, while 100
stocks from a series of global indices are
picked for the db x-trackers Stoxx global
Select Dividend 100 ucits ETF.
The most complex index is that operated
by two Lyxor ETFs, launched in 2012 and
2013, and based on parent company
Societe generale’s Quality Income indices.
No financial stocks are allowed and
companies must have a market cap of
at least $3 billion (£1.8 billion). Then stocks
must gain at least seven out of nine points
according to the ‘Piotroski score’, named
after academic Joseph Piotroski. The score
is meant to weed out financially weak stocks
from a pool of potential value investments.
Then stocks are selected according to the
strength of the balance sheet, and after that,
their dividend yield. Once they’ve passed all
those hurdles, stocks are weighted equally
in the index. It’s a world away from the basic
index approach operated by iShares
uK Dividend, and skirts the borders of
the active/passive investment divide.
And even once you’ve waded through all
these details about the indices ETFs track,
there can still be further odd quirks. The
Amundi FTSE uK Dividend Plus ETF, for
example, may look like a similar fund to
the iShares uK Dividend ucits, as both track
the same index. But the Amundi ETF doesn’t
pay income, which is instead reinvested.
Likewise the db x-trackers mScI North
America High Dividend Yield Index ETF,
which launched this year.
And the frequency of income payments
can vary depending on the fund, even when
it is from the same provider. For example,
some SPDr ETFs pay income every quarter,
others twice a year.
While there are a myriad of different
approaches to constructing an equity
income passive investments, thankfully
things are a little more straightforward for
the bond buyer. We’ll take a lot a look at the
options for the fixed income passive investor
over the page. •••
Piotroski: theory influences Lyxor ETFs
September | Issue 7Income InveStor
contentSPaSSIve Income StrateGIeS
Bonds in bountiful supply
The chief hurdle for the passive bond
investor is the size of the market: while
there are only a relative handful of passive
equity income funds, the number of fixed
income ETFs and trackers available to the
uK investor runs into the hundreds.
We’ve attempted to whittle down the
market by focusing on those funds that
are proving most popular with investors.
So in the tables in this e-zine, we have
highlighted the best-selling fixed income
ETFs and tracker funds on Hargreaves
Lansdown, the uK’s largest online
stockbroker.
Of the top 20 best sellers since the start
of the year, we then knocked out any that
did not yet have a three-year track record,
to present some of the most popular funds
available for the passive fixed income
investor. As with the equity income and
property income strategies, we’ve shown
the income and capital return after three
years if you’d invested £1,000.
Niche markets
most of these funds are tracking well-
established, straightforward indices that
lack the complicated formulas and rules
applying to some equity income strategies.
But the sheer number of funds on the
market means that investors are able to
target very specific areas of the market
if they want to: ETFs are usually the best
route for this rather than trackers. The
iShares gBP ultrashort Bond, for example,
allows investors to target bonds maturing
in less than a year.
Laird said that given the low-yield
environment, passive fixed income
strategies were proving popular among
some cost-conscious investors. With
yields low, investors aren’t particularly
keen on seeing their income eaten up
by the higher charges traditionally
attached to active management.
But that low cost comes at a price.
