Cautious manged funds

edited 30 November -1 at 1:00AM in ISAs & Tax-free Savings
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kevin09061960kevin09061960 Forumite
7 Posts
edited 30 November -1 at 1:00AM in ISAs & Tax-free Savings
Hi folks
I am feeling really uncomfortable with the cautious managed fund I set up with the halifax 3yrs ago, my wife an I have invested over 31k in class c shares ie uk growth, uk equity, corporate bonds, international growth and cautious manged and have never made a penny, at present our plan is only worth just over 28K and am thinking about cutting our losses and pulling out to reinvesting in guaranteed fixed interest bonds/cash Isa's etc. My fund manager thinks I am mad? has anyone any advice PLEASE???
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  • Go to the Motley Fool site www.fool.co.uk. You will find lots of excellent advice there. They emphasise that index trackers outperform the vast majority of managed funds all the time.
  • AegisAegis Forumite
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    Go to the Motley Fool site www.fool.co.uk. You will find lots of excellent advice there. They emphasise that index trackers outperform the vast majority of managed funds all the time.
    And they're wrong.

    The fact of the matter is that while it might be cheaper to invest in an index tracker, it is by no means a guarantee to outperform managed funds. As they like to quote on their site that 50% of managed funds fail to beat the index, it seems odd that they neglect the fact that 100% of index trackers will fail to beat the index. Rather than comparing this like-for-like figure, they claim that there is no way that managed funds can be a better option than trackers, and ignore any further statistical analysis that can be done from there.

    For example, it is well known that in the managed fund arena, bank funds perform significantly worse than investment house funds. So, by ignoring all of the bank funds you're immediately left with somewhere in the region of 65-75% of the remaining managed funds beating both the index and the index trackers. However, I've read through the "index tracker vs managed fund" article on a few occasions and never saw this mentioned at all.

    In times like this I would personally hate to be in tracker funds. I like the fact that a manager can pick some more defensive/non-cyclical stock to get in to at this very wary time for investors. I like the fact that a manager can also take advantage of the situation by gathering a small holding of stocks with a hight chance of rising back up even in this environment, therefore mitigating losses seen elsewhere. In short, I like my downside protection and would happily pay a little extra for it, especially when it doesn't seem to affect the actual growth potential at all.

    Compare, for example, one of my current holdings with the best index tracker over the last 3 years in the UK All Companies Sector:

    Invesco Perpetual High Income:
    1 month: -7.8%
    3 months: -1.5%
    1 year: -13.8%
    3 years: 35.2%
    5 years: 102.3%
    10 years: 159.5%

    FTSE AllShare top performing tracker (HSBC FTSE 250 Index):
    1 month: -9.4%
    3 months: -8.-%
    1 year: :-18.9%
    3 years: 28.8%
    5 years: 95.2%
    10 years: 81.8%

    As you can see, there's no time period where this managed fund underperforms the top performing index tracker categorised as AllShare, and with the right research it isn't hard to find a manager who adds enough value to his fund to make it outperform the index year on year.

    There are occasions where index funds seem suitable, but for the most part I would suggest that there are only a few special sectors where they are generally better than active funds, not least of which seems to be the US for some reason.

    I think the Motley Fool articles on this matter are extremely misleading and seem to focus on charges rather than overall returns (their assumption that if a managed fund and a tracker got the exact same pre-charge growth the tracker would be cheaper is correct, but as shown above it is far from the case every time), while it is overall returns that the investor eventually sees. I'd rather pay 1.5% for 20% annualised growth than 0.1% for 15% annualised growth any day of the week.
    I am an Independent Financial Adviser
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
  • dunstonhdunstonh Forumite
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    Hi folks
    I am feeling really uncomfortable with the cautious managed fund I set up with the halifax 3yrs ago, my wife an I have invested over 31k in class c shares ie uk growth, uk equity, corporate bonds, international growth and cautious manged and have never made a penny, at present our plan is only worth just over 28K and am thinking about cutting our losses and pulling out to reinvesting in guaranteed fixed interest bonds/cash Isa's etc. My fund manager thinks I am mad? has anyone any advice PLEASE???

    You are right to feel uncomfortable. Halifax funds are pretty awful. Also, you haven't spoken to a fund manager. You have spoken to a tied sales rep.

    However, your solution is probably not the right one. A whole of market approach would be better.
    Go to the Motley Fool site www.fool.co.uk. You will find lots of excellent advice there. They emphasise that index trackers outperform the vast majority of managed funds all the time.

