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R Squared - closet trackers?

Closed-end funds and OEICs
EssDeeAitch
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R Squared - closet trackers?

#230940

Postby EssDeeAitch » June 20th, 2019, 10:44 am

I am looking at some IT's and for a particular trust, Edinburgh Dragon I notice that over 3 and 5 years, the R-Squared is 0.92 / 0.91 against the MSCI AC Asia ex Japan Index.

Does being this close make it a closet tracker and is there any source that shows which trackers benchmark against a specific index?

Also, any recommendation for research into Asia IT's would be appreciated

monabri
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Re: R Squared - closet trackers?

#231069

Postby monabri » June 20th, 2019, 9:45 pm

Maybe there is another way to address this?

(1) select the candidate IT for investigation - perhaps confined to say a choice of half a dozen?

(2) If one plots the relevent indice and compares it to the fund in question then one can assess if the fund is merely tracking the indice or is it outperfoming it over a "reasonable time period"?

https://markets.ft.com/data/indices/tea ... 000PUS:MSI

[Graphs generated by monabri using the free tools available from the Financial Times - link to the FT above]

https://postimg.cc/ZCvmW60b

(sorry - this board won't allow embedding of a graph - hence the link)

The R-squared calculation of 90% would suggest it is a tracker but the evidence (graph) suggest otherwise. It did appear to be tracking the MSCI index until ~Jan 16, then it started to outperform (one would have to investigate if there was a reason for this).

Good luck with this !! (you can bet some of the candidates pick an obscure choice of index and the comparison is not easy - example, closer to home, Cit of London - index UK Growth&Inc Sec Wgt NAV ).

The other source of comparison is the HL website where you can select an "Equity" (such as EFM- Edinburgh Dragon) and then choose from an index - but then of the 2500+ indices, the index benchmark might be missing. :(

https://www.hl.co.uk/funds/fund-discoun ... ion/charts

forrado
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Re: R Squared - closet trackers?

#231072

Postby forrado » June 20th, 2019, 9:52 pm

Personally, I dislike the terms closest tracker and index hugger. By way of common usage the terminology has come to imply a pejorative meaning. Instead, I prefer to look at it is terms of correlation to an appropriate index.

You ask if there is any source that shows which trackers benchmark against a specific index?

For my own “correlation” purposes I use the services of Trustnet, and in particular the funds comparison tool.

The Trustnet funds comparison tool can be used without the need to log-in, however, it is advisable to be a registered Trustnet user for ease of future access to the comparison tool.

To begin with one will notice a basket logo located in the top right-hand corner of the page. The object of the exercise is to place a selected fund factsheet of any of those hosted on the Trustnent site into that basket. This is done by clicking on the corresponding basket logo featured on each fund factsheet page. If successful, a number will indicate alongside the basket logo how many factsheets have been added.

To run the fund comparison tool >>> click on the basket logo in the top right-hand corner of the page >>> select the “Examine these funds using FE Trustnet tools” option >>> run the “Comparison Report”. The tool will run and generate a comparison report on a selected maximum of 4 factsheets if there are 5 or more stored in the ‘basket’.

Scroll down to the very bottom of the displayed report and one will see a ‘Correlation’ report.

Unfortunately, the tool will not allow comparison against a chosen index. The way to get round this is to find an open-ended fund on Trustnet that tracks such a chosen index and use that as a substitute.

In terms of tracking the MSCI AC Asia ex Japan Index then the chosen substitute is this Vanguard fund at …

https://www.trustnet.com/factsheets/o/fpe1/vanguard-pacific-ex-japan-stock-index-acc-gbp

When I run the Trustnet comparison report using the Vanguard fund v. the Ediburgh Dragon Trust at …

https://www.trustnet.com/factsheets/t/eb02/edinburgh-dragon-trust-plc-ord-20p

The current correlation between the two funds is - if Vanguard is 1:00 then Edinburgh Dragon is 0.73. Which suggests to me that there is enough separation between the two funds to indicate that Edinburgh Dragon will deviate from that of the Vanguard index fund.

monabri
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Re: R Squared - closet trackers?

#231081

Postby monabri » June 21st, 2019, 12:28 am

I guess this needs more investigation (*) as the HL site says that returns on EFM beat the index but the Trustnet site suggest to the contrary ( assuming VG is tracking the MSCI ex Jap index).


Forrado said
"The current correlation between the two funds is - if Vanguard is 1:00 then Edinburgh Dragon is 0.73. Which suggests to me that there is enough separation between the two funds to indicate that Edinburgh Dragon will deviate from that of the Vanguard index fund."

But they don't deviate , over a reasonable timeframe ( clicking on the graph presented on the trustnet website allows more plotting options)

Name Edbrgh Drgn Tst plc O20p Vanguard Pac XJ Stk Idx
1 year Performance 10.20% 11.25%
3 year Performance 65.21% 61.27%
5 year Performance 59.67% 61.77%

The correlation states that they moved in the same direction 73% of the time...but maybe not by the same amount.....and after 5 years they both end up at a gain ~60%. So if Vanguard is a tracker, then total return for EFM is near as spit the same.

Edit: at least a return of just under 60% figure is what is reported on both HL and Trustnet ...


(* it's a bit late on for more investigation).

DavidM13
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Re: R Squared - closet trackers?

#231091

Postby DavidM13 » June 21st, 2019, 6:38 am


monabri
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Re: R Squared - closet trackers?

#231168

Postby monabri » June 21st, 2019, 12:11 pm

The R Squared value of 0.9 is high suggesting that the fund tracks the MSCI index in question.

Then we have the MSCI index performance " by proxy" in the form of the Vanguard fund. This indicates that after 5 years the EFM fund has achieved very similar returns of 60%.

So, can we conclude that EFM is behaving as a expensive tracker because it appears to be the case?

My concern is over the data from the actual MSCI index from the Financial Times website...but that might be incorrect or am I simply misinterpreting the data?

EssDeeAitch
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Re: R Squared - closet trackers?

#231214

Postby EssDeeAitch » June 21st, 2019, 2:13 pm

Many thanks for responding all; I have had a look at all the suggestions made and feel a lot more comfortable working out whats what.


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