Strategic bond funds have proved popular
among investors given the bleak outlook for
some forms of fixed income. The attraction
of these sorts of funds is that crucial calls
over which sectors to back – government,
investment-grade or high-yield debt – are
placed in the hands of a fund manager. But
this sort of approach is not possible for the
passive investor, who instead has to make
those calls themselves.•
September | Issue 7Income InveStor
contentSPaSSIve Income StrateGIeS
fIxeD Income etfS
Capital return (£) Income (£) Index tracked Cost (%)
db x-trackers II iBx uK gilts Infl-Lnkd 1214.63 32.7 markit iBoxx uK gilt Inflation-Linked Tr 0.2
iShares $ TIPS 1041.9 0 Barclays u.S. govt Inflation Linked Tr uSD 0.25
iShares $ Treasury Bond 7-10yr 993.92 56.63 Barclays u.S. Treasury 10 Year Term Tr 0.2
iShares £ corporate Bd ex-Financials 1114.54 130.39 markit iBoxx gBP Non-Financials cr 0.2
iShares £ corporate Bond 1-5yr 1056.78 105.04 markit iBoxx Sterling corporates 1-5 Year cr 0.2
iShares £ Index-Linked gilts 1144.92 98.49 Barclays u.K. govt Inflation Linked Tr gBP 0.25
iShares core £ corporate Bond 1145.41 126.84 markit iBoxx gBP Liquid corporates Large cap Tr 0.2
iShares core uK gilts 1071.96 70.61 FTSE A British govt All Stocks cr 0.2
iShares Emer mrkts Local govt Bd 804.03 140.88 Barclays Em Lc government Diversified Tr 0.5
iShares Euro corp Bd ex-Fin 1-5yr 952.54 61.13 Barclays Euro Aggre corp ex Finan Tr Eur 0.2
iShares Euro High Yld corporate Bd 1032.4 188.56 markit iBoxx Eur Liquid High Yield Tr Eur 0.5
iShares J.P. morgan $ Emer mkts Bd 1025.54 142.18 JP morgan EmBI global Diversified Tr 0.45
iShares uK gilts 0-5yr 1003.9 23.55 FTSE A British govt under 5 Years cr 0.2
DATA FrOm 31/08/2011 TO 31/08/2014
September | Issue 7Income InveStor
contentSPaSSIve Income StrateGIeS
fIxeD Income trackerS
Capital return (£) Income (£) Index tracked Cost (%)
BcIF corporate Bond 1-10 Year 1116.55 121.19 markit iBoxx Sterling corporates 1-5 Year cr 0.45
BcIF corporate Bond Tracker 1141.94 108.4 markit iBoxx Sterling Non gilts Overall cr 0.12
BcIF uK gilts All Stocks Tracker 1037.63 36.28 FTSE A British govt All Stocks cr 0.2
HSBc uK gilt Index retail 1014.29 103.31 FTSE A British govt All Stocks cr 0.18
Legal & general All Stocks gilt Index 1045.33 87.14 FTSE A British govt All Stocks cr 0.18
Legal & general All Stocks Index Lkd glt Idx 1205.05 30.56 FTSE A (Index Linked) British govt All Stocks cr 0.18
Scottish Widows Overseas Fixed Int Tracker 923.46 35.14 JP morgan global gBI ex uK Tr 0.63
Scottish Widows uK Fixed Interest Tracker 1053.51 74.15 FTSE A British govt All Stocks cr 0.36
Scottish Widows uK Index Linked Tracker 1195.35 30.6 FTSE A (Index Linked) British govt All Stocks cr 0.12
vanguard global Bond Index gBP Hedged 1101.07 30.59 Barclays global Agg Float Adjusted Tr 0.15 (+0.2 on entry)
vanguard uK Inflation-Linked gilt Index gBP 1262.14 2.27 Barclays uK gvt ILB Float Adjusted Tr gBP 0.15
vanguard uK Investment grade Bond Index 1131.12 112.35 markit iBoxx Sterling Non gilts Overall cr 0.15 (+0.5 on entry)
vanguard uK Long Duration gilt Index gBP 1184.59 69.08 Barclays uK gvt 15+ Yrs Float Adjusted Tr gBP 0.15
DATA FrOm 31/08/2011 TO 31/08/2014
September | Issue 7Income InveStor
head to head:active vs passive income approachesBy Daniel Grote
contentS
September | Issue 7Income InveStor
contentSheaD to heaD: actIve vS PaSSIve Income aPProacheS
Having run the rule over the
passive income options available,
it’s now time to examine the biggest
question: are they any better than paying
a fund manager to deliver your income?
We’ve put them to the test by pitting
them against some of the best active
manager talent in income investment.
Now this isn’t an exact science. We
selected active managers for some
of the main areas in income investing,
covering both shares and bonds.