    As Aegis says, MF are wrong. At least they are wrong in how they present the information.

    The three main FTSE trackers (100,250 and all share) you will find they are in the UK All companies sector. The FTSE100 trackers have spent most of the last 14 years in the bottom half (often in the bottom percentile). FTSE all share trackers spend most of the time mid table (as expected). FTSE250 trackers spent a lot of the period at or near the top but recently have suffered heavily.

    The 100 & 250 are influenced by the performance of the large and mid caps. However, the all share is the general market. So, if the all share is coming in at mid table consistency, MF's view that it outperforms the vast majority of managed funds is incorrect.

    The wording should be that a tracker should outperform a managed fund with the same asset make up. However, the only funds that tend to have a similar make up are the passive managed funds. The rest will have manager discretion within the aims and objectives that are set for that fund. Eliminate the passive managed and bank funds and you are left with a much smaller range and stand a better chance of success.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Ian_WIan_W Forumite
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    kevin09061960,
    Your thread has been blown a bit off course by the first reply which got it into an index tracker v managed fund argument which is a bit silly. An index tracker would probably have your investment in the £26K range at the moment. So if you're thinking of jumping ship now, how much more would you feel like that with around TWICE the shortfall?

    For example the Halifax 100 tracker is down 15.9% over 1 year whereas their cautious managed is down 9.3% - the better performing CM funds are actually positive over 12 months.

    As dunstonh says the Halifax funds are pretty naff - the CAUTIOUS MANAGED one you mentioned is 57 out of 73 funds in that sector over 3yrs. You can toggle for other periods and you'll see that "mediocre" would probably be a kindly description of its performance.

    In that sector you'll see one of the better performers is INSIGHT DIV TARGET RET which, ironically, is an HBOS company but Halifax tied reps don't seem to use it - only their own, poorer performing, one.
    So investing through your bank isn't the best way and considering you've limited access to funds it's also expensive as they'll charge full commission without giving proper advice. Straight away your fund has to make 4 or 5% to cover those charges.

    Only you can decide whether to pull your money out but before you do try talking to an IFA who does investments. Initially it won't cost you anything, if you move to them it shouldn't cost more than Halifax, and they should be able to suggest a range of funds that more closely match your risk tolerance - which based on a 10% drop would probably IMO be low risk. They should also explain that investments have to be viewed as long term, 5-10yrs, as ups and downs do happen but in the longer run investments generally give a better return than cash accounts.

    BoL whatever you decide.
  • Financial Advisers will always tell you that Index Trackers are the work of the devil for a very simple reason: they are far from unbiassed and as most advisers are commission-based would lose a lot of commision if they widely recommended them.

    Trackers typically pay them only half their usual annual trail commission and sometimes none at all. That's why they get very, very hot under the collar at their very mention. :)

    Financial Advisers and fund manager will never want you to cash in the investments that pay them renewal commision every year so don't believe their advice is unbiassed for a single minute. Unless of course you intend to move it to something else that pays them more commission. :rolleyes:

    Don't think badly of them, that's how they pay their kids' school fees.

    Conversely, I believe Motley Fool sell the L&G trackers so their lack of bias must be suspect too. I'm just a humble investor like you.

    It is completely true that most managed funds do underperform the indexes the trackers follow. Their main problem is the that their fees tend to be six times higher than the lowest charges on trackers so that they can pay higher commission rates to advisers.

    Commission based salesmen and advisers are trained in ways to fend off questions with all sorts of misleading comparisons such as comparing a FTSE 100 tracker instead of a FTSE All share tracker with a largely All-share fund. They'll tell you a very good story because that's their job.

    Many managed funds are really just closet trackers anyway but charging a much higher fee.

    So the position is that if you can find the right fund it may out perform a tracker but be aware that its luck might run out and go very pear-shaped eventually such as several once loved Jupiter and New Star funds. This year's winners might be next year's losers. Funds that were overweight in bank shares did very, very well until it all went wrong. The worst performing managed funds are withdrawn and disappear from the tables completely and the new ones started with a clean track record.

    Trackers on other hand will just plod on year after year, always in the top half of comparable funds but never the best and never the worst.

    Be aware of the limitations of trackers too. For example if you want a fund with a very high income rather than growth, then a tracker can only return the market average. You'll usually need some managed funds to balance a portfolio.

