Avoiding overpriced upstarts with smart beta
Magellan’s Hamish Douglass considers Uber and Tesla to be bad investments but you don’t need to pay active fees to avoid those stocks.
Uber may not be the only one at risk
Recent comments from Magellan Financial Group CEO and CIO Hamish Douglass that Uber is "constantly losing money and it's capital-raising strategy is a Ponzi scheme" and that "the probability of Tesla surviving in the long term [is] actually pretty low as well," attracted widespread media attention.
In reporting these comments, one writer labelled Douglass a "disruption disciple."
The industry in which Douglass has built his reputation - active funds management - is also under pressure from disruption - by smart beta.
Smart Beta: The disruptive force
In January 2016, the CFA Institute's Financial Analysts Journal published an article titled ‘The Asset Manager's Dilemma: How Smart Beta is Disrupting the Investment Management Industry.' According to its authors "the ultimate goal of disruptive innovation in investment management is to deliver superior investment outcomes ... In the case of smart beta, the investment outcome is higher returns and/or lower risk after fees and costs."
VanEck Vectors MSCI World ex Australia Quality ETF (ASX code: QUAL) is a smart beta ETF that, like Magellan's fund, does not hold Uber or Tesla. But QUAL does this for a fraction of the cost.
Compared to some of the biggest global equities funds in Australia QUAL is a standout performer.
Performance to 30 April 2017
Source: Morningstar Direct, as at 30 April 2017. Results are calculated to the last business day of the month and assume immediate reinvestment of all dividends and exclude brokerage or entry costs associated with investing in the funds. Past performance is not a reliable indicator of future performance.
QUAL tracks the performance of the MSCI World ex Australia Quality Index, which includes companies with high quality scores based on three fundamental factors:
- high return on equity;
- stable year on year earnings growth; and
- low financial leverage.
So QUAL avoids the much higher-risk companies like Uber and Tesla, with their overstretched valuations.
MSCI's Quality approach has demonstrated significant outperformance during market downturns with outperformance and less volatility over the long-term relative to the market benchmark index, the MSCI World ex Australia Index.
Source: Morningstar Direct, VanEck. 30 November 1994 – 30 April 2017
IMPORTANT NOTICE:. This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity and issuer of the VanEck Vectors MSCI World ex Australia Quality ETF (‘Fund’). Nothing in this content is a solicitation to buy or an offer to sell shares of any investment in any jurisdiction including where the offer or solicitation would be unlawful under the securities laws of such jurisdiction. This is general information only and not financial advice. It is intended for use by financial services professionals only. This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 38 37. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance, or any particular rate of return from the Fund.
QUAL is indexed to a MSCI index. QUAL is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to QUAL or the MSCI Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and QUAL.
QUAL invests in international markets. An investment in QUAL has specific and heightened risks that are in addition to the typical risks associated with investing in the Australian market. These include currency risks from foreign exchange fluctuations, ASX trading time differences and changes in foreign laws and regulations including taxation.