Index Tracker Funds

earlgrey_3

You've given a list of dubious claims without any justification or facts.

dunstonh wrote: »

Common errors we see on the board are:
1 - they are lower risk. Wrong. They can actually be higher risk than the sector average. especially if they are tracking a narrow index or a riskier index.

Index trackers are as risky (or safe) as the index they track.

The Allshare index is down around 30% on the year which is still a whole lot better than the 58%+ loss of some managed funds in the UK all companies sector. I would be very concerned if you really believed what you are saying accurately represented the truth. IFAs are supposed to understand these things.

The once frequently New Star alone have 4 funds in the UK all companies sector down over 47% this year. The trackers are of course just above average as usual, in line with the index. The majority of managed funds have as usual under-performed the indexes.

dunstonh wrote: »

This has switched somewhat with the decline as large caps will look more attractive than mid caps in a recession. However, value is where the growth it likely to be in the near future and you dont get a tracker on value.

I'm surprised you feel so able to predict the market now when, despite all the warnings elsewhere, you failed to predict the market falls earlier this year. Very much the reverse in fact. Where was your crystal ball then? Perhaps that has something to do with the fact that the more you persuade people to stay invested the more commission you make.

dunstonh wrote: »

5 - The Motley Fool article contains a number of incorrect statements or rather statements used in a distorted context. For example, they say "9 out of 10 managed funds don't manage to beat the index over the long-term. ". If that is the case, then how is it that the FTSE all share trackers consistently come in mid table? If its middle, then that means half the funds are above and half are below. That doesnt equate to being in the top 10% as MF say it does.

If you are an IFA and genuinely don't understand that then I'm totally amazed. Any kid with a CSE in maths should be able to explain. Or perhaps ask on the MF board for help if you genuinely don't understand the numbers?

sabretoothtigger

The ftse all share is still going to contain the top 100 shares as a large proportion of its overall value just like any movement in vodaphone is a massive amount of the ftse figure you see on the news because its so big in comparison to the others

I would agree the ftse isnt the best index to track, it wasnt doing that great even in this boom we've had.
Ive followed it before and I would not choose to do again even if you consider its way below the long term average right now so is due for growth in theory.
In practise its got all those banks who have to repay previous over growth and 'false profits'

dunstonh

If you are an IFA and genuinely don't understand that then I'm totally amazed. Any kid with a CSE in maths should be able to explain. Or perhaps ask on the MF board if you genuinely don't understand the numbers?

Would you like to explain how FTSE all share trackers that consistently perform around the 4th, 5th and 6th percentile allow for the MF to say that perform in the 1st percentile?

Index trackers are as risky (or safe) as the index they track.

Correct. They also lack downside protection provision as they will follow the index all the way down as well as all the way up. The ability to have some hedging or provision for cash or lower risk holdings within the fund can hinder them in bad times as well as benefit them in good.

I would be very concerned if you really believed what you are saying accurately represented the truth. IFAs are supposed to understand these things.

What you mean is that you dont understand and are trying to deflect it back at me.

Commission-based financial advisers dislike trackers because managed funds pay them two or three times as much trail commission as trackers. The dodgier advisers will give all sorts of reasons to justify their position. The L&G all share tracker pays them just 0.30% p.a trail commission and the L&G Gilts index pays 0.00%. Whereas they can get 0.75% p.a. and more by selling managed funds.

Thats myth number 6. They pay trail commission. The normal trail is 0.5%. The L&G funds pay 0.25%-0.3% but trackers with lower charges than L&G can actually pay more trail. Gartmores UK tracker pays 0.5% trail despite having the same charges as L&G.

Property funds, fixed interest funds often pay less trail as well so on any balanced portfolio you would typically be getting less than 0.5% trail. There are also managed funds that pay zero trail commission as well.

As has been seen on other threads, Earlgray is anti-IFA and particularly negative towards me and will post anything to try and steer threads away from the topic into an anti IFA thread. You can probably guess that from the way he posted already. I have no benefit from what you or anyone else reading does. I dont care what do. i have already said there is a benefit to trackers at times and not at others and that you should pick them for the right reasons. Not the wrong reasons. Quite a few occasions in the past I have suggested trackers are the best move but I have also told others that they should be more balanced and diverse as they have gone 100% into a single tracker. Its a shame as it would be nice to debate the issues without the personal attacks or chip on shoulder type comments.

I would be very interested in the proof of that claim. Bottom of what exactly? The All-share index has often trailed the FTSE100 but not always - with this year as an example. The L&G FTSE100 tracker is about 2% ahead of the L&G All share tracker this year.

its been posted a number of times before and verified by others. The sector they are in is the UK all companies sector. So, you benchmark them by the funds with a similar or same objective to ensure a like for like comparison.

