Fund Managers at Vanguard answer five questions from our investment team about their fund and its performance, introducing the fund to investors.

Guest Editor
Posted in Investing, Fund Manager Q&A on 27.01.17

Q1: What is the underlying strategy of this Fund?

This is a long-only, broadly diversified portfolio that seeks significant exposure to the value factor, which has been shown to provide long-term out performance. The fund invests in equity securities included in the FTSE Developed All Cap Index and the Russell 3000 Index.

Vanguard’s Quantitative Equity Group (QEG) uses a proprietary quantitative model to evaluate the equity investment universe, which is composed of large, mid and small cap equity securities from developed markets across the world, and includes a diverse representation of companies, market sectors and industry groups.

The model then implements a rules-based active approach that aims to assess the factor exposures of securities, favouring equity securities which, when compared to other securities in the investment universe, have lower prices relative to their fundamental measures of value (such measures include price-to-book, forward earnings to price and operating cash flow to price ratios).

Q2: What are the most important investment exposures for this fund?

The Vanguard Global Value Factor UCITS ETF is designed to be a fully invested, global equity portfolio that targets premiums associated with low-value stocks, which are stocks that look inexpensive compared with the company’s fundamentals (such measures include price-to-book, forward earnings to price and operating cash flow to price ratios). The current geographical and sector breakdowns are as follows (as at 30 November 2016):

Top geographical breakdown: United States:58.6%; Japan: 9.3%; United Kingdom: 6.9%; Korea: 4.2%; France: 3.4%; Canada: 3.1%; Germany: 2.6%; Italy: 2.3%; Spain: 1.7%; Hong Kong: 1.4%

Sector breakdown: Financials: 41.0%; Consumer services: 12.2%; Industrials: 12.0%; Consumer goods: 8.8%; Utilities: 6.7%; Healthcare: 5.5%; Basic materials: 5.4%; Technology: 4.1%; Oil & Gas: 2.7%; Telecommunications: 1.6%

Q3: What are the long-term risks of the strategy?

As the strategy is not benchmark driven the tracking error is expected to be wider than the market. Based on long-term historical simulations, the ex-ante tracking error was ~8%. Turnover will be relatively high, with back tested data showing rates of ~100%.

Although the value factor has been shown to provide long-term out performance, past performance is not a guide to the future and there could be prolonged periods when value under performs.

Q4: In what conditions/environment should we see strong performance from the Fund?

Relative to the benchmark, the fund is likely to perform well when value stocks are in favour.

Q5: What benefit can an investor get from investing in this type of Fund over others?

Investors access factors implicitly within their portfolios; however, an explicit focus on factors offers potential benefits in terms of:

Transparency, by deliberately focusing on factor exposures in portfolio construction, investors may gain a clearer understanding of the drivers of portfolio returns.

Control, a portfolio may be exposed to factors through a variety of investments. For example, some fundamentally weighted indexes provide a value factor exposure. But due to the index’s periodic rebalancing, this exposure can vary over time. In contrast, an investment that explicitly targets the value factor may provide a more consistent exposure. It’s important for investors to consider whether to delegate factor exposure to a manager or index or to maintain direct control over factors.

Cost, in some cases, investors may pay high fees to obtain factor exposures that are available more cost-effectively by allocating directly to a factor.

Guest Editor
Posted in Investing, Fund Manager Q&A on 27.01.17

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