We’ve either gone for iconic names –
like Neil Woodford – or managers that
have made it into our Citywire Selection
list of top fund picks or gained a
Citywire rating.
And we’ve tried to compare their
performance to that of the passive
fund option closest to their strategy
from the selection we highlighted in the
first chapter. We’ve gone back as far
as we can go with performance records
to try and give you the clearest picture
possible: each of the head-to-heads
starts when the youngest fund was
launched. And to keep things simple,
we’ve showing the capital return you
would have received, in percentage
form, and the income you would have
received, in pounds, had you invested
£1,000 at the beginning of the
time period.
Click through the following pages
to see how active and passive strategies
fare against each other. We start with
a bit of a bombshell •••
September | Issue 7Income InveStor
contentSheaD to heaD: actIve vS PaSSIve Income aPProacheS
Passive pick pips Woodford
Shock horror! Neil Woodford is no better than
a tracker! Britain’s most famous investor loses
out the Vanguard FTSE UK Equity Income
fund on both income and capital return over
five years.
We picked the Vanguard fund to pit against
an actively-managed fund because we
preferred its approach to that of the other
passive equity income giant, iShares UK
Dividend Ucits ETF. We plumped for Invesco
Perpetual High Income as its active foe due
to its iconic status. Run by Neil Woodford
until earlier this year, it is now in the hands
of Mark Barnett, after Woodford quit Invesco
to set up his own fund group.
But we were being a bit sneaky too. We
knew the Vanguard fund would come out on
top: it’s no secret, and is a fact often referred
to by financial advisers who believe in
the passive approach to investment.
Woodford’s famous aversion to banks
would have played a part in Vanguard’s
victory on the capital return front. He may
have invited in HSBC last year, but he didn’t
hold Lloyds, Barclays or Royal Bank of
Scotland over the three years, when the
share prices of all three rose substantially.
It’s also worth pointing out that both Invesco
Perpetual Income and High Income morphed
into more growth-oriented strategies, and
eventually had to leave their equity income
peers to join the Investment Management
Association’s UK All Companies sector.
So the fact the Vanguard fund returned
more income isn’t a great surprise.
But it doesn’t mean investors should all be
rushing out of CF Woodford Equity Income
as quickly as they rushed in to it and snap
up a tracker. We’ve run the two funds against
each other for as long a time period as we
can: from when the Vanguard fund launched
in June 2009. Of course, that doesn’t capture
the impact of Woodford shunning banks
when the credit crunch bit, and technology
stocks when the tech bubble burst. And
you’d have to construct a very clever tracker
to be able to make those sorts of calls.
Woodford: beaten by Vanguard tracker
See how the funDS fareD over the PaGe >
September | Issue 7Income InveStor
Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014
0
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80Vanguard FTSE UK Equity Income Index Invesco Perpetual High Income
0
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Invesco
Perpetual
High
Income
Vanguard
FTSE UK
Equity Income
Index GBP
£358.71
£309.69
-60
-50
-40
-30
-20
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10
20db x-trackers EuroStoxx Slct Div 30 Invesco Perpetual European Eq Income Inc
Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013
050
100150200250
Invesco Perpetual European Eq Income
db x-trackers EuroStoxx Slct
Div 30
£188.19£210.58
0
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50SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
Oct 2011 Oct 2012 Oct 2013
0
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60
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100
SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
£97.41
£71.80
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Income (£1,000 invested)
Income (£1,000 invested)
contentSheaD to heaD: actIve vS PaSSIve Income aPProacheS
vanguard beats invesco
on both capital and
income
September | Issue 7Income InveStor
contentSheaD to heaD: actIve vS PaSSIve Income aPProacheS