However, here is more up to date data for the individual calender years from 1996 (2008 not available until Friday). I have put the percentile in brackets. Sector average is mid table so would be 50. If a fund is (1) that makes it top. If it is (100) it makes it bottom. I have also topped it off with the 10 year cumulative figures.

[php]Year Sector Average L&G 100 L&G all share

1996 16.62 13.75 (73) 15.15 (60)
1997 18.29 26.99 (13) 22.01 (46)
1998 9.78 15.22 (23) 13.13 (35)
1999 26.07 17.30 (89) 23.18 (54)
2000 -4.58 -9.78 (89) -5.73 (53)
2001 -14.67 -15.41 (68) -13.17 (38)
2002 -23.55 -23.88 (58) -22.97 (42)
2003 22.66 15.32 (96) 19.99 (57)
2004 12.65 8.69 (85) 11.88 (48)
2005 21.23 17.94 (83) 21.11 (43)
2006 17.46 12.39 (89) 16.42 (53)
2007 1.62 4.83 (34) 4.45 (37)
10 year cumulative
5.55% 3.18% (94) 5.68% (46)

[/php]So, we can see from those figures supplied by Financial Express that neither the FTSE100 or FTSE index trackers from L&G have managed to enter the top 10% of funds at any point since 1996. The L&G 100 did come close in 1997 by hitting 13% but over 10 years but spent most of the time at the bottom end. It had a cumulative return that put it ranked at 94%. You would have had a harder job picking a managed fund that fell into the bottom 6%. Also, the all share can be seen to be more consistent at the mid table range as you would expect.

Aegis

earlgrey wrote: »

Commission-based financial advisers dislike trackers because managed funds pay them two or three times as much trail commission as trackers. The dodgier advisers will give all sorts of reasons to justify their position. The L&G all share tracker pays them just 0.30% p.a trail commission and the L&G Gilts index pays 0.00%. Whereas they can get 0.75% p.a. and more by selling managed funds.

That means on an investment of say £100K they'll get just £300 a year or less in annual trail commission if they sell tracker funds but up to £1000 a year for the same investment if they sell managed funds. Makes a big difference to their profits. That's the major problem with using commission-based IFAs and to some extend those using a "hybrid" fee-based fee system.

Please stop doing this. Every time dunstonh posts, there you are with a rant against IFAs that take commission along with the hybrid fee advisers too. It's getting very old, and you still haven't actually demonstrated that any bias exists, you simply assert it every single time and generally ignore the explanations as to why the bias doesn't exist with the hybrid fee system.

You'll get a very different story from those advisers who charge a genuine flat rate fee. You can get a less biased opinion than from commission hungry advisers in this Financial Times booklet, long advocates of trackers: http://www.brochurecentre.co.uk/pdf/file_55.pdf and 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/

Sounds like they fully accept the Efficient Market hypothesis with their justification for picking trackers over managed funds. I find this rather unusual, as I just did my first mock paper for the Diploma of Financial Planning, and one of the areas they touch on is the Efficient Market hypothesis and why it suffers from limitation. Needless to say, the idea that all prices automatically factor in all available information ignores limits to the flow of information from the companies to the general investor and investor sentiment (often uncorrelated to technical or fundamental information), meaning that on a small scale arbitrages do exist for some time and that in the long run it is possible to pick stocks that are currently undervalued or overvalued and to react accordingly.

The idea that funds which beat their respective benchmarks over and over again do so only through shear luck strikes me as very strange indeed.

I would be very interested in the proof of that claim. Bottom of what exactly? The All-share index has often trailed the FTSE100 but not always - with this year as an example. The L&G FTSE100 tracker is about 2% ahead of the L&G All share tracker this year. Generally though I wouldn't disagree that tracking the wider index may be the better option but it depends on the objective and on other investments.

As a general rue, trackers appear in the middle of the performance table in the long run for a given sector, while bank managed funds appear towards the bottom and good quality investment house managed funds appear towards the top. Obviously there's quite a variance in the spread of both sets of managed funds to the extent that they sometimes overlap, but as a general rule of thumb if you exclude bank-managed funds from the performance tables, the total returns are likely to be better for a managed fund than a tracker within that index regardless of the investment period you select.

As for why I say this, it's because I did a bit of research on trackers and managed funds before I started to invest my cash. I looked at performance tables over 3, 5 and 10 year periods to ensure that the funds I picked weren't just one-off lucky picks, and also ensured that I was happy with the mandate that the manager had for stock selection. Once I was happy enough, I commited.

I don't have a single tracker fund in my portfolio right now.

Low cost trackers are consistently just above average for their sector year after year - just as you'd expect. Managed funds can be at the top for one year or even five years then bottom the next. The high fees are a major drag on their performance. That's not to say there's not sometimes a case for managed funds if for instance you want a fund with a bias towards income for example.

