UK gilts are once again the asset class with the highest percentage of 5 FE Passive Crowns but the proportion of funds achieving the accolade has fallen in the data provider's latest rebalance of the passive sector.
While nearly half (48%) of UK gilts funds achieved the maximum five FE Passive Crown Rating in July, this has fallen to 38% in the latest rebalance.
However, UK gilts fund maintained their position as the top of the sector charts, followed by property, North American equities and emerging markets equities funds, which saw vehicles achieving the top 5 Crown rating reach 30%, 29% and 29% respectively.
Meanwhile, not a single sterling corporate bond bund achieved the top rating for the third consecutive rebalance in a row, which FE portfolio manager Oliver Clarke-Williams attributed to the difficulty in accurately tracking the asset class.
He added: "Not only are they often made up of hundreds of securities but because they are traded over the counter rather than on an exchange like equities, buying and selling is much more difficult."
The ratings looked at 292 passive funds, 22% of which achieved a top rating, and are designed to check how well a passive fund is doing its job at tracking its benchmark over three years.
Funds are ranked objectively and transparently using a quantitative methodology in which funds are ranked between one and five FE Passive Crowns.
Clarke-Williams said: "It is not surprising that UK Gilts have topped the charts as it is a highly liquid asset class and therefore easy to replicate.
"Likewise, passive North American equity funds tend to track their benchmarks well due to the size and efficiency of the market.
"More surprising is that there are so many five FE Passive Crown rated Property and Emerging Markets funds as these are generally seen as quite difficult markets to replicate."
At a group level BlackRock's iShares again retained the top spot with 25 five FE Passive Crown rated funds, up from 23 in July, while Vanguard retained second place with ten, down 11 in the previous rebalance.
Newly rated funds
The latest rebalance also saw six funds rated for the first time after meeting their three-year performance record, with one - Credit Suisse CSIF Equity EMUXtrackers - achieving a five FE Passive Crown Rating at the first time of asking.
Clarke-Williams said: "Too much of the active passive debate has been focused on the ability of active managers, whilst passive funds have been considered more or less equal.
"The dispersion in quality among passive funds is almost as great as it is among active funds and poor tracking and high charges can cause major underperformance that most people would not consider possible.
"It is important to put as much effort into identifying a good passive fund, as a poor choice can be just as destructive to wealth."
FE uses three components when calculating the FE Passive Crown Rating. Tracking difference is the most influential component, followed by tracking error and fund size.
• Tracking difference, which calculates the annualised relative performance of a fund compared to the underlying index. For example, if a fund returns 10 per cent over 12 months and an index returns 12 per cent, the tracking difference is two per cent.
• Tracking error, which calculates the volatility of the difference of the returns between a fund and its benchmark. For example, a fund that perfectly replicates the performance of its underlying index every day over a 12-month period, its tracking error will be zero. However, if a fund deviates from its index on a regular basis it will have a higher tracking error, even if the tracking difference after 12 months is zero.
• Fund size. While this is not typically discussed when comparing tracker funds, FE sees it as important.
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