    You can get a less biassed opinion than from commission hungry advisors in this Financial Times booklet, long advocates of trackers: http://www.brochurecentre.co.uk/pdf/file_55.pdf

    Here Bloomsbury Financial Planning who provide non-commission based management for high worth individuals explain why they favour trackers whenever possible: http://www.bloomsburyfp.co.uk/about/howwework.php

    They also provide some good quotes like:

    "Investment managers sell for the price of a Picasso [what] routinely turns out to be paint-by-number sofa art." Patricia C. Dunn, former CEO, Barclays Global Advisors

    "Active [investment] management is little more than a gigantic con game." Ron Ross, Ph.D., The Unbeatable Market, 2002

    "It is difficult to systematically beat the market, but it is not difficult to systematically throw money down a rat hole generating commissions (and other costs)." Michael C. Jensen Harvard University

    "Studies show either that most managers cannot outperform passive strategies, or that if there is a margin of superiority, it is small." Prof. Zvi Bodie, Investments

    "The investor‘s chief problem - and even his worst enemy ' is likely to be himself" Benjamin Graham, (scholar and investor who taught Warren Buffet at Columbia Business School) legendary American investor, scholar, teacher and co-author of the 1934 classic, Security Analysis

    "…those index funds that are very low-cost….are investor-friendly by definition and are the best selection for most of those who wish to own equities." Warren Buffett, Chairman of Berkshire Hathaway,” 2003

    " the best way to own common stocks is through an index fund" Warren Buffett, Chairman of Berkshire Hathaway, 1996 With an estimated net worth of around US$62 billion,[4] he was ranked by Forbes as the richest person in the world as of February 11, 2008.[5]

    "Most stock pickers and market timers should go out of business – take up plumbing, teach Greek..." Paul A. Samuelson, Nobel Laureate, The Journal of Portfolio Management, 1974, p. 17-19



    I expect a financial adviser will now explain why it's much better to use funds that pay them shedloads of commission. ;)
  • jamesdjamesd Forumite
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    They emphasise that index trackers outperform the vast majority of managed funds all the time.

    And nobody who knew what they are doing or had a choice would buy the managed funds that do worse. Since index trackers after fees will do less well than the index they are tracking they also aren't a great idea.

    It's a bit like saying that Premium Bonds pay better than the vast majority of bank accounts, without bothering to mention that Premium Bonds are a poor deal and you can pick savings accounts that pay more than the average bank account if you bother to look for them.

    They also tout a value investing scheme that anyone could have beaten just by picking one of the most popular equity income funds in the UK. At least the author of that series of articles now says that it's beaten most of those so he's giving a clue to those who pay attention...

    Some of their concepts would work quite nicely in the United States, where there are significant tax advantages to trackers and buy and hold investments. Those advantages don't apply in the UK. There's a lot of interesting reading over there but sometimes the concepts that work for the US tax situation and US markets have been moved over here a bit too freely.
  • jamesdjamesd Forumite
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    kevin09061960, one approach would be to find yourself an IFA from unbiased.co.uk. Given the sort of costs charged via Halifax and the performance of what they sell the IFA my well cost you less than you're paying now, but with better advice.

    There are benefits to be had from switching away from the Halifax funds because of the cost and performance of their versions of the funds.

    That isn't quite the same thing as changing into cash now. It's traditional that inexperienced investors buy when the markets are doing well and sell when they are doing badly. That's a great way to lose money. It's also one factor in the endowment problems a few years ago, when regulators forced endowments out of the markets just before they started to rise again, costing lots of endowment holders large amounts of money.

    So in general, what you've been told is correct: provided you can handle the downside we're going through, staying invested is likely the way to go.

    Values may fall further before they rise consistently again so there is some possible gain from switching now and buying back a little later. The problem with that is getting the timing right.

    Do you need the money any time soon? If not then switching away from the Halifax but staying invested is likely to be best longer term.

    If you need it soon or just can't handle the downs and the chance that things will fall further, then switching out may be the best option for you. However, you can instead adjust the mixture of investments to some that will go up and down less.
  • jem16jem16 Forumite
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    earlgrey wrote: »
    Financial Advisers will always tell you that Index Trackers are terrible for a very simple reason: they are far from unbiassed and as most advisers are commission-based would lose a lot of commision if they recommended them.

    An IFA will recommend a tracker where it turns out to be the best advice in a balanced portfolio - mine did. Same goes with NS&I Certificates which pay no commission at all.

