What do you think of tracker funds?

ReportInvestor

Re the large cap, small cap debate I note that the HSBC FTSE 250 Tracker (ie the FTSE 350 minus the 100 biggest) has comfortably outperformed the other trackers over 1 month, 3 months, 6 months, 1 year, 3 years, 7 years according to Money Observer eg +88% over 7 years compared to the average tracker that was +21%..

Some commentators in 2005, including Anthony Boulton at Fidelity, suggested that it was time for large caps to improve their relative performance.

I think it's important to disentangle the large caps v small caps debate from the tracker v actively managed funds debate.

One thing I'm still not clear about is this idea of dh that actively managed funds can protect themselves on the way down.

I agree if it means that they can go into defensive stocks, but what it doesn't mean is that they go into cash - very, very few funds have that facility or want it.

Imagine your reputation as a fund manager if you got it wrong .

EdInvestor

dunstonh wrote:

Fashion investing doesnt make a tracker old fashioned. It just doesnt make them the fashion of the moment. Equity Income has been that.

I don't really know what you mean by "fashion investing".

Dividend strategies (eg Equity Income) have outperformed since the beginning of stockmarkets - growth funds, trackers don't come near.

This is well known.

Times article

EACH year, conveniently at the peak Isa season, top securities houses bring out detailed, slightly esoteric studies comparing the long-term returns of different classes of investment and stock markets.

They deserve to be bestsellers because they invariably feature a semi-eternal truth that is perennially ignored: over stock market cycles, most of the real return from owning shares comes from reinvested, rolled-up dividends.

Share prices, on average, stay ahead of inflation, except in prolonged bear markets, but the accumulation comes from the power of compound dividends.

This basic point is probably about 90% of what most people need to know about share investing.

dunstonh

I don't really know what you mean by "fashion investing".

Its a common enough phrase. Surprised you havent seen it before. Especially given your reliance on the media to be the bible for your information.

Fashion investing is whatever is consumer flavour of the moment usually brought on by media reports of what has done well and thats what you should be in. The biggest disaster of this is when the media was encouraging tech stocks/funds. For example, at the point the Daily Mail was encouraging it, the tech funds had grown by three quarters of the highest value achieved. Had you gone in at that point you would have seen 6-8 months of growth before seeing the big decline that occured leaving you with only 10% of your original investment.

Fashion investing doesnt make the area of investment inappropriate to hold within your portfolio. However, it doesn't mean it is the new magic area to make money. Using your equity income example, growth funds were beating equity income funds in the 90s. They will again. Its the natural cycle.

This just highlights the problems when people go with one fund (or limited number) solutions.

I think it's important to disentangle the large caps v small caps debate from the tracker v actively managed funds debate.

Why? If you look at the peformance of trackers against the sector average of the large/mid/small cap sectors, you will see the tracker is very close to the sector average in it's respective area.

One thing I'm still not clear about is this idea of dh that actively managed funds can protect themselves on the way down.

I agree if it means that they can go into defensive stocks, but what it doesn't mean is that they go into cash - very, very few funds have that facility or want it.

I never said they go into cash. defensive stocks reduces the potential for drop when compared to a tracker which doesnt have that option. You just have to look at the last 5-6 years to compare trackers with managed funds to see that trackers have performed poorly during the drop but equally better in the recovery.

Which is best for the future? Who knows? Are the markets going to have sustained recovery favouring trackers or is it going to be volatile, favouring managed funds? Is income the best area going forward or is growth? We can all say what has been the best areas but there is no way to judge or guess what is going to happen. Pick one area and you may get lucky. However, you have higher chance of getting it wrong. Pick all the areas and spread it across them and you hedge your bets, reduce your risk and if you use rebalancing, you can let the investment do its job with limited reviews if you wish.

cheerfulcat

dunstonh wrote:

Fashion investing is whatever is consumer flavour of the moment usually brought on by media reports of what has done well and thats what you should be in. The biggest disaster of this is when the media was encouraging tech stocks/funds.

dh, you cannot blame the media alone. It was the investment houses which jumped on the bandwagon with all their fancy tech funds. And that was a classic stock market bubble; it wasn't a fashion, it was a mania.

Pick all the areas and spread it across them and you hedge your bets, reduce your risk and if you use rebalancing, you can let the investment do its job with limited reviews if you wish.

And of course you can use trackers to do this

dunstonh

dh, you cannot blame the media alone. It was the investment houses which jumped on the bandwagon with all their fancy tech funds. And that was a classic stock market bubble; it wasn't a fashion, it was a mania.

Exactly, it became the fashion.

And of course you can use trackers to do this

In areas where there are no trackers you cannot but in areas there are then there is certainly no harm.

cheerfulcat

dunstonh wrote:

In areas where there are no trackers you cannot but in areas there are then there is certainly no harm.

I'm pretty certain that most areas are covered by trackers/ETFs. In fact I would go so far as to say that ETFs offer many more areas than UTs, especially for anyone prepared to take a currency risk and look at US listed ETFs. But even the European ETFs cover a very large part of the global markets.

Pal

Personally I think that the tracker/active management debate is hugely overhyped. It is the asset class that you choose that makes the biggest contribution to your returns, and represents the largest area of risk for the investor (Selecting bonds instead of cash, cash instead of equities and so on).

If your chosen market rise or fall by 15% it is really pretty irrelevant whether you are in a tracker that changes by 15% less a small fee, or in an active fund that changes by between 13% and 17% less a larger fee. It is the 15% change on the asset class that makes the most difference, not whether an active manager slightly outperforms or underperforms. All an active manager is doing is adding a relatively large amount of risk to achieve a relatively small amount of potential out (or under) performance. I appreciate that outperformance adds up over time, but that is only if your chosen manager outperforms over your long time period. In practice very few managers actually manage to outperform over long time periods, something that points very strongly to the idea that active manager outperformance has more to do with random luck than actual investment manager skill.

Having met quite a few active equity and bond managers, it is pretty clear to me that most active management is largely guesswork (which can work as often as it fails) and statistical manipulation to confuse the customer.

For anyone to find a good active manager who really knows what they are doing is almost impossible, because of the smoke and mirrors that investment managers use to try and stop people finding out about their inner workings. For normal investors it is completely impossible to make an informed decision on which active manager to appoint. (Anyone who even looks at past performance statistics when selecting an active manager needs shooting).

For these reasons alone, I would suggest using trackers, or using a fund or funds or manager of managers service. The fees on the latter are higher, but then someone with access to the inner workings of the managers will be doing proper regular reviews for you. They may not get it right all the time, but they stand a much better chance than the average person on the street.

The investor can then concentrate of choosing the right asset class to be in, which is where most of the investment risk is concentrated anyway.