Active levels the score in Europe
Oh dear. You wouldn’t have had much
fun if you had invested in this ETF at the
beginning of 2008. OK, so you would
have been hard pressed to find anything
that didn’t lose you money as the financial
meltdown took hold, but it’s noticeable that
the Invesco fund managed to limit its losses
with a lot more success. The eurozone crisis
hit the Invesco fund marginally harder, but
Citywire AAA-rated manager Stephanie
Butcher’s ability to tap into the recovery
post-2011 is responsible for the bulk of
her lead over the ETF. A heavy position in
the recovering banking sector over that
period has helped her, unlike the ETF, end
the period firmly in the black. You would
also have received more income from the
Invesco fund, although the differences aren’t
Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014
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80Vanguard FTSE UK Equity Income Index Invesco Perpetual High Income
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300
350
400
Invesco
Perpetual
High
Income
Vanguard
FTSE UK
Equity Income
Index GBP
£358.71
£309.69
-60
-50
-40
-30
-20
-100
10
20db x-trackers EuroStoxx Slct Div 30 Invesco Perpetual European Eq Income Inc
Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013
050
100150200250
Invesco Perpetual European Eq Income
db x-trackers EuroStoxx Slct
Div 30
£188.19£210.58
0
10
20
30
40
50SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
Oct 2011 Oct 2012 Oct 2013
0
20
40
60
80
100
SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
£97.41
£71.80
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Income (£1,000 invested)
Income (£1,000 invested)
Invesco fund races ahead after eurozone
crisis
quite as stark: £210 versus £188 had you
invested £1,000. And you would have had
to wait around longer for your money if
you’d invested in the ETF, which pays out
distributions annually, while the Invesco
fund pays them twice a year.
Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014
0
10
20
30
40
50
60
70
80Vanguard FTSE UK Equity Income Index Invesco Perpetual High Income
0
50
100
150
200
250
300
350
400
Invesco
Perpetual
High
Income
Vanguard
FTSE UK
Equity Income
Index GBP
£358.71
£309.69
-60
-50
-40
-30
-20
-100
10
20db x-trackers EuroStoxx Slct Div 30 Invesco Perpetual European Eq Income Inc
Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013
050
100150200250
Invesco Perpetual European Eq Income
db x-trackers EuroStoxx Slct
Div 30
£188.19£210.58
0
10
20
30
40
50SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
Oct 2011 Oct 2012 Oct 2013
0
20
40
60
80
100
SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
£97.41
£71.80
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Income (£1,000 invested)
Income (£1,000 invested)
September | Issue 7Income InveStor
contentSheaD to heaD: actIve vS PaSSIve Income aPProacheS
US market hard to beat
The US is a notoriously hard market
to beat, and here’s more proof. JP US
Equity Income, managed by Citywire
+ rated Clare Hart and Jonathan Simon
only just scrapes a marginally better capital
return than the SPDR S&P US Dividend
Aristocrats ETF since the latter’s launch
in October 2011.
The JPM stretches its lead when it
comes to income though, returning £97
to investors over that period compared
to £72 from the ETF.
Admittedly, given the ETF is relatively
young, we are measuring the two across
a relatively short time period of less than
three years. And a particularly benign period
at that: the US stock market has performed
strongly, with no credit crunch-like event
to really test the two funds’ mettle. In fact,
even had the ETF been around longer, the
JPM fund only launched at the end of 2008,
when the worst of the financial meltdown
had already passed, so we’d still be in
the dark.
Standard & Poor’s Dividend Aristocrats
indices, while yield-weighted, do feature
some constraints that seek to guard
against them piling into stocks with
a rising yield due to a tumbling share
price. That could have prevented the ETF
from being hurt as badly as the iShares
UK Dividend was during the credit crunch.
However, so too do the Eurostoxx Select
Dividend indices, and as we’ve seen
in the previous head-to-head, that
didn’t stop the db x-tracker ETF
suffering heavy losses.
Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014
0
10
20
30
40
50
60
70
80Vanguard FTSE UK Equity Income Index Invesco Perpetual High Income
0
50
100
150
200
250
300
350
400
Invesco
Perpetual
High
Income
Vanguard
FTSE UK
Equity Income
Index GBP
£358.71
£309.69
-60
-50
-40
-30
-20
-100
10
20db x-trackers EuroStoxx Slct Div 30 Invesco Perpetual European Eq Income Inc
Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013
050
100150200250
Invesco Perpetual European Eq Income
db x-trackers EuroStoxx Slct
Div 30
£188.19£210.58
0
10
20
30
40
50SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
Oct 2011 Oct 2012 Oct 2013
0
20
40
60
80
100
SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
£97.41
£71.80
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Income (£1,000 invested)
Income (£1,000 invested)
close call between the
two funds
Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014
0
10
20
30
40
50
60
70
80Vanguard FTSE UK Equity Income Index Invesco Perpetual High Income
0
50
100
150
200
250
300
350
400
Invesco
Perpetual
High
Income
Vanguard
FTSE UK
Equity Income
Index GBP
£358.71
£309.69
-60
-50
-40
-30
-20
-100
10
20db x-trackers EuroStoxx Slct Div 30 Invesco Perpetual European Eq Income Inc
Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013
050
100150200250
Invesco Perpetual European Eq Income
db x-trackers EuroStoxx Slct
Div 30
£188.19£210.58
0
10
20
30
40
50SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
Oct 2011 Oct 2012 Oct 2013
0
20
40
60
80
100
SSgA SPDR S&P US Dividend Aristocrats
JPM US Equity Income
£97.41
£71.80
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Cap
ital g
row
th (%
)
Income (£1,000 invested)
Income (£1,000 invested)
September | Issue 7Income InveStor
contentSheaD to heaD: actIve vS PaSSIve Income aPProacheS
Nimble Prusik fund’s
approach pays dividends
The dx-trackers mScI Asia ex-Japan
High Dividend Yield ucits ETF is another
example of a fund tracking a ‘smart’ index.
The mScI index is made up of stocks
with higher than average dividend yields
but also tries to ensure those yields are
sustainable and persistent with some
screens meant to ensure only ‘quality’
stocks get in.
All that said, it hasn’t been able to
compete with the stellar record of the
Prusik Asian Equity Income fund, which
beats it on both capital and income.
citywire AAA-rated Tom Naughton
runs the Prusik fund, which is based
in Ireland but a favourite of some uK
multi-managers. He has limited the
size of the fund (a move that passive
funds would not tend to make) to allow
him to continue investing in smaller
companies effectively. Those small
company stocks have helped deliver
much of his impressive gains.
Apr 2011 Apr 2012 Apr 2013 Apr 2014
db x-trackers MSCI AC Asia ExJpn HDY
Prusik Asian Equity Income
-20
-10
0
10
20
30
40
50
60
Prusik Asian Equity Income db x-trackers MSCI AC Asia ExJpn HDY
0
50
100
150
200
£182.89
£109.51
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Apr 2011 Apr 2012 Apr 2013 Apr 2014
db x-trackers MSCI AC Asia ExJpn HDY
Prusik Asian Equity Income
-20
-10
0
10
20
30
40
50
60
Prusik Asian Equity Income db x-trackers MSCI AC Asia ExJpn HDY
0
50
100
150
200
£182.89
£109.51
Income (£1,000 invested)
Cap
ital g
row
th (%
)
naughton focuses
on smaller companies
September | Issue 7Income InveStor
contentSheaD to heaD: actIve vS PaSSIve Income aPProacheS
Strategic bond funds peerless
OK, this one is perhaps an unfair
comparison, but it’s the best we could do.
No analysis of fixed income investments
would be complete without looking at
strategic bond funds, which have proved
the most popular among investors in recent
months. Picking one to look at was not a
problem – the Jupiter Strategic Bond fund,
run by citywire + rated Ariel Bezalel, is a
citywire Selection star pick. But finding a
passive fund to compare it to was a harder
task. We picked the vanguard global Bond
Index fund, which invests in government
and corporate bonds from all around the
world, as it was the closest among the
passives in our selection to Bezalel’s
go-anywhere approach.
