This fund provides exposure to many of the largest publicly-traded companies in the developed world. It is best employed as a core building block for investors that want to get a large chunk of their equity exposure within one fund, rather than taking a more granular approach to building a geographically-balanced equity portfolio.
An important thing to keep in mind, however, is that although the underlying MSCI World Index has very broad geographical scope, its exposure is all from developed markets. This fund should ideally be paired with some form of emerging markets exposure for a more balanced mix. In the last 10 years the MSCI World and the MSCI Emerging Markets Index have shown a correlation to one another of 83%, although over the last five years the correlation has crept up to 89%.
The fund pays out dividends from the underlying stocks on a quarterly basis, currently at an annual yield level of 1.91%. So it may suit an investor seeking moderate levels of income, although the tax implications of such distributions for each investor would have to be taken into consideration.
More than three years after the nadir of the global financial crisis, the world is still reeling from its effects. Unlike scores of prior crises, this one was truly global in nature, dragging markets down in unison. Recovery has been largely anaemic, and in January the World Bank cut its forecast for global growth in 2013 from 3.0% to just 2.4%.
To combat the worldwide economic slowdown and subsequent sovereign debt crisis in Europe, central banks throughout the developed world have been enacting a series of extremely accommodative monetary policy actions, from lowering short term interest rates to near zero, to “quantitative easing” bond purchases, and long term refinancing operations. Central bankers have been coordinated in signalling that they will go to great lengths to ensure ample liquidity in the system. This has led to what some view as a “Bernanke Put”, or “Draghi Put”— so-named after the respective heads of the U.S. and European central banks— whereby monetary action can be relied on to come to the rescue of stock investors when markets falter.
But fiscal policy has not been doing its part. Governments around the developed world have swung aggressively into austerity mode through efforts to reduce their spending. In the near term this will likely be a significant drag on economic growth. The combination of government and consumer deleveraging has been taking its toll on aggregate demand, which is adding to the ranks of the unemployed, which weighs further on demand, in a vicious cycle.
The U.S. has managed to avoid the “fiscal cliff” scenario that would have automatically triggered potentially damaging spending cuts and tax rises, but is not in the clear yet as an agreement on increasing the debt ceiling still needs to be made by Congress to avoid the country defaulting on its debt. A prior round of debt ceiling brinksmanship in 2011 led to a ratings downgrade of U.S. government debt by Standard & Poor’s, accompanied by a sharp sell-off in equities.
The U.S. economy continued to show lacklustre progress towards recovery. Its unemployment rate, while off its highs, is still stubbornly lofty at 7.8%, and a portion of the decline seems due to some workers giving up on the job search and therefore falling out of the official calculation. GDP advanced at an annualised pace of 3.1% in the third quarter of 2012. One recent bright spot is that the long-anticipated recovery in U.S. housing seems to be taking hold. The S&P/Case Shiller Home Price Index 20-city composite was up 4.3% in the 12 months through October, although it is still down roughly 30% from its 2006 peak.
A potential catalyst for global stocks would be a tactical asset shift away from bonds, which increasingly resemble a one-way bet as interest rates have nowhere to go but up.
Over the past 10 years, the MSCI World Index has produced an annualised gain of 6.09%, vastly inferior to the 14.90% tally for the MSCI Emerging Markets.
The price-to-earnings ratio of the MSCI World was 13.8 at the end of December 2012, compared to an average level of 14.7 since 2004, and a low of 8.4 in February 2009.
The MSCI World Index is a free-float market capitalisation-weighted index covering 24 developed countries all over the world. It currently has 1,610 mid- and large-cap constituents and covers approximately 85% of the total free float of the component markets.
The index is reviewed quarterly, with size cut-offs recalculated semi-annually. The universe is initially screened for liquidity, as measured by the value and frequency of trading. The median constituent has a market capitalisation of $7.1 billion.
The index is heavily tilted towards the U.S., whose weighting of 52.5% at the end of December was more than five times larger than the next highest representatives, the United Kingdom and Japan, with respective weights of 9.6% and 8.5%.
On a sector basis the index is broadly diversified. The top weight is Financials, which made up 20.3% of the total at the end of December, followed by Information Technology at 11.9%. Consumer Discretionary, Industrials, Consumer Staples, Healthcare, and Energy all had weights between 10.2% and 11.2%.
There is very little portfolio concentration, with just 9.9% of the index within its top 10 names. The top individual position is Apple, at a 1.95% weight.
The fund uses an optimised sampling technique to try to capture the performance of its benchmark, owning a physical basket of securities designed to match the characteristics of the underlying index but not necessarily the exact stocks in the exact weights. Compared to the index’s 1,610 constituents, the fund held 1,228 names at the end of December 2012. In certain circumstances the fund may also use derivatives to achieve its objectives. The fund is Irish-domiciled and has the U.S. dollar as its base currency. The fund had total assets of $5.2 billion at the time of writing.
Cash received as dividends from the underlying stocks is held by the fund until distributions are made to fund unitholders on a quarterly basis. This can create a cash drag on the portfolio, causing it to underperform its benchmark in rising markets, and outperform in declining markets. Given the annual yield level of 1.91%, the cash build up between quarterly distributions is unlikely to amount to much.
In the 12 months through the end of September 2012, an average of 4.63% of the portfolio was out on loan, to a maximum of 8.29%, and in total the programme added 5 basis points of net return to the fund. BlackRock, iShares’ parent company and lending agent, claims to keep 40% of gross securities lending revenue for itself, out of which amount it will pay the associated costs of the activity, and passes 60% of the revenue to the fund. BlackRock has recently reviewed its lending programme and introduced a 50% cap on the amount of assets that its iShares funds can lend out. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary from 102.5% to 112% of the value of the securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower fails to return, but it will not cover losses incurred on the reinvestment of cash collateral.
The fund has a total expense ratio (TER) of 0.50%, which is high relative to other funds offering similar exposure.
Other costs potentially borne by the unitholder but not included in the total expense ratio include bid-ask spreads on the ETF, securities lending fees, transaction costs on the infrequent occasions when the underlying holdings change, and brokerage fees when buy and sell orders are placed for ETF shares. Income generated from securities lending could potentially recoup some of the total costs.
For broad exposure to global developed markets there are plenty of choices out there. Providers offering ETFs that track the MSCI World Index include UBS, Source, Lyxor, db x-trackers, HSBC, CS, ComStage, and Amundi. Of these, the largest is the iShares fund. The fund with the lowest TER is the HSBC fund, with a TER of 35 basis points.