    How many times have you consulted an IFA and what was the problem? Every time you have this tracker v managed argument you accuse advisers of being biased.
  • dunstonhdunstonh Forumite
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    Financial Advisers will always tell you that Index Trackers are the work of the devil for a very simple reason: they are far from unbiassed and as most advisers are commission-based would lose a lot of commision if they widely recommended them.

    I'm fee based so it makes no difference to me.
    Trackers typically pay them only half their usual annual trail commission and sometimes none at all. That's why they get very, very hot under the collar at their very mention. :)

    Property funds and fixed interest funds usually pay less as well. However, you see lots of those in portfolios as well.
    It is completely true that most managed funds do underperform the indexes the trackers follow.

    Its completely false. Please produce your evidence to support that comment. I suggest you look at the UK All companies sector and see the position of the All share trackers in the performance league tables. You will find them consistently around mid table. That more or less means half are better, half are worse.
    Many managed funds are really just closet trackers anyway but charging a much higher fee.

    Some managed funds are. In particular bank, insurance company and passive managed funds. That doesnt mean you avoid the rest though.
    Trackers on other hand will just plod on year after year, always in the top half of comparable funds but never the best and never the worst.

    Evidence please? Mid table consistency is not the same as top half.

    Here are some posts which help supply facts:
    http://forums.moneysavingexpert.com/showthread.html?t=970539&highlight=L%26amp%3BG+tracker+managed post #6 shows L&G FTSE100 tracker against sector average

    http://forums.moneysavingexpert.com/showthread.html?t=922727&highlight=L%26amp%3BG+tracker+managed post #12 shows L&G all share tracker against sector average
    http://forums.moneysavingexpert.com/showthread.html?t=362375&highlight=l%26amp%3BG+all+share+tracker+managed+sector+average+performance post #13 also shows L&G all share vs sector average

    The quotes you have given are mainly US based and that is a very different market to the UK. Warren Buffett is a very successful investor. However, he is well known for not following that he says. He actively looks for value when he invests.

    From Reuters:

    Higher-charge funds produce better returns
    Chris Duncan

    Funds with higher annual management charges reap better returns in volatile investment markets than
    those with the lower AMCs, according to research by Standard & Poor's.
    In a study across a number of investment sectors over the past five years, S&P found that people who
    were willing to invest in funds with the highest AMCs were more likely to get better returns.
    In the UK all companies sector, investors with £1,000 in a fund with an AMC of 0.49 per cent or less
    received an average return of £1,233 while investors paying 1.5 per cent or above received an average
    of £1,384.
    In the Japanese sector, investors paying an AMC of 0.49 per cent or less received an average return of
    just £870 compared with £1,044 for those paying at least 1.5 per cent.
    But although the story remained the same across many other sectors - including North America and
    Europe (excluding UK) - returns varied much less with AMCs in the bands between 0.49 per cent and
    1.49 per cent and in some cases investors would have benefited from a lower AMC.
    In the North American sector, investors paying an AMC between 1 per cent and 1.24 per cent saw an
    average return of £1,434 but those paying between 0.5 per cent and 0.74 per cent received £1,472.
    However, in all cases, the most expensive bands of between 1.25 per cent and 1.5 per cent or above
    substantially outperformed funds with AMCs of 0.49 per cent or lower.
    Skandia investment brand manager Phil Morse says: "I think the performance of the more expensive
    funds just goes to show why investors are generally happy to pay higher AMCs, especially in volatile
    markets which require a stockpicking approach."


    Having an anti-IFA rant is doing the OP any favours. Especially as a lot of what you have said cannot be supported by the facts. Its too simplistic to say tracker or managed is best. It depends on what you are looking for when investing, what instruments you are using and how you build the portfolio.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • jamesd wrote: »
    Since index trackers after fees will do less well than the index they are tracking they also aren't a great idea.
    Yes of course they do. They track the index minus the charge. What would anyone sensible expect? The charge can be as low as 0.25%.

    That's far better than a managed fund that tracks the indexes, or worse, but then charges 1.5% or more.
    jamesd wrote: »
    It's a bit like saying that Premium Bonds pay better than the vast majority of bank accounts, without bothering to mention that Premium Bonds are a poor deal and you can pick savings accounts that pay more than the average bank account if you bother to look for them.
    Did you find someone who didn't know that? ;)

    Managed fund charges in the UK have risen significantly over the years and wouldn't be tolerated elsewhere.
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