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Insights.

uk equity income etf event preview

15/1/2018

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Trackinsight investor summit 2018

8/1/2018

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Which was the best performing UK Equity Income index in 2017?

4/1/2018

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  • In the search for yield, UK Equity Income is a key component of client portfolios.
  • There are a number of London-listed UK Equity Income ETFs to choose from, each tracking a different index methodology.
  • This report looks at the best performing UK Equity Income indices in absolute and risk-adjusted terms for GBP investors.


UK Equity Income Indices
Investors have a choice of UK Equity Income index strategies, each with different risk-return characteristics, weightings methodologies and factor tilts.
These difference influence the performance of each index strategy (all figures below are on a total return basis for GBP investors).

Best performing for 2017
The best performing strategies for UK Equity Income in 2017 were:

  1. +12.3% total return of the MSCI UK Select Quality Yield index (tracked by BMO MSCI UK Income Leaders ETF (LON:ZILK)) 
  2. +8.7% total return of the FTSE 350 ex Investment Trust Qual/Vol/Yield Factor 5% Capped Index (tracked by Lyxor FTSE UK Quality Low Vol Dividend (DR) UCITS ETF (LON:DOSH).
  3. +7.9% total return of the WisdomTree UK Equity Income Index (tracked by WisdomTree UK Equity Income UCITS ETF (LON:WUKD)

This compares to +12.3% for FTSE 100 (best tracked by HSBC FTSE 100 UCITS ETF (LON:HUKX)).

Best performing over last 3 years
The best performing strategies for UK Equity Income over the last 3 years were:

  1. +26.4% cumulative total return of the FTSE 350 ex Investment Trust Qual/Vol/Yield Factor 5% Capped Index (tracked by Lyxor FTSE UK Quality Low Vol Dividend (DR) UCITS ETF (LON:DOSH).
  2. +20.8% cumulative total return of the WisdomTree UK Equity Income Total Return Index (tracked by WisdomTree UK Equity Income UCITS ETF (LON:WUKD).
  3. +18.1% cumulative total return of the FTSE UK Dividend+ Index (tracked by iShares UK Dividend UCITS ETF (LON:IUKD).

This compares to +31.5% cumulative return for FTSE 100 (best tracked by HSBC FTSE 100 UCITS ETF (LON:HUKX)).

Fig. 1: Total Returns (Cumulative) by strategy/index (cumulative, GBP terms)
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Best risk-adjusted returns
The best risk-adjusted returns in 2017 of available UK Equity Income indices was achieved by:

  1. MSCI UK Select Quality Yield index (tracked by BMO MSCI UK Income Leaders ETF), with a 1Y Sharpe ratio of 1.40
  2. FTSE 350 ex Inv Trust Qual/Vol/Yield Factor 5% Capped Index (tracked by Lyxor FTSE UK Quality Low Vol Dividend (DR) UCITS ETF) with a 1Y Sharpe ratio of 1.07
  3. WisdomTree UK Equity Income Total Return Index (tracked by WisdomTree UK Equity Income UCITS ETF) with a 1Y Sharpe ratio of 0.97.

To look at consistency of risk-adjusted returns, we have plotted 1Y Sharpe ratios vs 3Y Sharpe ratios for each UK Equity Income index strategy in Fig.2 below.

Fig.2.  1Y & 3Y Sharpe Ratios, selected UK Equity Income index strategies (GBP terms)
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Conclusion
Different index construction methodologies has a material impact on performance outcomes – both in absolute terms and on a risk-adjusted basis.

A naïve interpretation is to consider performance in isolation, however our view is that index selection is more nuanced than that: it should relate to the objectives and constraints of individual client portfolios and the desired exposure  -  on asset-basis, risk-basis and factor-basis and the interaction between the selected strategy and the rest of a client portfolio.

Note: Scope of our comparison
For these reports, we have analysed the indices and ETFs detailed in Fig.3.

Fig. 3: UK Equity Income Indices & ETFs vs HSBC FTSE 100 UCITS ETF (LON:HUKX)
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[ENDS]
NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.
This article has been written for a US and UK audience.  Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers.  For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.  This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates.  For information and disclaimers, please see www.elstonconsulting.co.uk
Photo credit: N/A; Chart credit: Elston Consulting; Table credit: Elston Consulting
All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement.
Chart data is as at 30-Dec-17
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Which equity factors won in 2017?

3/1/2018

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  • We look at the different factor versions of World Equity indices to see which factors won in 2017.
  • World Equity Momentum factor delivered highest 1Y total return at +20.57%
  • World Equity Momentum factor delivered highest 1Y risk-adjused return with Sharpe ratio of 1.94


Focus on market cap indices is a choice, not an obligation
A market cap weighted approach has well known drawbacks: it biases larger companies, regardless of efficiency and is "procyclical" - buying larger amounts of more expensively valued companies.

