Can anyone recommend a stakeholder - we want to transfer?

paul666

except uk trackers havent beaten much for some years (partly down to the fact trackers dont do as well in poor stockmarket performance and partly down to the fact that the UK has been the worst stockmarket performer out of the G8 countries). Plus placing all your money in one sector is foolish anyway.

I disagree. Strongly. We've been round this discussion before DD...

I'm not going to spend my time posting links to various articles from providers, papers and finance web sites to prove my point. And I cannot hope to achieve your rate of posting on this board and some of the associated ones which I consider to be very helpful and welcome.

But every three months or so, I'll wander over here and take issue with some of the stuff I may see because it's so at odds with what is commonly accepted elsewhere. I hope you'll forgive me.

dunstonh

I am aware of these amateur sites you refer to. The problem is that most of the past performance figures quote specific periods where the trackers have generally been better. Everybody can pick periods which suit their particular fund. There was a time when the UK tracker was consistently better over the longer term than the average managed fund. It hasnt been the case for about 6 years though. It is well known that trackers are bull market investments.

In addition, the comparisons are often made against funds which should not be compared. ie, UK tracker fund vs balanced managed fund or UK tracker fund vs cautious managed. The funds have a different investment goal and different underlying assets (or index to track). There are going to be times when one is better than the other because they are different.

In very simple terms trackers do tend to perform very well when going up but when going down, there is no downside protection and they miss the benefit of dividend returns.

The issues affecting the UK stockmarket and not the other G8 countries are specific to the last few years so looking at performance before 1997 is not a good guide anyway.

Lets compare the L&G UK Index Fund to Fidelity Special Situations fund. L&G tracker is in the UK all companies tracker sector and Fidelities fund is in the UK all companies active sector. If you invest in 1995, you would see little difference between these funds until 1999. Up to then then, they had taken it in turns to be higher than the other. After the stockmarket crash the Fidelity fund ran away with it. £100 in 1995 would be worth £192 with L&G but £442 with Fidelity.

Lets pick a managed fund. Newton Balanced managed. Oops that beaten the tracker. Lets pick a bank fund HSBC UK Growth. Oops again, thats beaten the tracker. So does Scotish widows Stockmarket growth fund. I could go on and on with an endless number of funds which have beaten the tracker.

What is commonly accpeted elsewhere is out of date and to be expected by daily mail readers who visit sites with "fool" in the name. I believe that the fool site quotes that 82% of active funds failed to beat the benchmark FTSE all share index from 1984-2004. Nice headline quote but then that includes active funds of lower risk which are far less volatile along with far east funds which have never recovered from the high. Plus that period covers a time when the UK economy shifted from boom and bust with periods of high growth followed by declines but the higher inflation rates of that time pushed the markets up again in a way that wouldnt happen in a low inflation economy. There were also a greater number of mergers taking place which pushed the index up faster.

I am not saying a tracker is a bad investment or a good one. However, it is not the answer for everyone. If we are about to go through a stockmarket boom, then a tracker is an ideal place to be. If the FTSE is still 4900 in 5 years time then the tracker will be the same value but at least the managed funds would have had the dividend income in the meantime.

I do use trackers in my recommendations but i never place 100% into them. Indeed a rather large single premium pension i did today had 15% placed in the UK tracker fund. I also placed 15% into an active fund as well to hedge my bets. The rest going into other sectors. That probably says more than the rest of this rather long post that was never meant to be this long

paul666

I find myself agreeing with just about everything you say! However,

I am aware of these amateur sites you refer to.

Oh! Spot on sir! An excellent ripost :-)

I am not saying a tracker is a bad investment or a good one. However, it is not the answer for everyone.

Neither am I, but in the absence of any other educated choice or professional advice, a cheap UK tracker can be a good place to start.

On average, funds *have* cannot beat the market because they *are* the market. So why not cut your losses and buy the market? as a first step

In very simple terms trackers do tend to perform very well when going up but when going down, there is no downside protection and they miss the benefit of dividend returns.