But no passive strategy can really reflect
an active manager’s ability to switch
between different sorts of bonds as they see
fit. The vanguard fund, for example, tracks
the Barclays global Aggregate Float Adjusted
Bond Index Hedged, which aims to simply
represent the global bond market – not take
a position on which sort of bonds are likely
to do well. It’s also worth noting that this
index doesn’t boast a particularly high yield,
hence the low level of income you would
have received from the vanguard fund if
you had invested when it launched. It’s not
intended as a high income generator,
but more as a portfolio diversifier.
Jun
2011
Jun
2012
Jun
2013
Jun
2014
0
10
20
30
40
50
Vanguard Global Bond Index GBP Hedged
Jupiter Strategic Bond
Jun
2009
Jun
2010
0
50
100
150
200
250
300
350
400
Vanguard Global Bond Index GBP Hedged
Jupiter Strategic
Bond
£389.13
£47.06
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Jun
2011
Jun
2012
Jun
2013
Jun
2014
0
10
20
30
40
50
Vanguard Global Bond Index GBP Hedged
Jupiter Strategic Bond
Jun
2009
Jun
2010
0
50
100
150
200
250
300
350
400
Vanguard Global Bond Index GBP Hedged
Jupiter Strategic
Bond
£389.13
£47.06
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Bezalel races ahead
September | Issue 7Income InveStor
contentSheaD to heaD: actIve vS PaSSIve Income aPProacheS
L&G’s veteran fund delivers steady income
Legal & general’s All Stocks gilt Index fund
has been around for a long time – it was
launched in 1981 – and is one of the larger
passive bond funds around. It’s perhaps
no surprise that the passive option seems
popular for gilt investors – with the low
yields on gilts, they will be particularly loath
to give any of that away in extra charges
they can avoid.
citywire + rated mike Amey is no slouch,
and Allianz gilt Yield has delivered a better
capital return over its lifetime than the L&g
fund. But you would have received more
income from the passive pick, and would
be likely to continue doing so in the future.
The L&g fund currently boasts a distribution
yield of 2.4%, versus 2.0% from the
Pimco fund. May 2005 May 2008 May 2011May 2002 May 2014
-10
-5
0
5
10
15
20
25
30
Legal & General All Stocks Gilt Index
Allianz Gilt Yield
0
100
200
300
400
500
600
Legal & General All Stocks Gilt Index
Allianz Gilt Yield
£489.77
£582.07
Cap
ital g
row
th (%
)
Income (£1,000 invested)
May 2005 May 2008 May 2011May 2002 May 2014
-10
-5
0
5
10
15
20
25
30
Legal & General All Stocks Gilt Index
Allianz Gilt Yield
0
100
200
300
400
500
600
Legal & General All Stocks Gilt Index
Allianz Gilt Yield
£489.77
£582.07
Cap
ital g
row
th (%
)
Income (£1,000 invested)
allianz delivers more
capital but less income
September | Issue 7Income InveStor
contentSheaD to heaD: actIve vS PaSSIve Income aPProacheS
Baillie Gifford takes
on Goliath and wins
Legal & general’s All Stocks Index-Linked
gilt Index Trust is a mammoth fund,
boasting £1.2 billion of assets. We’ve
pitted it against one of the few active
index-linked gilt funds with a citywire-
rated manager, the Baillie gifford Active
Index-Linked gilt fund, run by + rated
Phil Annen. unsurprisingly, neither fund
would have provided you with stellar
levels of income had you invested
when the Baillie gifford fund launched.
But the active option clearly trumps
the L&g giant on that front, while the
two funds are broadly level-pegging
in terms of capital growth.
