iShares Pacific ex Japan Equity Index: April 2022 fund update

• BlackRock has been managing index portfolios since 1971
• This fund provides low-cost exposure to hundreds of companies across Asia and the Pacific
• It’s closely tracked the FTSE World Asia-Pacific ex-Japan Index since launch
• 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 iShares Pacific ex Japan Equity Index fund invests in Asia, home to some of the most dynamic economies in the world. In particular, emerging markets have the potential to grow strongly over the long term, though they’re higher risk. This fund invests in company shares of all sizes, across a variety of industries and countries including Australia, Taiwan, South Korea and China.

An index tracker fund is one of the simplest ways to invest and can be a low-cost starting point for a portfolio aiming to deliver long-term growth. We think this fund could be used to diversify a global portfolio or be a good addition to a portfolio of tracker funds.

Manager

Kieran Doyle is a Senior Portfolio Manager in BlackRock's Institutional Index Equity Team. He's been part of the team since 2004 and became the lead fund manager in 2016. Every equity index fund at BlackRock has a primary, secondary and tertiary manager, who each have the ability to run the fund, along with the wider team. The wider team is well-resourced and experienced in index investing.

BlackRock’s global approach allows them to work closely with their teams across the world, helping to drive more efficient management of their funds. We have positive conviction in Blackrock’s ability to provide simple and effective tracking options for investors.

Process

The fund aims to track its benchmark, the FTSE World Asia Pacific ex Japan Index, by investing in every company in the index and in the same proportion. This is known as full replication. It’s currently made up of around 650 companies and is focused on sectors such as technology, financials and basic materials.

Keeping costs low is a key part of the team’s strategy to track the index closely. The portfolio managers communicate with local teams across the Asia Pacific region to ensure trades are placed at the best price, keeping costs low.

Approximately 4% of the fund is invested in smaller companies. They have greater growth potential than their larger peers but can be higher risk.

The fund also has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by BlackRock on a daily and monthly basis to ensure the fund is being run efficiently. The fund can also lend some of its investments to others in exchange for a fee in a process known as stock lending. This helps to keep costs low.

Since BlackRock’s lending program started in 1981, only three borrowers with active loans have defaulted. In each case, BlackRock was able to repurchase every security out on loan with collateral on hand and without any losses to their clients.

Culture

BlackRock is currently the largest asset manager in the world, running $10 trillion globally as of January 2022. The company was founded in 1988 by eight partners including current CEO Larry Fink and is known for both active and passive strategies across the world. Employees at BlackRock are encouraged to hold shares so that they are engaged with helping the company perform well and grow. The iShares brand represents BlackRock's family of index tracking and exchange-traded funds.

As one of the world's largest asset managers, and with lots of resource and knowledge under its belt, BlackRock aims to continue to drive further development in this part of the investment market. Being such a large player in the index tracking arena gives BlackRock unique access to the marketplace, which can help reduce trading costs.

The team running this fund works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.

ESG integration

Blackrock was an early signatory to the PRI and has offered ESG-focused funds for several years, including through its iShares range of passive products. However, it only made a company-wide commitment to ESG in January 2020. Following that announcement, the company promised to expand its range of ESG-focused ETFs, screen some thermal coal companies out from its actively managed funds and require all fund managers to consider ESG risks. Overall, we feel Blackrock’s ESG integration is still a work in progress.

As the iShares Pacific ex Japan Equity Index Fund isn't an ESG-specific fund, there are no company exclusions applied like tobacco or weapons, however an ESG version of this fund is now available.

The firm has courted controversy in recent years for failing to put its significant weight behind shareholder resolutions aimed at tackling climate change. It responded by committing to greater transparency on its voting activity and providing rationales for key votes. The firm also outlines its work on voting and engagement in annual and quarterly Stewardship reports.

Blackrock’s Investment Stewardship (BIS) Team aims to vote at 100% of meetings where it has the authority to do so, meaning they vote at around 16,000 meetings in 85 markets each year. In 2021, BIS engaged 1,057 times with companies across the Asia-Pacific region. More recently they engaged with Samsung Electronics, who are based in South Korea.

Samsung has challenges with reporting on targets like carbon neutrality. Given these issues, the board has shown its intent on strengthening and enhancing the diversity of skillsets amongst directors to improve expertise on climate and environmental-related issues. As a result, the BIS voted for the nomination of a board member who would bring deeper expertise to better assess climate related risks and opportunities for the company.

Cost

The fund has an ongoing annual fund charge of 0.11%. We believe this is an excellent charge when compared with other passive funds in this sector. This is one of the lowest cost funds on the HL platform for passively tracking the Pacific ex Japan market. Our platform charge of up to 0.45% per annum also applies.

Performance

Since launch in August 2005, the iShares Pacific ex Japan Equity Index fund has continued to track the FTSE World Asia Pacific ex Japan index well. 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 strategies used by the BlackRock team.

Over the last 10 years the FTSE World Asia Pacific ex Japan Index has returned 142.29%*. This performance is partially down to the inclusion of industrials whose stock prices have contributed more positively to performance. Over the same timeframe, the fund has returned 136.81% to investors.

Given BlackRock's size, experience and expertise running index tracker funds, we expect the fund to continue to track the FTSE World Asia Pacific ex Japan well in future, though there are no guarantees. A glance at the five-year performance table below shows in some years the fund has tracked the index closer than others.

Remember, past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2022.

More on iShares Pacific ex Japan Equity Index, including charges

iShares Pacific ex Japan Equity Index Key Investor Information