No dividend returns ??? trackers aren't bent towards High Yield but they still get dividends which is why they come in "Inc" and "Acc" flavours.

Fidelity Special Situations is indeed wonderful. It's truly a star amongst 1,000s - literally. Not because it has done well but because it has *continued* to do well. I also like Aberdeen Property, Jupiter FinOps, First State British Smaller Companies, ML Gold & General and JPFM NatRes.

I try to avoid reading the daily mail and I'm deeply hurt that you should suggest that I do. I'm more of a Guardian/Indy man. I've always thought of the daily mail as a bit of a flag waver for IFAs actually. :-)

But yes, I do admit to being a complete fool. :-)

dunstonh

I realised that picking Fidelity special sits was a cheap shot. Indeed i initially typed that using that fund as an example was like saying trackers were better than active funds as you are not really looking at like to like. However, i removed that and went on to give a balanced fund and a bank fund as an example (after all, bank funds tend to be disasters most of the time)

Of course there are two variations of index trackers. One matches the index and doesnt get dividends and the other (which is the better of the two) has shares to the same weighting of the index they are tracking and does get dividends.

As for daily mail, they lost my faith years ago when they listed tech funds in the same chart as corporate bond fund showing how much better tech funds had performed. I wonder how many people invested in tech funds based on that when perhaps they should have looked at the lower peforming but more consistent corporate bonds.

Pal

You are ignoring a massive problem with the long term reporting of investment statistics - survivorship bias.

Tracker funds tend to track well and have long performance histories. Active funds that consistently underperform quickly lose their investors and fail to attract new money. As a result they are closed down, renamed, restructured or merged with other funds. This means that, even if the performance of all active funds over time was a randomly generated perfect normal distribution around the average, you would expect active funds to APPEAR to outperform trackers over the long term because the crap active funds are vanishing from the long statistics.

As has been pointed out, tracker funds reflect the market performance, which means that they mainly reflect the average performance of all other active funds. Given that tracker funds have lower fees, it is intuitively impossible for the AVERAGE active fund to consistently outperform a tracker. The average performance of active funds is what the tracker is tracking, and they are doing it for a lower annual fee.

Unfortunately it is impossible to prove this using past performance statistics, because the statistics are inherently flawed by survivorship bias. It is only by reviewing the large number of active funds that are closed down over the period that you begin to see the real picture, and that information is not easily available.

You are also ignoring the nature of random influences in active management. Fidelity special situations is often trotted out as a shining example of excellent fund management. But if you assume that the performance of a fund is largely random chance, it is inevitible in such a large investment universe that at least a few funds will have a consistently good past performance histories. It doesn't mean that the investment managers have any skill, and more importantly, it does not mean that the good performance will continue into the future. In other words, even if you believe that active managers have outperformed in trackers over any period in the past, there is no guarantee that such a situation will continue in the future. Any debate regarding specific "periods" when one type of fund will generally outperform the other is largely rubbish. It is people attempting to use irrelevant past performance statistics to prove a theory and represents data mining at its worst - examining data until you find the answer you want.

Another problem is one of the scale of risks involved.

Investment in index tracker funds, particularly equity funds, involves a specific (and quite large) amount of investment risk when compared to, say, investing in cash.

Cash can be expected to increase every year by between about 3 and 6%. The equity market can be expected to go up or down in any year by anything up to (say) 25% in either direction.

The most aggressive active equity managers have targets of outperforming the market by around 2% a year over longer term periods, so by investing in the best active manager you are changing your expected performance range in any year to anything from minus 23% to plus 27%. Knock off active fees compared to tracker fees and you lose about another 0.5% of that annual performance. Given the complexity involved in choosing and monitoring active managers, that is a very small amount of additional gain for the additional risk and time that is required. You also have to knock off adviser fees from the overall performance....

We also have the age old problem of actually selecting the correct manager in the first place. Almost all individuals and advisers use past performance statistics and fund manager marketing material (or worse IFA magazine articles) to choose funds without doing any kind of meaningful research into the managers and their internal processes. Even worse, there are some that blindly follow "star managers" despite the fact that they are almost always the product of random statistical anomolies rather than any indication of investment skill.

