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Smart Beta: Kevin Smith of Margetts Wealth Management

Smart Beta: Kevin Smith of Margetts Wealth Management

Margetts Wealth Management’s Kevin Smith uses index trackers to gain exposure to US equities and the UK stock market for diversification and additional return.

Birmingham-based Margetts Wealth Management tends to invest actively, but uses trackers for exposure to US equities and, at times, the UK stock market.

Margetts managing director Kevin Smith said: ‘We use both active and passive strategies, but primarily active funds as we feel managers who stick to their investment fundamentals can add real value.’

‘Active managers are where the real value can be added,’ he said. ‘We may look to passive funds when we are trying to limit the risk of significant underperformance versus a specific index or provide diversification of styles across active and passive approaches.

‘Trackers are mainly used for US exposure, where active management has struggled to provide any additional return. The only other area where trackers are considered at present is the UK, to provide some diversification of styles across the two approaches.’

Full replication costs

Smith uses the Royal London US Tracker fund. Managed by Symon Bradford, it aims to achieve the capital return of the FTSE World US index by investing primarily in the securities that make up that index.

However, Bradford said full replication might result in too much costly trading, which could outweigh the benefit of perfect replication, so he also used some sampling, and a small degree of active management, to avoid these potential costs associated with full replication.

The fund has a low annual management charge (AMC) of 0.20%, with additional costs of 0.04%, giving a total expense ratio (TER) of 0.24%

‘It is not exchange traded, which reduces transaction costs,’ said Smith.

‘Exchange traded funds have to be purchased on exchanges, which give rise to additional transaction costs and underlying spreads. As intra-day dealing is not required by our clients, who invest for the longer term, daily priced collective investment structures are preferred.

'There is also very cautious stock lending within this fund, which reduces risk.’

Other trackers

Margetts also likes the Vanguard FTSE UK Equity Income Index and Vanguard US Equity Index. Both have an AMC of 0.20%, which includes all other costs. Vanguard FTSE UK Equity Income tracks a custom-built FTSE benchmark on a full replication basis. The index selects the highest yielding companies within the FTSE 350 with a 5% stock limit.

Meanwhile, Vanguard US Equity Index fund tracks the S&P Total Market index, using a combination of full replication and optimisation with a 90/10 ratio.

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