Investor Insight: A new index is born


Rather like cricket scores and the weather forecast, we get used to hearing about stock markets on a regular basis without paying a lot of attention.
[See the full post at: Investor Insight: A new index is born]


I’d like to ask Robert Davis for the differences between the formulation of this Freedom index and the investment selection process used by his fund when it was originally launched, i.e . when it was still called The Munro Fund. I see that the original web-site for that fund is no longer with us, but I am able to show the following which is taken directly from The Munro Fund’s 2011 annual report:

As is stands, this new index simply looks to have been created to match that process rather than being an original idea. This seems quite typical of smart beta strategies, which appear to crete an index to match a product requirement rather than creating a product to match an index.



Regarding the previous article by thus author, When comparing funds investors need to be wary of what they’re comparing and the comment:

As far as investors are concerned they simply want a level playing field so that they can make simple comparisons of all types of fund in the asset class, be they active, passive or smart beta. While it makes sense to compare index funds to their relevant benchmark it is also helpful to see how they perform against their active competitors. Comparison websites should facilitate this task, not make it difficult.
Trustnet does facilitate this, as the following charts demonstrate (I've included the Munro Fund's original benchmark index, the average performance of the fund's actively-managed sector, and two funds that follow competing passive strategies based upon forecast dividends):

5-year Total Returns

5-year Total Returns


Since the Munro Fund’s inception:

Since the Munro Fund's inception

[The Vanguard fund has not existed for the whole of this time, and is therefore, excluded]



Not a great advert for the VT Maven Smart Dividend fund then.

Could it be because in chasing dividend shares it’s buying in to companies with unsustainably high dividends? Or is there another explanation?

I didn’t realise you can upload charts and images here @Arkwelder - good research effort.



I don’t get how a so called smart tracker’ can be do so badly. I thought the idea of them was to be clever and not just buy all the rubbish normal trackers do. Is an explanation for this?

It would be interesting to know if there is. I’ve read stuff in Investors Chronicle about smart beta, where is supposedly better than normal trackers.

In the factsheet in the link it’s performed very badly in all periods except for the last 6 months where it’s in the top 25% of funds.


Yes, the index does use the same process as the fund, first known as The Munro Fund and then renamed the VT Maven Smart Dividend UK Fund. When the fund was launched we did ask exisiting index providers to create a new one using this process but we were unable to find one that would do it.

Since then we have been fortunate in forming a relationship this year with The Freedom Index Company to create this new index.

There are many reasons for the difference in performance since launch. The most important being the small initial size of under £1m which caused high costs in relative terms and high tracking error as the porfolio could not fully replicate the model/index with only 90 stocks.

Now that the fund is closer to £6m and has 200 stocks those problems are much reduced. Moreover, the large outperformance of mid caps since 2009 impacted relative performance because the fund was unable to fully replicate that section of the market because of these size and cost issues.
On the plus side the fund’s yield of 4.7% is one of the highest and the volatility is one of the lowest in the UK All Co sector.

As has been pointed the relative performance has improved this year and, according to FT Adviser, it has beaten 83% of its competitors over the last 6 months.

The policy at FE Trustnet is not to rank passive funds by position or quartile.


Look that’s a reasonable explanation @robert-davies but I would need to see a longer period of good performance before I would buy in to this.


I can see why people say this. All I would point out is the FCA warning that past performance is no guide to future returns.
A major distortion of the market over the last 5 years has been QE. This programme of cheap money have favoured riskier assets over less risky ones. In practice that means low beta funds, generally those with a bias to value, have under performed more aggressive funds. That will not always be the case as this year is demonstrating.