While many advisers will state that it is only a small part of their selection process, the impact of past performance on recommendations is enormous. For example professional advisers will NEVER stick their necks out and recommend a fund with a bad past performance history, even if they believe that the fund is fantastic and is likely to perform well in the future. My company would never do it, and we do huge amounts of investment manager research that smaller IFAs could never hope to match. The professional risk is simply too great and clients would be very quick to try and sue if the recommendation turned out to be wrong.

And then we have adviser fees. With active managers you need to continually monitor your managers and their likely future performance. Most people pay advisers to do this, and there are likely to be switching costs every few years in the future, all of which have to be knocked off the active manager performance figures, along with their higher management fees....

In summary, 99% of private investors should be sticking with index tracker funds if they want to invest in equities or Government bonds. Active management is most suitable for corporate bond or property portfolios, or people who simply enjoy gambling and can afford to do so.

dunstonh

Nice post Pal.

It should be noted that most small IFAs are attached to Networks who research investment funds and provide information that a small IFA cannot hope to get alone but as the Network supports 5000 IFA firms, it has that spending and research power.

Past performance is useful in one area and thats spotting consistently poor funds. That information can be used with other research material to spot the fund mangers/companies that have perhaps, mid performance aims (can't think of another way of wording that for now). Once a fund manager/team is replaced, past performance is irrelevent. New people with new ideas will do things differently. So a duff fund historically, may get turned round. Of course it could remain duff. That is the unknown that Pal talks about.

At the end of the day, the focus should be on asset allocation rather than sticking all your money into one fund/sector. Research from the FSA and a number of other places says this is the most important factor. I read recently that long term performance is down to 94% sector allocation with the rest being fund selection and timing. So its more down to getting the right mix, not the right fund.

Also, on charges. The difference in pensions is either non existent or very small whether its a tracker or a managed fund.

The biggest issue on a tracker is downside protection or lack of. Active funds will usually have more downside protection. So as has been said, goind up tracker funds are good. Going down, they are less so. With fewer mergers, lower inflation and no boom/bust economy along are trackers as desirable as they used to be? Those things did favour trackers more than active funds

Most pension providers offer a range of "managed" funds. These are funds that i personally dislike and rarely do I recommend one. They are a jack of all trades and a master of none. However, it is there or with profits where most policyholders seem to end up because they choose the default fund or they get put in it because they have seen a tied advisor (tied advisors are not allowed to recommend funds).

paul666

Just as a matter of interest / reference, this highly recommended post on the fool by someone who used to manage two or three funds seems to demonstrate, as Pal indicates, that active funds are for institutional investors only.

http://boards.fool.co.uk/Message.asp?mid=8591392

And Yes, we are getting seriously off topic here...

jolenejolene

Hi everyone,

well thank you for all your posts! I have been reading and trying to decide what to do!

I think i need to see an IFA - as even with all of your help I don't know where to go.....

Thanks again!

Jolene

CashSaver_2

Find a life company that offers a pension wrapper and access to a wider range of external funds - preferably with free switching. You may pay marginally more than a stakeholder product but you may find more suitable risk profiled funds that will outperform the M&S.

The biggest "charge" on your pension fund is arguably the performance of the underlying investment. Finding a pension wrapper that offers the flexibility and choice of funds is worth paying a little extra.

Look for an IFA that specialises in pensions. Ask what qualifications they have.

DiggingOut

Don't just see one IFA. Some are very good at recommending the funds that pay them the highest commission. Talk to a couple of IFAs, at least.

Take the recommendation of IFA #1 to IFA #2 and ask him why the fund he is recommending is better than this one, and vice versa. It's your money, after all, and they are supposed to be working for you. If they want a nice commission off of your money, let them earn it.

Alternatively, do some research yourself. If you decide you like the tracker approach (I do, myself, because I think GWB's tax cuts and his pension proposal are going to trigger a long-run bull market in the USA with world-wide effects, and in a bull market I expect the trackers to shine), go with L&G's epension, their fee structure is very low.