For most MoneyWeek readers, the emergence last month of a new issuer of exchange-traded funds (ETFs) in Europe wasn’t a big event. The European market is already intensely competitive, with big-name brands such as BlackRock, iShares and Vanguard slugging it out with big asset managers and smaller, innovative players.
So the news that UK giant Legal & General Investment Management (LGIM) has finally entered the mainstream market – with a range of “core” main-market index trackers – didn’t make front-page news.
LGIM’s new range prompted comment because its index trackers operate a negative screen: they exclude certain types of stocks. This means the index the fund is tracking excludes stocks on a “future world protection” list. The fund won’t include some notorious arms manufacturers, coal businesses and outfits that contravene the UN Global Compact (a non-binding agreement to encourage firms to adopt sustainable and socially responsible practices).
Costs dropping like a stone
But what I found more interesting was the pricing of LGIM’s offering. The six new ETFs are all priced at between 0.05% (for the UK and Europe excluding UK) and 0.1% (for the rest of the world, including an Asia Pacific tracker and a US tracker). They compare favourably with products from iShares and Vanguard. One of the latter’s biggest tracker funds is based on the FTSE 100 index and costs just 0.06%.
In fact, the cost of ETFs is dropping like a stone. Over in the US, big issuers such as Fidelity have been shouting about their zero-fee ETFs, while in Europe the battle seems to be about getting the pricing of mainstream trackers below 0.1%. All of this raises a tempting prospect. Investors should now be able to put together a portfolio of main-market index trackers, including ones that invest in the US, the UK, Europe, Japan and Asia Pacific (ex-Japan), for an average price of less than 0.1%.
At this price, robo-advisers and digital wealth managers face an awkward question: why invest in their products (for charges of around 0.50%) if you can do it yourself for under 0.1%? You should also be able to stuff this portfolio full of ETFs by different issuers, so you won’t be entirely dependent on iShares or Vanguard. LGIM’s intervention raises the stakes in this price war – and throws in a simple exclusion screen for next to nothing.
The other key issue raised by the LGIM launch is that, in future, you’ll need to look much more closely at the index your fund is tracking. LGIM is using a fairly unusual index series that tracks the main asset classes but doesn’t use a well-known index provider such as MSCI, FTSE or S&P Dow Jones. So, for instance, with the UK version of the range you’re not tracking the FTSE 100 or FTSE All-Share. Instead, it’s an index that looks and feels like the FTSE, but which is managed by a small index provider called Solactive.
Why pay for the index brand?
LGIM has done this because mainstream index developers charge a substantial amount of money to license their brands. These global index firms are highly profitable, boasting sky-high operating margins. If you’re only charging a handful of basis points for running an ETF, why hand over some or most of those basis points to a big brand?
In effect, our money is increasingly being used to pay for big brand names to maintain their oligopoly. This model is ripe for disruption, and the answer might be self-indexing (where the issuer runs their own index) or bringing in smaller index firms who work with the issuer (the LGIM model). As these alternative models proliferate, investors should expect the fees charged on big, main-market ETFs to start to tumble below 0.05%.
Activist watch
Nestlé is facing the accusation that its corporate governance set-up is hampering growth, says Leila Abboud in the Financial Times. Corporate governance practice in the UK and US “typically frowns upon” chief executives becoming board chairmen and overseeing their successors, which has been the situation at Nestlé for decades. Activist investor Third Point, which owns 1.25% of the group, has now suggested that chairman Paul Bulcke, Nestle’s chief executive from 2008 to 2016, “seems too comfortable with the status quo”, which risks “holding up the pace and magnitude of change”.
Short positions… passive investing has gone too far
• Index-fund assets invested in stocks now total some $4.6trn, while total index-fund assets have surpassed $6trn (these are funds that merely track the market rather than trying to beat it). But what happens when the index fund becomes too successful for its own good, asks Jack Bogle, creator of the first index fund and founder of passive-investing giant Vanguard, in The Wall Street Journal. If historical trends continue, a handful of giant institutional investors will one day hold voting control of every large US corporation.
Public policy cannot ignore this growing dominance, and must consider its impact on the financial markets, corporate governance, and regulation, says Bogle. “I do not believe that such concentration is in the national interest.” Tentative solutions to the problem, he reckons, include more competition from new entrants to the index field, and forcing giant index funds to spin off their assets into separately managed entities.
• If you’re a fan of star fund manager Terry Smith’s no-nonsense investment style, then arguably a possible opportunity has opened up in his Fundsmith Emerging Equities Trust, says Gavin Lumsden on Investment Trust Insider. On Monday the shares were trading at 3% below their net asset value, which is “unusual” for a £308m trust that has traded at a premium for much of the past four years.
The discount has emerged after the trust’s share price failed to keep pace with a sharp recovery in the portfolio following the market downturn in October. Smith has clearly not delivered in emerging markets in the way he has in developed markets with his flagship fund, says Lumsden. “I would urge anyone thinking of piling in to consider its underperformance of the past three years” first.