Dec 2011 Dec 2012 Dec 2013Dec 2010
-5
0
5
10
15
20
25
30
Legal & General All Stocks Index Lkd Glt Idx
Baillie Gi�ord Active Index-Lnkd Gilt
0
30
60
90
120
150
Legal & General All Stocks Index
Lkd Glt Idx
Baillie Gifford Active
Index-Lnkd Gilt
£130.37
£41.63
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Dec 2011 Dec 2012 Dec 2013Dec 2010
-5
0
5
10
15
20
25
30
Legal & General All Stocks Index Lkd Glt Idx
Baillie Gi�ord Active Index-Lnkd Gilt
0
30
60
90
120
150
Legal & General All Stocks Index
Lkd Glt Idx
Baillie Gifford Active
Index-Lnkd Gilt
£130.37
£41.63
Income (£1,000 invested)
Cap
ital g
row
th (%
)
Ballie Gifford best for income
September | Issue 7Income InveStor
trackers or etfs: which are best?By Jennifer hill
contentS
September | Issue 7Income InveStor
contentStrackerS or etfS: whIch are BeSt?
Passive investors have a plethora of
income-generating opportunities,
with the most suitable option often
dependent upon the type of investor.
While traditional trackers are ideal for
buy-and-hold investors, exchange-traded
funds (ETFs) are better suited to more
active investors.
The two approaches also differ in terms
of cost, investor protection, stock lending
and tracking error.
Flexible friend
ETFs offer intra-day dealing, so enable
investors to be more nimble. ‘There are more
options to trade – not necessarily just for
active traders; it’s good for everyone,’ said
Kris Heck, managing partner at Tanager
Wealth Management.
In contrast, traditional trackers operate an
end-of-day dealing system, whereby investors
must trade at the price at 4pm on the day after
their order is submitted.
‘You have to wait until T+1 to find out your
price and can’t move fast in choppy markets
to get out or in,’ added Heck. ‘ETFs give
certainty of price: you know the price
in seconds.’
Other advisers believe the speed at which
ETFs can be traded is of no discernible benefit
to the average income-seeking investor.
Craig Burgess, managing director of
Blackstone Wealth Management, said:
‘ETFs are very much more suitable for active
investors who believe they can improve
their returns by regular, even intra-day trading,
but I’m not sure how tactical trading helps
an income seeker.’
Added strings
ETFs have other strings to their bow. Firstly,
they give greater choice among indices and
asset classes than normal index funds. ‘For
example, there are numerous fixed income
ETFs, but far, far fewer tracker fixed income
funds,’ said Heck. •••
‘ETFs give certainty of price. You know the price in seconds.’
krIS heck
September | Issue 7Income InveStor
contentStrackerS or etfS: whIch are BeSt?
ETFs can deliver greater returns to investors
by stock lending – lending the stock to
someone who wants to short it, and who will
provide collateral – a more prevalent practice
among ETF managers than fund managers.
‘There is usually a small yield enhancement,
but it can be significant in volatile markets,’
said Heck.
ETFs tend to track indices more closely
than traditional tracker funds, with synthetic
ETFs often trumping physical ones on this
front. The former enter into a contract with a
bank to receive the exact return of the index
they want to track in exchange for a fee,
while the latter buy shares in the companies
that make up the index.
Keep it simple
With greater complexity comes greater
risk. ‘We don’t use ETFs for a number
of reasons, but in the past we opted only for
full replication,’ said Burgess, warning of the
risk of a synthetic ETF running into trouble.
‘Just because it hasn’t happened doesn’t
mean you’re not taking a risk.’ He said.
Traditional trackers also come with a safety
net in the form of the Financial Services
Compensation Scheme, which protects you if
the fund manager goes bust. UK-based ETFs
are also covered, but few ETFs are domiciled
in the UK.
Managers of traditional trackers also
stock lend, but in moderation. ‘Being
passively-managed funds they tend not
to be aggressive stock lenders as it’s
simply not the remit of the fund to generate
alpha by any means,’ said Burgess.
BlackRock, which runs ETF provider
iShares, pays 60% of revenues into the
lending funds, while traditional tracker
giant Vanguard says it pays all of the
revenue back into its funds after
costs. •••
‘We don’t use ETFs for a number of reasons, but in the past we opted only for full replication.’
craIG BurGeSS
September | Issue 7Income InveStor
contentStrackerS or etfS: whIch are BeSt?
