Fidelity Index World: May 2024 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 Microsoft, Apple 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 simple way to form the share portion of a portfolio or could diversify a portfolio focused more on the UK or emerging markets.

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 around $1.3trn 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 aims to track the performance of the MSCI World Index. It does this by investing in every company in the index, roughly 1,500, 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 index is made up of large and medium-sized companies across 23 developed countries. 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 around 70% of the fund invested there.

With a large part invested in the US, it’s no surprise that technology companies have the biggest weighting in the fund. They made up 23.2% at the end of April 2024. Financials and healthcare followed at 15.4% and 12.0% respectively.

Cost management is very important to Geode. They try to make up for the factors that detract from performance such as dealing commissions, taxes and the cost of running the fund.

Geode have a conservative approach to index investing. For example, they don’t lend the investments in this fund like some other companies do.

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. The firm developed a structured engagement program which allows it to be more systematic in its engagement on environmental and social issues, became involved in more collaborative engagement initiatives and introduced ESG data into fund managers’ quarterly reviews to raise awareness of ESG issues. The firm 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.

In June 2019, Fidelity launched its own proprietary ESG ratings tool. It scores thousands of companies based on their ESG credentials on a forward-looking basis, with investment analysts tasked with the job of ensuring the ratings are up to date. The ratings system was later updated to include an assessment of each company’s ability to manage negative externalities. Fidelity also developed a climate rating which highlights companies where engagement is most necessary if the firm is to achieve its aim to halve portfolio emissions by 2030 and reach net zero by 2050.

While Fidelity has made strides forward at the firm level, we don’t think this has fully fed through to the fund level. Although there is plenty of ESG information available to all Fidelity fund managers, we’re not yet convinced they all put it to full use.

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%. Our platform fee of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform fee applies.

Performance

Over the last 10 years, the fund has tracked its benchmark closely returning 222.54%* compared to 232.55% 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, are priced at midday whereas their benchmarks are priced at market close. This can lead to what appears to be a greater tracking difference.

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 difference. All performance figures used in this update are based on the fund being priced at midday.

Over the last 12 months, the fund rose 20.78% versus the benchmark’s return of 19.41%. The companies known as the ‘Magnificent Seven’ - Google parent Alphabet, Amazon, Apple, Meta (previously Facebook), Microsoft, Nvidia and Tesla – dominated market returns over the year due to the recent advancements in Artificial Intelligence (AI). This led to strong US stock market performance and meant that technology and communication services had the highest returns of the global sectors.

One country whose stock market performed better than the US was Denmark. Danish pharmaceutical company Novo Nordisk, which makes up two-thirds of its market, performed well thanks to the popularity of its diabetes drugs in the US. However, Denmark only makes up a small portion of the fund, which means it doesn’t have a big impact on overall performance.

Switzerland’s stock market on the other hand delivered negative returns during this time. And sector wise, consumer staples detracted from the fund’s performance. Swiss company Nestlé, the world’s largest food and beverage company, struggled over the year. Higher inflation has increased the company’s own costs and the cost of living for customers which has resulted in lower-than-expected sales.

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.