The past five years have shown the simplest strategy of all – investing equal amounts in companies in an index – might not suit all markets.
It’s claimed by some portfolio theorists that higher returns and less risk can be achieved when investing in an index by allocating equal amounts of capital to each company and periodically rebalancing. But two that do this have underperformed the S&P/ASX 200 and S&P 500 by 0.62 per cent and 3.5 per cent respectively on average over the five years to September 30. What happened?
“Different jurisdictions have been trying to solve that puzzle: how do we allow active products to come on to the market and at the same time protect the intellectual property of the active manager,” Campion says. The past five years have seen an underperformance of 0.91 per cent, however, which shows the strategy isn’t always a sure thing. Is the art in utilising equal-weight ETFs all in the timing?
The team applies a different philosophy to the US market, where instead of marketing an S&P 500 ETF for four basis points, like iShares does, it charges 49 basis points for a fund that applies Morningstar’s “wide moat” strategy – i.e. investing in companies with a strong competitive advantage. That fund is also equally weighted, but applies a value assessment. Since inception in June 2015, the fund has returned 15.13 annualised, against 12.73 per cent for the S&P 500.
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