Fidelity Index World: June 2023 fund update

• 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 features 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 including household names like Apple, Microsoft and Amazon.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a low-cost starting point for a portfolio aiming to deliver long-term growth. It could also be a good addition to a portfolio focused more on the UK, 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’s become a large company, with $939bn of assets under management and has a well-resourced team of experienced investment professionals. Portfolio managers have an average of over two decades of experience, but 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 regulatory 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 makes for a good partnership.

Process

The fund is managed to track the performance of the MSCI World Index. It aims to do this by investing in every company in the index, roughly 1500, and in the same proportion. This is known as full replication. However, for practical reasons and/or to reduce dealing costs, there are times where the smallest positions aren’t included. The biggest sectors of the portfolio are currently information technology, financials and health care.

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. Just over two thirds of the fund is made up by American companies, and 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.

Culture

Fidelity was founded in 1969 and is a global investment manager. 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.

As a privately-owned business, Fidelity can maintain a long-term view without the pressures of short-term shareholder demands, which we think is a positive for any investment business.

Fidelity is also strongly aligned with the company who manage the fund, Geode. Certain senior staff and investment professionals participate in an Equity Ownership Plan, which helps align participants with Geode’s long-term goals. This also enables them to share in the success of the company and by doing so, their interests are further aligned with the investors in the fund.

ESG Integration

Fidelity has committed to improving its approach to ESG in recent years. They’ve developed a structured engagement program which allows them to be more systematic in their engagement on environmental and social issues, become involved in more collaborative engagement initiatives and introduced ESG data into fund managers’ quarterly reviews to raise awareness of ESG issues. The firm has also bolstered its dedicated ESG team, which writes regular ESG reports on companies held by Fidelity fund managers. The firm votes where it is possible to do so and quarterly voting reports are posted online, complete with rationales for votes against management and abstentions.

Given Geode acts as the shareholder on behalf of Fidelity, they engage in direct dialogue with companies they invest in, to improve the company’s governance and environmental outlook. Geode’s engagements seek to build an understanding of the portfolio companies’ long-term strategy in conjunction with their corporate governance practices. As this is a passive fund, engagements may be focused on specific-voting matters or have a broader and long-range focus.

We view this active ownership as a positive approach to addressing stewardship issues. That said, the Geode stewardship team comprises only four individuals which is smaller than other fund groups in the market.

While Fidelity has made strides forward, we think ESG integration is a work in progress. That said, Fidelity Index World is a passive fund designed to track an index. This means it doesn’t integrate ESG analysis or exclude companies deemed to be sin stocks, like those involved in tobacco or weapons.

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.

Perfomance

Since launch in December 2012, the Fidelity Index World fund’s tracked its benchmark closely returning 234.66%* versus 252.53% for the index. 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. Past performance is not a guide to the future.

Performance figures can sometimes be distorted by the time a fund is valued versus its benchmark. For example, most global 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.

So far this year, we’ve seen a slight turnaround for ‘growth’ companies, which have held up well, and performed better than their value orientated peers. They tend to be companies capable of delivering above-average growth, such as those in the technology sector, and have led market returns this year. Inflation levels have started to peak and in many countries around the world there are hopes that central banks will stop hiking rates and potentially begin to lower them. This could be good news for growth investors.

However, inflation remains at stubbornly high levels, rates haven’t yet started to fall significantly and issues in Ukraine, Russia and China continue to persist. Many believe that if these issues continue, it may drive higher inflation, meaning companies will likely endure higher wage costs, as workers demand increased pay to support higher prices. This may slow profits for companies.

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 31/05/2023.

Figures used for the fund since launch are for the A share class as it has a longer track record. Please note that it has a higher annual charge.

Find out more about Fidelity Index World, including charges

Fidelity Index World Key investor information