The good managers tend to outperform their index each year. Citywire are quite good at listing the added value that specific managers have brought to their funds over various time periods (at least they do from memory, I can't access the site right now) to allow the investor to again ensure that the manager is earning his AMC.

But always be wary when an IFA tells porkies or gives smoke and mirrors "facts" about tracker funds to justify the funds that pay them high commission and perhaps look elsewhere for advice.

Everyone should always be wary of anyone telling "porkies" and should always try to get to the bottom of their ulterior motives for doing so.

On that note, can you show where there's an IFA telling porkies about managed funds? Moving on to your next post, the following are what you have brought up as dubious:

Index trackers are as risky (or safe) as the index they track.

The Allshare index is down around 30% on the year which is still a whole lot better than the 58%+ loss of some managed funds in the UK all companies sector. I would be very concerned if you really believed what you are saying accurately represented the truth. IFAs are supposed to understand these things.

The once frequently New Star alone have 4 funds in the UK all companies sector down over 47% this year. The trackers are of course just above average as usual.

In the all share index on trustnet for 1 year returns, the highest tracker is in position 73 of 340 or so, which is quite a respectable top quartile performance. In defence of the managed funds around it, however, they are mostly higher-risk funds looking for better returns in good markets and are mostly invested in smaller companies rather than the FTSE 100, which is what this tracker is focused on. The first AllShare tracker comes a few positions later in 100th, which is an upper second quartile performance, more or less what you would expect for the best tracker when the difference in performance between 100th and 200th is only 2% return annually, as this is when the low charging structure comes into its own.

I'm surprised you feel so able to predict the market now when, despite all the warnings elaswhere, you failed to predict the market falls this year. Very much the reverse in fact. Perhaps that has something to do with the fact that the more you persuade people to stay invested the more commission you make.

Sooner or later the market will rise again, and the fund managers who are good at stock picking will bve making good returns over the market again. Tracker or managed, anyone who remained invested over the last year lost money, so I fail to see what this has to do with the difference between the two.

Becoming a financial adviser doesn't automatically give a crystal ball to play with, unfortunately.

If you are an IFA and genuinely don't understand that then I'm totally amazed. Any kid with a CSE in maths should be able to explain. Or perhaps ask on the MF board for help if you genuinely don't understand the numbers?

I have 2 a-levels in maths and a masters degree in a highly numerate subject, all of which included fairly extensive statistical analysis, and I very much disagree with much of what is said in the MF article on trackers. It seems that they're happy to twist the facts completely to suit their argument, demonising managed funds to the point where it almost looks like slander.

If I was less trusting I might even accuse them of commission bias because they sell trackers through their website...

sabretoothtigger

Does the table show returns before fund charges are applied, low charges are supposed to be the real advantage of trackers.

The lowest charge for a ftse tracker is .3% I think and l&g is .5% but also there is tracking accuracy

dunstonh

Does the table show returns before fund charges are applied, low charges are supposed to be the real advantage of trackers.

the tables are net of annual management charges. You will find all the performance charts out there are inclusive of the retail annual management charge.

StevieJ

It seems that a number of managed funds are tracking the index at the moment out of fear. Also what about income funds that stuck with the banks all the way down because they needed the dividends, I now realise that income funds are a very dangerous place to be:eek: although they were probably classed as one of the safer options in days gone by .
Trackers for me every time :j Except for SG CORE Alpha Japan, this has performed very well even though the index has halved, due partly to exchange rates but also excellent management.

sabretoothtigger

LLoyds say they will give free shares instead of a dividend, a scrip issue or whatever.
They'll do this in the spring last I read where as barclays wont be giving anything till autumn at earliest, not sure about the others or if any of them will be around even
Shares might only be worth a few pennies by then but its still income (at the expense of capital)


Funds would be silly not to follow the index fairly closely after a fall. We saw a 20% rise not long ago after all, just got to be perfect on the timing and you could do better then in a normal market

dunstonh

Equity income funds ranged from medium to high risk so they tended to stagger either side of an index tracker as far as risk goes. What has "generally" happened is the higher risk versions have gone down by more than the lower risk versions.

However, having done a quick comparison of the two sectors by dumping them into a single list with 12 month performance, there are far more equity income funds at the top end than UK all companies funds. No surprise that its mid caps that seem to be at the bottom end. The old favourite Inv Perp High Income proving to be as consistent as ever. (its currently showing as lower risk than the L&G Index tracker and showing -7.1% over 12 months compared to sector average of -18.2%, That compares to -22.1% for L&G index tracker and -24.8% for uk all companies sector average)

The UK equity income sector is about to be shaken up with a new UK Equity growth and income sector being created and the funds in there being split between the two. This should help identify those that need the dividends more and perhaps have higher risk than those that do not.

sabretoothtigger

When you get the offical 2008 figures for that table you gave could you let us know, Im interested to see how it compares
I didnt realise 2007 had been so slow