This is a critique of "passive investing". We don't believe there's such a thing as passive investing. There is index investing and non-index investing. There is subjective investing and systematic investing. Choice of index, choice of methodology, choice of asset allocation are all active decisions. Index investing simply delivers the desired investment approach in a way that is efficient, transparent and cheap.

Factor-based indices
The arrival of factor-based indices, means that for a required World Equity exposure, we can select which factors we want exposure to: for example, Size, Momentum, Quality, Value or Minimum Volatility.

The different factors can be summarised as follows:

  • Size: smaller capitalisation companies
  • Momentum: companies with upward price trend
  • Quality: companies with strong and stable earnings
  • Value: companies that are undervalued relative to their fundamentals
  • Min Volatility: companies with lower volatility performance characteristics


How have these different factors fared?
Ranking the 1Y performance of these factors in 2017: Momentum factor delivered the highest total return at +20.6%, followed by Size factor at +13.1%, followed by Quality factor at +12.5%, followed by Value factor at +11.5%, and finally Min Volatility at +7.1%. This compares to +13.2% for the traditional cap-weighted approach.

Fig 1. Equity Factor 1Y Realised Risk-Return
Picture
On a 3Y basis, the annualised returns of Momentum come in at +18.2%, followed by Size at +15.7%, followed by Quality at +15.2%. This compares to +14.6% for the traditional cap-weighted approach.

Fig 2. Equity Factor 3Y Realised Risk-Return
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Risk-Adjusted Returns
Ranking the 1Y risk adjusted performance by Sharpe Ratio: Momentum leads at 1.94, followed by Size at 1.44, followed by Quality at 1.30. This compares to 1.37 for the traditional cap-weighted approach.

On a 3Y basis, Size leads at 1.33, followed by Momentum at 1.30, followed by Quality at 1.19. This compares to 1.15 for the traditional cap-weighted approach.

In Fig 3. we plot the 1Y and 3Y Sharpe ratio for each World Equity factor relative to traditional cap-weighted Global and EM Equity indices, to compare the risk-adjusted returns of different factor exposures over different time frames.

Fig 3. Equity Factor Sharpe Ratios
Picture
Conclusion: a differentiated approach
We are not suggesting that one factor approach is inherently superior to another. But with a broader array of factor exposures readily accessible to decision-makers to match with their portfolio requirements, there's no longer need to complain about the limitations of cap-weighted indices.

NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.
This article has been written for a US and UK audience.  Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers.  For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.  This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates.  For information and disclaimers, please see www.elstonconsulting.co.uk
Photo credit: N/A; Chart credit: Elston Consulting; Table credit: Elston Consulting
All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement.
Chart data is as at 30-Dec-17
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Asset Class Risk-Return Map: 2018 review and outlook

2/1/2018

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  • Investors were amply rewarded for risk-taking in 2017, with recovering growth, supportive liquidity, prospective tax cuts and lower interest rates all supporting higher valuations.
  • These fundamentals, combined with a significant decline in market volatility led to a strong year for markets with equity markets at record highs
  • Portfolio positioning for asset allocation remains key and we refresh the risk-return characteristics of each asset class for GBP investors.

For historic and expected asset class risk-return perspectives, see below.

Fig. 1: 1-year historic asset class risk-return for GBP investors
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Fig. 2: 3-year historic asset class risk-return for GBP investors
Picture
Fig. 3: 5-year expected asset class risk-return for GBP investors
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Source: Blackrock Investment Institute, total returns basis (arithmetic) for GBP investors

NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.

This article has been written for a US and UK audience.  Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers.  For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.  This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates.  For information and disclaimers, please see www.elstonconsulting.co.uk

Photo credit: N/A; Chart credit: Elston Consulting (Fig 1&2), BlackRock (Fig 3); Table credit: N/A

All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement.

Chart data is as at 30-Dec-17
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  • WHO WE ARE
    • About
    • Contact
    • Events
    • Press
  • WHAT WE DO
    • Portfolio Solutions >
      • Our Portfolios
      • Custom Portfolios
      • Research Portfolios
    • Fund Solutions >
      • Our Funds
      • Custom Funds
    • Index Solutions >
      • Our indices
      • Custom Indices
    • SPECIALIST STRATEGIES >
      • Liquid Real Assets
      • UK Equity Income
      • Permanent Portfolio UK
      • All Weather Portfolio UK
      • Dynamic Risk Parity
      • Gold and Precious Metals
      • Enabling Net Zero
    • Research >
      • Investment Research
      • Regulatory Research
    • CPD
  • WHO WE HELP
    • Financial Advisers
    • Discretionary Managers
    • Asset Managers
    • Asset Owners
    • 中文
  • Insights