Trackers offered by Dresdner RCM, Gartmore and HSBC have received frAAA ratings from Standard & Po...
Trackers offered by Dresdner RCM, Gartmore and HSBC have received frAAA ratings from Standard & Poor's Fund Services, in its first ever rating of index tracking funds.
Other funds which received frAAA status included M&G Index Tracker, Royal & SunAlliance's FTSE All Share Tracker, and Scottish Widows UK Index Trust.
The Standard & Poor's report has included assessments on 20 funds tracking either the FTSE 100, 250, 350 or All Share indices. Apart from the research group's normal qualitative factors in assessing each company, its investment team and process, analysts also identified three quantitative factors.
These included looking at the fund's tracking error, how closely in terms of capital only and gross of fees, each fund tracked its benchmark index. Analysts also examined the total expense ratio of each fund and its bid/offer price spread.
Other factors considered in the report included the management approach to the fund, whether the group seeks full or partial replication of the chosen index, the use of stock lending and futures as well as the practice for dealing with changes in the constituents of the index tracked.
Guy Boden, associate director at S& P, said: "Groups are able to obtain a higher fr rating by either tracking the benchmark more closely, reducing their annual management fees or cutting their initial charge. An frAAA-rated fund has a low tracking error, modest annual fees and either a very low or nil initial charge."
Barclays Global Investors, one of the larger UK index tracking houses, received ratings for two of its funds. The b2 market Track 350 Fund achieved frAA status while Barclays FTSE 100 fund achieved an frA rating. The FTSE 100 fund was kept at the frA band due to its higher than average total expense ratio and one of the highest spreads in the review, at 6%.
Also known for its ability in trackers, Legal & General received an frAA rating on its UK Index trust. Despite the fund's low tracking error of 0.4% combined with its relatively low expense ratio, its high exit fee of 3% if the fund is sold within the first year, has prevented the fund from an frAAA rating.
In the report Boden noted that UK retail investors appear to favour FTSE All Share funds over those that track the FTSE 100 because of the broader spread of holdings and reduced concentration of assets in the top 10 holdings.
Although many managers claim it is easier to manage a FTSE 100 fund for the retail investor, the funds are vulnerable to changes in the publication of the quarterly index reviews as seen in March and June this year, Boden said.
When the index changes, managers of FTSE 100 funds must sell the stocks moving out and buy those moving in, whereas a FTSE All Share tracker will do little, already holding the new entrants. The high weighting of Vodafone in the FTSE 100 and the All Share has also affected the way in which trackers have been managed, he said.
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