Best investment?

sdooley

A FTSE 100 tracker might outperform a managed fund limited to investing in the FTSE 100. This would make sense as the rewards for the managers to do anything much more adventurous than quasi-tracking the market (e.g. taking a large position in M&S a few months ago - it's still trading lower but might be expected to bounce back) are smaller than the sack which will undoubtedly await them if they underperform by 5% for a single quarter.

But a managed fund with greater flexibility might outperform. If you pay people to make judgements, then take away their ability to make any, you won't win. That's clear.

turbobob

If you had an FTSE100 tracker over the past 10 years it would have underperformed the majority of managed funds in the UK All Companies sector (bottom quartile as Dunston has said).

If you had an FTSE250 tracker (there aren't many about) it would have done much better, as mid sized companies have generally outperformed large companies in this period.

An FTSE All Share tracker (probably the most commonly available tracker funds) would have performed somewhere between the two, as this index is made up of both of the above indices and also the All Small index.

Ian_Griffiths_Halifax

Overpay on your mortgage.

fudgecat

I wonder if there is a particular reason you have decided on the interest only and separate investment route? Such low starting payments into the investment vehicle (whichever one you choose) could mean a real risk that you will not have the repayment sum at the end of the term.

dunstonh

Motley Fool has always said that trackers outperform the majority of managed funds?

They are wrong. They take a part truth and misrepresent it. It seems to again come from the US version. A managed fund with the same investment brief as a tracker will almost always underperform the tracker. That is where the truth is. Problem is that most active managed funds dont have the same investment objectives as a tracker so you cannot compare like for like.

If you doubt anything said about trackers on this thread, then look up the performance tables of the UK all companies sector and look where the trackers are in relation to funds with similar objectives or variations of that theme (UK equity).

Ian_Griffiths_Halifax

dunstonh wrote: »

They take a part truth and misrepresent it.

Hmmm now where else does that often happen around 8-8.30am weekdays :think:

poppy10_2

Why Trackers Beat Managed Funds

Why do managed funds do so poorly as a group? The first thing is to realise that, taken together, managed funds can't outperform the index. Why? Taken as a group, they are the market (and therefore the index). You can't outperform yourself. It's the bit like the fact that most drivers think they are better than average. It's just not possible.

Trackers do better than most managed funds primarily because their charges tend to be a lot lower. They don't employ expensive fund managers that make numerous buy and sell decisions that in the end merely cancel each other out. Trackers typically have no initial charge and an annual management charge of 1% or less. Managed funds on the other hand have initial charges of up to 5% and annual charges of around 1.5%. On top of that they also tend to buy and sell more shares each year, so they incur more in the way of dealing charges too.

Now these amounts may not sound like a lot but over 5 years or more, these charges start to add up and it means that managed funds lag trackers by a considerable amount.

Say you put £1,000 into a managed fund and £1,000 into a tracker, and before charges they both grow at 11% a year -- not a bad performance at all! However, the combination of initial charges and annual charges takes the managed fund's return down to 8.5% a year, while the index tracker charges no initial fee and 1% a year, taking its return down to 10% a year.

After 10 years your managed fund would be worth £2,261 but your tracker would be worth £2,594. Over 20 years the managed fund would grow to £5,112 and the tracker would return £6,728. So your extra 1.5% a year return means that your final sum after 20 years would be 24% higher.

That's why we have a saying at the Motley Fool - small differences in annual returns matter, a lot!

. .

misscharlie

I'm currently on maternity leave and plan to have another child in the next year. I plan to go back to work in 3 years time, so our income would then be doubled. My Oh earns 32k and I earned 35k. Obviously we're taking a hit on maternity pay, but we'll be in a much better position later on. Also I have another property which I let out Only a small flat, but later on could sell it for equity to the house. We also have at least 200k inheritance to come. (i know nothing to bank on but its a definite for the future!)

dunstonh

poppy, the MF article is misleading. Lets take the following bit:

Say you put £1,000 into a managed fund and £1,000 into a tracker, and before charges they both grow at 11% a year -- not a bad performance at all! However, the combination of initial charges and annual charges takes the managed fund's return down to 8.5% a year, while the index tracker charges no initial fee and 1% a year, taking its return down to 10% a year.

Now, that assumes that if both grow by the same amount that the tracker will be better as its cheaper. However, the odds of a managed fund performing the same as a tracker are remote as the assets within the fund will be different. Its a bit like saying that a savings account will be cheaper than an investment if they grow the same.

If you doubt this then look up L&G UK 100 index or L&G UK index and see how they compare to sector average. Here are the UK 100 index tracker stats (performance ranking/out of number of funds in sector):
YTD: 201 / 290
2007: 90 / 271
2006: 217 / 248
2005: 186 / 228
2004: 185 / 217

Only once in the last 5 years has it made it into the top half. If you look at cumulative performance over the last 5 years then the L&G 100 index fund grew by 38.2% after charges compared to the sector average of 50.3% after charges. The Index tracker fund will hover around sector average due to the nature of its make up. So, for that one, it means that by more or less being mid table it is underperforming half the managed funds in the sector and beating half the managed funds.

The tracker will be better than virtually all passive managed funds (which are often closet trackers anyway). So by the time you rule out passive managed funds, rule out most of the bank funds and most of the insurance company funds you are left with a smaller core range of managed funds with focused aims and objectives which do offer better potential against the level of risk.

Here is a stat for you. Since the two L&G index funds launched on 31st Jan 1995 you would have the following performance figures (after charges):
L&G index tracker : 166.1%
UK all companies sector average : 154.8%
L&G FTSE 100 index tracker : 115.00%

So, that is 13.5 years and the index tracker has only outperformed sector average after charges by that small amount. The charges havent really made that much difference at all really. Just under half of the funds in the sector beat the index tracker. Most beat the 100 index tracker. Why don't you see that on the MF website? (is it perhaps because they sell and earn from L&G index trackers?)

There is a time and place for them but it is impossible to build a decent portfolio relying on trackers only. I built a portfolio today for someone with 10 funds or which 2 were trackers. I couldnt have built the portfolio with trackers only and that would have compromised the investment and that would lead to lower returns in the long run.

misscharlie

I hadn't thought about just simply overpaying on the mortgage. I take it this is still an option on interest only then?