Calculating the return on a tracker fund

sugarfree

Anybody know a website / calculator where I can find out roughly how much I would have made over the past 20 years if I'd invested £100 monthly in a fund that simply tracked, say, the FTS All Share index?

Thanks.

ReportInvestor

Not quite your question.

Over 7 years the average UK Tracker yielded 21% and the L&G All Share Tracker yielded 29% according to Money Observer.

Average actively managed UK fund was up 37% over the same period.

sugarfree

Thanks for that, ReportInvestor.

EdInvestor

Anyone planning to invest in a tracker should check not only the charges, buy also the "yield": that's the dividend the tracker pays. Some sneaky providers deduct hidden charges off the divi - avoid them. Over the long term, real returns after inflation come from the reinvested divis, so this is important.

Pal

I have no reason to suspect that ReportInvestor's stats are wrong, but people have to bear in mind that they are going to be horribly distorted by survivorship bias: Failing actively managed funds will not last seven years - they will have been rolled into more successful funds or ones without seven year track records, so that their poor performance does not get counted in the statistics.

This is the main trick used by active managers when they attempt to show that active managers outperform tracker funds. There are many other tricks as well, such as choosing a timeframe (say seven years) rather than a longer or shorter period that might show your tracker or active fund in a worse light.

My main question for the OP is to ask why they are looking at past performance stats? If it is for a misselling claim of some kind then fine, but otherwise it is pointless looking at past performance stats. You might as well calculate how much you would have gained if you had spent £100 a month on the winning National lottery tickets.

Pal

EdInvestor wrote:

Anyone planning to invest in a tracker should check not only the charges, buy also the "yield": that's the dividend the tracker pays. Some sneaky providers deduct hidden charges off the divi - avoid them.

Which ones?

I did find out recently that, for pension fund clients, L&G only report actual tracking performance and do not include dividends received. As a result they severely understate their total performance. This is not "sneaky" but it does mean that investors need to be careful to compare like with like when comparing fund performance.

EdInvestor

Pal

You can see the quite wide variations in yields here on the Trustnet list.

It is true that it is not "sneaky" in that the differences are transparent, as long as you know where to look. Unfortunately retail tracker investors tend to be novices and don't usually know - if indeed they even know what a yield is.

BTW re trackers in pensions,how can they be a justified choice when you can get a decent tracker for 0.5% or less in an ISA or with no tax wrapper at all, while the minimum for any pension - even an occupational D/C is around the 0.7-0.8% range and most people are paying 1%?That's double the price.

ReportInvestor

Pal wrote:

Failing actively managed funds will not last seven years - they will have been rolled into more successful funds or ones without seven year track records, so that their poor performance does not get counted in the statistics.

This is the main trick used by active managers when they attempt to show that active managers outperform tracker funds.

And yet dog funds continue to hold £100bn of investments . I agree that there are plenty of investors who would do better in trackers than in their existing funds.

What % of funds do you guess are affected by the process you describe over a 7 year period, Pal?

The process of change also adversely affects trackers. As stocks drop out of the index and come in, it is actually near to impossible to replicate the index itself.

And there can be other issues, e.g. trackers can be forced to suddenly buy resource companies in the former Russian republics just because they decide to be quoted in London or buy that old IFAs' favourite, Standard Life, just because it decides to float.

They simply have to chase these stocks to fulfil their function, regardless of value.

Milarky

sugarfree wrote:

Anybody know a website / calculator where I can find out roughly how much I would have made over the past 20 years if I'd invested £100 monthly in a fund that simply tracked, say, the FTS All Share index?

If you take the FTSE or similar index the 'moving average' (or MA) is the curve which measures the average level over the period of time (maybe it's a daily average, I'm not sure). This tells you how much the index cost to buy in equal instalments whereas the actual FTSE tells you how much it costs you to buy/sell instantly. Thus the difference between the MA and the current FTSE level will tell you (approximately) how much profit/loss your drip-fed money is worth today.

I've just done a download and a quick spreadsheet of 5 years daily prices (can't go back any further, I'm afraid) for the period Feb 2001 to Feb 2006. Now this shows that the average buying price - excluding dividends, I believe - would stand at about '4760' assuming you bought the FTSE every trading day since then. The current level was about 5850 last time I looked. Therefore the 'FTSE-5yr-MA' has returned about 22.8% over five years as a whole - during 2 years of which it was falling of course.

22.8% doesn't sound much but that's based on a 'regular saving' rather than lump sum - on average only about half of the money put in has been invested for the full five years. This annualises out at about 8.4% but with dividends of about (I dunno, 3.6%?) during that time it could look like 12% gross return

Over the last three years only, of course, the performance will have been that much better.

General remark: I assume the reason why this type of statistic isn't used more widely is because it might make lump sum investing look too risky and thus less attractive and investors want to be able to put down a lump rather than the protracted effort of drip feeding investment.

Pal

ReportInvestor wrote:

What % of funds do you guess are affected by the process you describe over a 7 year period, Pal?

All of them. The removal of underperforming funds from the index will significantly increase the "average" performance figures for active funds, even if only (at a guess), 10% of active funds are merged or wound up over the seven year period.

An easy way to see this in action is to compare the number of tech funds in 1999 with how many there are now.

The process of change also adversely affects trackers. As stocks drop out of the index and come in, it is actually near to impossible to replicate the index itself.

And there can be other issues, e.g. trackers can be forced to suddenly buy resource companies in the former Russian republics just because they decide to be quoted in London or buy that old IFAs' favourite, Standard Life, just because it decides to float.

They simply have to chase these stocks to fulfil their function, regardless of value.

Obviously tracker funds have issues when it comes to accurately replicating the index, but they are very good at it, which is why their returns tend to be reasonably close to their chosen index, even over long time periods. In the meantime the vast majority of actively managed funds have sustained periods of above and below benchmark returns, often with the company converting them into an expensive closet tracker to try and retain business.

You suggest that they have to "chase" stocks as if they are somehow bad investment, but the trackers are only investing at the price set by the market. In practice they will also use other financial products and purchase outside of the normal markets in order to reduce their purchase price and avoid market distrortion. For example this is why L&G's all-share tracker has tended to outperform its benchmark over recent years.

Pal

EdInvestor wrote:

BTW re trackers in pensions,how can they be a justified choice when you can get a decent tracker for 0.5% or less in an ISA or with no tax wrapper at all, while the minimum for any pension - even an occupational D/C is around the 0.7-0.8% range and most people are paying 1%?That's double the price.

Which ISA offers a tracker fund that cheap? You will understand my being slightly cynical given your previous claims about Hargreaves Lansdown being competitive on fund charges.

Assuming you are correct, I agree that, post 6 April this year, it would make sense for most people to invest in an ISA for as long as the tax relief holds out, and then invest in a pension in the years approaching retirement.