Fidelity Index World: June 2021 fund update

Alexander Watkins | Thu 10 June 2021

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• The fund is run by a highly experienced team of passive fund specialists
• We think this is an excellent option for accessing broad global markets
• The fund is a simple, low-cost way to track the MSCI World Index
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Fidelity Index World fund invests across a broad range of developed countries like the US, Japan and European countries including the UK. It offers exposure to large and medium sized companies such as household names Apple, Microsoft and Amazon.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a great, low-cost starting point for a portfolio aiming to deliver long term growth. It could be a good addition to a more UK-focused portfolio, or a simple way to form the equity foundation of a portfolio.

Manager

Fidelity launched this fund in December 2012 and appointed Geode Capital Management – a specialist provider of index trackers – to manage the investments. Geode began in 2001 as a division of US-based Fidelity Investments and became an independent, private company in 2003.

It has become a large company, with around $800bn invested and has a well-resourced team of experienced investment professionals. Portfolio managers have on average over two decades of experience. Given their team-based approach, there are no named managers on any passive funds.

While Geode manages the investments, Fidelity International Limited is ultimately responsible for the fund. They handle the sales, marketing, compliance and regulations functions. While not the usual arrangement for passive providers, we think Geode’s scale and passive investment specialism combined with Fidelity’s operations and commercial expertise is a good partnership.

Process

The fund aims to replicate the MSCI world index by buying all the 1650+ constituent companies and in the same proportion. This is known as full replication. Sometimes the smallest positions aren’t included for efficiency and cost-savings. The biggest portions of the portfolio are currently the information technology, financial and health care sectors.

US stock markets dwarf others around the world and tend to form a large part of global portfolios. The Fidelity Index World fund is no different, with American companies accounting for around two-thirds of the fund. Therefore, performance is heavily tied to the US markets.

The fund has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by Geode and Fidelity on a daily and monthly basis to ensure the fund is closely following the index. They also try to make up for the things that detract from performance such as dealing commissions, taxes and the cost of running the fund.

The team may also use derivatives known as ‘futures’ to help manage the portfolio more efficiently. Derivatives usually make up a small proportion of the fund and can help keep tracking error lower, though they can add risk if used.

Culture

Active management remains at the core of Fidelity’s investment philosophy, but they recognise investors want to include passive strategies as part of their portfolios. They’re a large asset manager and now provide a range of passive products in the UK, and globally, tracking popular indices.

The size of the company and the funds themselves means they have the scale to run them efficiently and cost-effectively. As a privately-owned business, Fidelity is able to maintain a long-term view without short-term shareholder demands, which we think is a positive for any investment business.

Certain senior staff and investment professionals participate in an Equity Ownership Plan that aligns participants with Geode’s long-term goals and enables them to share in the success of the company.

As a shareholder, Geode also engages in direct dialogue with companies they invest in, to improve the company’s governance and environmental outlook. We view this active ownership as a positive approach to addressing stewardship issues.

Cost

The fund has an ongoing annual fund charge of 0.12%. We believe this is good value when compared with other global passive funds in this sector. Our platform charge of up to 0.45% per annum also applies.

Performance

Since launch in December 2012, the Fidelity Index World fund’s tracked its benchmark closely. As is typical of index tracker funds, it’s fallen behind the benchmark over the long term because of the costs involved. However, this difference has been reduced due to the strategies used by the team.

Performance figures can sometimes be distorted by the time a fund is valued versus its benchmark. For example, most UK funds, such as Fidelity Index World, value at midday whereas its benchmarks are priced at market close. This can lead to what appears to be a greater tracking error. It’s not an indicator of poor management though, just a statistical mismatch.

To counteract this issue, Fidelity produce data that has been hypothetically re-priced using company share prices that make up the index at market close. These can be found on their factsheet and can give a more accurate display of the fund’s tracking error.

Given Geode's size, experience and expertise running index tracker funds, we expect the fund to continue to track the benchmark well in future, though there are no guarantees.

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2021.

Find out more about Fidelity Index World, including charges

Fidelity Index World Key investor information