Counting costs
Heck pointed to a big benefit often touted of
ETFs: lower costs. ‘ETFs generally have lower
TERs [total expense ratios] due to scale of
investments and because they don’t have to
maintain expensive back office retail account
systems,’ he said. ‘The ETF investor, in effect,
usually gets institutional not retail pricing.’
Investors in traditional trackers often have
to pay entry or exit charges which are usually
more than the corresponding bid/offer spread
paid on exchange for a similar ETF. For
example, Vanguard FTSE UK All-Share has
an entry charge of 0.4%, while SPDR FTSE
All-Share ETF has none and the spread is
usually less than this.
‘Investors pay their own way in or out of
the ETF and don’t subsidise the cost of more
active traders entering or leaving the fund –
a very important point,’ said Heck.
Those investing significant amounts should
also find ETFs cheaper on account of trading
commission: ‘It depends on your platform,
but many [ETFs] have fixed commissions
to deal shares, whereas funds may
have commission as a percentage
of the investment,’ he added.
Dealing fees
However, ETFs are not always the cheapest
route to ownership of an asset class,
particularly following the UK launch
of Vanguard in 2009.
‘Because of the growth in passive funds
we’re seeing the already ultra-low ongoing
charges of the funds we use falling
year-on-year,’ said Burgess.
Philip Bailey, an investment consultant
at Provisio, stressed that investors need not
make a choice between the two approaches.
‘The biggest consideration when selecting
an income-orientated passive is the index
you are tracking,’ he said. •
‘The biggest consideration when selecting an income-orientated passive is the index you are tracking.’
PhIlIP BaIley
September | Issue 7Income InveStor
*A loan in the form of a security, usually issued by a government or company, which normally pays a fixed rate of interest over a given time period, at the end of which the initial amount borrowed is repaid. **Shares of ownership in a company. Source of assets under management: M&G statistics as at 30.06.14. Morningstar logo copyright © 2014 Morningstar UK Ltd. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. OCT 14 / 51663
Fixed interest securities, also known as bonds*, can offer a more regular income than equities** and can bring an important element of diversification to your portfolio.
M&G Fixed Interest
Tacklingfrom every angle
Call: 0800 389 8600 Visit: www.mandg.co.uk/everyangle
Best Specialist Fixed Interest Fund House (UK)
2010, 2011 and 2012
Outstanding Fund Manager Award Richard Woolnough
2014
It’s vital to have an expert team behind your fixed interest investments. At M&G, our investment experience and expertise stretches back over 80 years.
Today, we are one of Europe’s leading active fund management groups with over £253bn of funds under management, over half of which are invested in fixed interest assets.
M&G’s line-up covers funds across the whole spectrum of bond investments, including high yield, corporate bonds, government
bonds and global bond solutions. As a testament to our expertise, we have been independently recognised within the industry and have won an array of awards for our funds and as a group.
The value of stockmarket investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. Bond funds provide a variable level of income. Past performance is not a guide to future performance.
51663 FI Direct Ad CII e-zine FI ad 319x169 10-14_01.indd 1 07/10/2014 16:50
September | Issue 7Income InveStor
Income Investor is published by:Citywire Financial Publishers, First Floor, 87 Vauxhall Walk, London SE11 5HJ . Tel 020 7840 2250 Fax 020 7840 2251. Citywire is an independent financial publishing and data group, 25% owned by Thomson Reuters plc.
THE TEAm EmAIL TELEPHONE
Editor-in-chief Gavin Lumsden [email protected] 020 7840 2256
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MARCHiSSuE
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September | Issue 7Income InveStor
Investment Trust Insider is published by: Citywire Financial Publishers, First Floor, 87 Vauxhall Walk, London SE11 5HJTel 020 7840 2250 Fax 020 7840 2251. Citywire is an independent financial publishing and data group, 25% owned by Thomson Reuters plc.
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September | Issue 7Income InveStor