UBS S&P 500 Index: October 2024 fund update

• UBS has more than 35 years of indexing experience

• This fund provides exposure to some of the largest companies in the US

• It’s tracked the S&P 500 Index closely since launch

• This fund does not feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The UBS S&P 500 Index fund offers a low-cost solution for tracking the performance of the US stock market, as measured by the S&P 500 index. This index is widely regarded as the best measure of the performance of large US companies and features household names like Apple, Microsoft and Amazon.

An index tracker fund is one of the simplest ways to invest. This fund could be used to diversify a long-term global investment portfolio, including those focused on other regions such as the UK, Europe or emerging markets, or one focused on smaller companies.

Manager

UBS has been managing index funds for more than three decades and the equity index team has over 15 years of industry experience on average. The team is led by Ian Ashment, who has been Head of Portfolio Engineering & Trading since 2006 after joining the team 35 years ago.

Each equity index fund has a lead and back-up portfolio manager as well as an associate portfolio manager, although in practice it’s a team based approach. The lead manager of this fund is Kaushik Patel. Patel has worked at UBS for 18 years and has been part of the equity index team ever since he joined. Prior to that, he was an analyst at J.P. Morgan focused on active strategies.

The portfolio managers are supported by the Research & Analytics team who analyse index events. They continuously interact with the firm’s traders who are located all over the world. UBS believe that global equity trading is one of their key strengths.

Process

The fund aims to track its benchmark, the S&P 500 Index, by investing in all the companies in the index, and in the same proportion. This is known as full replication and helps the fund track the index closely.

In any index tracker fund, factors like withholding taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. The team try to keep turnover in the portfolio, the frequency at which shares are bought and sold, as low as they can to minimise some of these costs. They also trade as efficiently as possible when there is an index change leveraging the expertise of their global trading teams.

They look to add value when there’s a corporate action, which is any event that materially impacts a company and its shareholders, such as a tender offer or merger. When there’s a corporate action, the team analyse the event and implement a trading strategy that they believe will add value to the fund’s performance. This can help to reduce the tracking difference between the fund and the index.

The portfolio managers monitor the fund’s tracking error daily, which measures how tightly and consistently the fund is tracking its benchmark. They work closely with an independent risk team to ensure the fund’s managed efficiently and tracking error remains low. UBS don’t lend any of the investments in their index funds like some other companies do.

Culture

UBS Asset Management, a division of UBS, benefits from the scale and strength of being part of a large global financial services group. Index-tracking investment solutions have been a core part of UBS Asset Management for over 35 years, and it’s become one of the largest index fund providers in Europe.

UBS Asset Management manages $796bn of index assets, which represents over 45% of its total assets. It offers a wide range of index strategies tracking a variety of indices and has strong relationships with major index providers like S&P.

As the index team has grown, there’s been opportunities for employees to get involved in different areas and broaden their work. Employees are encouraged to take part in the firm’s sharesave scheme which should incentivise them to be more engaged with the growth of the company.

ESG Integration

UBS believes that ESG issues and opportunities can affect investment performance, and by considering these factors they can deliver better informed investment decisions. Investment teams across UBS are supported to consider material issues by the Sustainable and Impact Investing team. Investment teams also have access to a proprietary ESG Risk Dashboard, which combines multiple ESG data sources to identify companies with the most material ESG risks. Leveraging these resources, analysts are required to include a forward-looking ESG assessment in their research. Controversial weapons and companies with significant revenues from thermal coal are excluded company wide.

The firm aims to reduce ESG risks where possible through stewardship. Voting is considered an important part of the firm’s fiduciary duty, and all votes are exercised where possible. Voting activity is publicised via a voting tool which allows company-by-company search functionality, and rationales are provided for votes against management recommendations and abstentions. Engagement is primarily carried out by the Sustainable Investing and Impact team. All proxy voting and engagement activities are overseen by the UBS Stewardship Committee.

The firm produces regular thought leadership articles which are available via its website, alongside informative videos and webinar recordings on various sustainability-related themes. The annual Stewardship Report also provides a summary of the firm’s voting activity, as well as engagement case studies.

Cost

The fund has an ongoing annual charge of 0.09%. Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform fee applies.

Performance

Since launch in November 2014, the fund has tracked the S&P 500 Index well, returning 285.61%*. As expected from an index tracker fund, it’s fallen behind the benchmark because of the costs involved in running the fund. However, the tools used by the managers have kept performance tight to the index.

This strong performance is partially down to the inclusion of technology companies in the index whose share prices have seen a rally in recent years. But remember, past performance isn’t a guide to the future.

Over the past 12 months, the fund has tracked the index closely, gaining 23.70%. In 2023, giant US technology companies known as the ‘Magnificent Seven’ – Google parent Alphabet, Amazon, Apple, Meta (previously Facebook), Microsoft, Nvidia and Tesla – dominated market returns due to significant advancements in Artificial Intelligence (AI).

AI has remained a key theme in 2024 but the performance of the ‘Magnificent Seven’ companies has been more mixed compared to 2023. Nvidia, the world’s most valuable computer chipmaker, has seen its shares continue to rise very strongly this year driven by huge demand for its products that power AI applications. Whereas, Tesla, an electric vehicle automaker, has struggled over the year due to slowing customer demand and growing competition in the electric vehicles market, particularly in China.

The Federal Reserve (Fed) raised interest rates to a 23 year high in July 2023. As inflation has fallen closer to its 2% target over the past year, the market has been expecting the Fed to cut rates. Growth companies, like those in the technology sector, are sensitive to interest rate movements so have performed well with the anticipation of rate cuts. The Fed finally lowered rates in September 2024, for the first time in four years, and went in with a larger 50 basis point cut compared to smaller cuts from most other major central banks.