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The trust, run by State Street Global Advisors (SSgA), tracks the FTSE GWA index which comprises companies with strong fundamental financial data such as earnings, cash flow and book value. The index is a product created by the UK group Global Wealth Allocations and FTSE and covers 2,000 listed companies across 23 developed markets.
The trust set up by SSgA is the first to track the index and is also the first fund product of its kind to be launched in the Asia region. Called the SSgA Wealth Weighted Global Equities Index Trust, it has been seeded by two institutional investors to the tune of A$340 million ($255 million).
Australia was chosen for the launch, says Jonathan Shead, a product engineer for SSgA in Sydney, because of client demand for new value-based funds. ôThere are two natural candidates for this kind of fund: long-term investors like insurance companies and endowments that arenÆt monitored on monthly performance and clients that want to diversify their portfolios with different strategies.ö
Shead says investors who lose their cool when a fund strays too far from the main index arenÆt likely to buy the strategy. ôIf you build a portfolio based on cash flow and earnings then this approach deliberately steers you away from what the stockmarket is doing when prices are expensive,ö he says. ôThe fund is likely to underperform in the lead up to a bubble like the Japanese bubble of the 1980s or the tech bubble of the late-1990s. So those investors that are sensitive to peer comparisons probably wonÆt be interested in this strategy.ö
Scenario testing using real data revealed the fund would underperform the stockmarket by about 5%-8% in the year leading up to a bubble like the one that burst in the late-1990s, and then outperform by 10%-2-% in the immediate aftermath. ôWe ran three or four simulations which showed that, in the long-term, the index does better than the broader market by about 1% or 2% a year.ö
The outpeformance margin would be better if returns werenÆt eroded by the high transaction costs inherent in the strategy. Since the FTSE GWA index comprises companies with a below-average price-to-earnings, the weighting of stocks in the index changes along with their share price. ôWhen a price moves you have to buy in or sell out which leads to greater transaction costs,ö says Shead, who says the expense ratio for the Australian trust will be 30bp.
Shead expects the fund to co-exist peacefully with market cap indices. ôMarket cap indexing is still pre-eminent and we donÆt expect this to change,ö he says. ôFundamental investingreally just provides investors with greater natural diversification than traditional 'value' indices or active value management.ö
SSgA wonÆt say how large it expects the Australian trust to grow. ôOur discussions with institutional investors have been very positive. We are also talking to investors in Asia about exploring similar products there.ö
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