Asset Manager Overview
iShares is one of the world's largest managers of passive strategies, managing both ETFs and open-ended passive funds. iShares is part of the U.S. asset manager BlackRock, having been acquired in 2009 as part of BlackRock's acquisition of Barclays Global Investors. BlackRock was a pioneer of passive investment strategies, having established its first passive fund in 1971.
Fund Manager/Team Overview
The equity and fixed income funds at iShares are managed by two separate teams, each with expertise in their respective asset classes. The equity team has been managing passive equity funds since 1971 and has offices across the globe to help portfolio managers obtain local market knowledge and work within similar time zones. Additionally, the portfolio managers have access to BlackRock's market-leading Aladdin system, which assists them with risk analytics and trading.
Investment Philosophy & Process Overview
The fund invests in physical securities and follows a full replication approach. A full replication approach, as the name suggests, involves purchasing all the securities in the same weights as they are represented in the index. In principle, this sounds very straightforward, but there are subtle differences in the way corporate actions, such as dividends and changes to the index composition, are handled. The impact of these differences on performance is small, and this is captured in our analysis of the fund's returns.
This approach, gross of fees, can provide the highest degree of accuracy in tracking the fund's benchmark. However, it can also involve higher transaction costs compared to other methods and is therefore more suitable for liquid markets.
The fund is priced and traded at 12:00pm. If the underlying market is closed, a fair pricing adjustment may be applied to align the fund with the expected price of the tracked index. Most of the time, fair value adjustments have no material impact on the fund's pricing operations. However, occasionally, when a market is closed, an event may occur that would materially impact prices. This was the case in February 2022 when Russia's invasion of Ukraine led to the suspension of all Russian stocks to international investors. Therefore, a fair price adjustment was applied by valuing all Russian securities at zero.
The fund is priced at a different time than the benchmark, which can slightly increase the tracking error and lead to notable differences in performance if there are market moves between when the fund and the benchmark are priced. This difference should then be eradicated the following day.
The fund can undertake stock lending activities. Stock lending involves lending securities to another party and receiving income in return. Trades are typically conducted with another entity, usually an investment bank, which introduces counterparty risk—the risk that the other party in the deal may renege on their agreement and fail to repay the stock in full.
iShares has strong risk controls in place to protect the fund in the event of a default on any stock lent. This includes strict over-collateralization requirements as well as third-party indemnification agreements. We believe that these measures, among others, make the risk of loss to fund holders relating to stock lending very remote in this fund. The fund benefits from the income generated from stock lending, with at least 62.5% of the gross income returned to the fund.
We would highlight that iShares provide investors with the lowest proportion of revenue from stock lending and tends to have the highest amount on loan compared to peers. However, the returns nets of fees from stock lending tend to be the same as peers.
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