More than a quarter of emerging market trackers have landed a five-crown rating in the latest FE passives rebalance despite being widely considered a difficult area of the market to track.
Seven out of 24 emerging market trackers landed the top rating from the fund research agency, reflecting 29% of the funds analysed, the same success rate as North American equities passives.
UK gilts were the asset class with the highest number of five-crown ratings representing 38% of funds analysed, although this was a drop from 48% in July. No corporate bond funds received the top accolade, the third time running the asset class has failed to make the grade.
In total, 292 passive funds were rated in the bi-annual FE passive crown ratings rebalance, which assesses how well a passive fund tracks its benchmark over three years.
Property and GEM trackers surprise
Portfolio manager at FE, Oliver Clarke-Williams said: “It is not surprising that UK Gilts have topped the charts as it is a highly liquid asset class and therefore easy to replicate. Likewise, passive North American equity funds tend to track their benchmarks well due to the size and efficiency of the market.
“More surprising is that there are so many five FE passive crown rated property and emerging markets funds as these are generally seen as quite difficult markets to replicate.” Thirty per cent of property funds received the top rating.
Both categories bet out the proportion of five-crown ratings in UK equity (22%), European equities (21%), Japanese equities (17%) and global equities (13%).
Clarke-Williams added: “Corporate bond funds have generally struggled to achieve a five FE passive crown rating. This is perhaps not surprising when considering how difficult some of these indices are to track.
“Not only are they often made up of hundreds of securities but because they are traded over the counter rather than on an exchange like equities, buying and selling is much more difficult.”
Blackrock increases lead over Vanguard
At a group level, Blackrock (iShares) retained the top spot with 25 five FE passive crown rated funds compared with 23 last time around in July, while Vanguard retains second place with 10, having achieved 11 in the previous rebalance.
The rebalance also saw six funds rated for the first time as they met the three-year performance history requirement. Credit Suisse CSIF Equity EMUXtrackers soared to a five-crown rating.
Clarke-Williams added: “Too much of the active passive debate has been focused on the ability of active managers, whilst passive funds have been considered more or less equal.
“The dispersion in quality among passive funds is almost as great as it is among active funds and poor tracking and high charges can cause major underperformance that most people wouldn’t consider possible. It is important to put as much effort into identifying a good passive fund, as a poor choice can be just as destructive to wealth.”
