Isa -Shares

jamesd

It's also interesting to know that Vanguard was the original populariser of the tracker funds concept and that the fool web site has an editorial focus in favour of tracker funds. No problem to read the material, just don't expect it to be a well-rounded discussion of the subject. You also need to know that US taxation favors holdings for longer than a year and that a study that took that into account found that active funds in the US beat trackers before tax, but not after tax, due to those differing capital gains tax rates. The UK doesn't have a different CGT rate for holdings less than a year.

If you aren't interested in learning and changing investments, stick to trackers. If you're interested in paying attention it's worth also looking at actively managed funds.

Even if you're interested in doing the work there are still times and areas where trackers can make most sense and sensible people paying attention may well use both for different things.

The easy way to do better than average fund performance is to rule out all the ones that consistently do badly. That works for both trackers and managed funds because it eliminates those with higher fees that aren't matched by better results.

Tracker advocates also correctly place a very high focus on fees, because a tracker fund charging higher fees can't generate better performance than the rest (not quite true, it can do things like share lending, but close enough). Those who also look at active funds will look instead at total return after fees, because total return is affected by manager performance as well as by fees for an active fund. So just looking at fees misses a lot of the picture, including the most important parts for an active fund.

One thing the Fool article didn't mention: none of the tacker funds even matched the FTSE performance, let alone beating it. Not even one. Guaranteed underperformance is part of the cost of sticking to only tracker funds. But it's still better than using managed funds and not paying attention. So use trackers if you won't pay attention.

dunstonh

it turns out that over five years, only about 25% of actively-managed UK equity funds investing in large companies did better than the FTSE 350. And put another way, it's even more stark a conclusion. Three quarters of them didn't outperform the FTSE 350

That is not a surprise. Funds with an investment focusing on large caps would have been expected to underperform the FTSE350. Most of the Labour years saw large caps underperform small and mid caps. So, any fund, managed or tracker, would be expected to follow suit.

and that the fool web site has an editorial focus in favour of tracker funds.

And what funds to Fool get paid to market?

You also need to know that US taxation favors holdings for longer than a year and that a study that took that into account found that active funds in the US beat trackers before tax, but not after tax, due to those differing capital gains tax rates. The UK doesn't have a different CGT rate for holdings less than a year.

This is a key difference in the UK and US. In the US, if you remove the taxation issue, managed funds fare a lot better. In the US it makes much more sense to invest in trackers. In the UK it is not quite so clear cut. Usually its a case of taking the best from both trackers and managed rather than compromise your investment principles.

pqrdef

jamesd wrote: »

Guaranteed underperformance is part of the cost of sticking to only tracker funds. But it's still better than using managed funds and not paying attention. So use trackers if you won't pay attention.

This I don't get at all. Trackers go up and down, and leave it to the investor to decide when to buy in and when to get out. They aren't supposed to be a long-term buy-and-hold. What they're offering is just exposure to a sector of the holder's choice.

If I want a long-term buy-and-hold and I don't want to pay attention, I want to pay a manager (or an IFA) to be doing that for me, because somebody should be.

To use a tracker that way is to say that

(a) we can pick a sector that's very likely to grow over the time we'll be holding it, whatever it does in the shorter term. But it's hard enough forecasting the market over 1 year, let alone 10. I'd make forecasts over 6 months or over 40 years, but in between times, anything could be anywhere at any time and could stay there for too long.

(b) knowledge and skill are illusions and nobody can beat pot luck. Maybe, but that's a counsel of defeatism and implies that there's no point in managing your managed funds either.

The Fool article refers specifically to "UK equity funds investing in large companies". The closet Footsie trackers, then. With a fund like that, the manager is locked up in a small box with his hands and feet tied. There's very little to be achieved by share-picking if one only has the 100 to pick from, because market sentiment rules, over the short-medium term, and the shares all go up or down together for that reason. If that weren't so, phenomena like the 2008 crash and the 2009 recovery wouldn't be possible, after all, the coimpanies are diverse enough.

So yes, not much point in buying a closet tracker. But that's not the whole managed fund universe.

jamesd

There are many people who invest for retirement and who both don't have the knowledge and interest in learning and who don't have a professional managing the funds for them. That's one area where trackers can beat managed funds that might have varying performance due to such things as manager changes or strategies inappropriate for the situation at a particular time. You can still forecast that there's likely to continue to be an equity risk premium which will usually make equities (or other investments with their own premiums) better for long term investing than savings accounts.

I agree with you that there really should be someone keeping an eye on things and making adjustments, but for those cases where this doesn't happen, trackers beat managed funds because of the reduced chance of major under performance.

Personally, I use both active and passive funds, depending on what I want at the time.

pqrdef

How does one judge underperformance? In any category some managers will be a little more cautious than others. They may not get as much out of a bull run, but then again, they may have been better prepared for risks that didn't in fact materialise. If I put my pension pot on a horse at 10-1 and it wins, I've got a fantastic return on my money and will retire in luxury. But what I did was probably not a sensible thing.

Colincbayley

All well and good guys,

BUT!

None of this helps the likes of me make a choice of funds

I am more than happy to pay attention to my investments, and to make choices. I am in it for the long term and want to invest a fair chunk of ££.

However, it still comes down to the same question, how do you choose which funds of the 000's to invest in.

I did some reading yesterday, and came out with the following, I based these choices on the markets they invest in, fees, S&P rating, lenght of time fund has been around etc.

What are your views.
£5000 in each fund (£10K this tax year and £10K next, times 2 as I can invest for my wife also) Then £20K per year from then on. I will chuck this years investment in as a lump sum, but drip feed monthly for following years.

Fidelity Global
Fidelity European
HSBC FTSE 100 Tracker
?? with exposure to China and Asia

blinko

are these unit trusts or investment trusts
they aren't bad
have they beaten the index over the last 5 years again no guide to future performance but its one of my tick boxes
are they giving you acces to the sectors you will grow
are they overlapping in exposure
whats your risk profile asia and emerging economies will be high risk with volalitity
why a FTSE tracker ? why not a UK fund

nrsql

pqrdef wrote: »

This I don't get at all. Trackers go up and down, and leave it to the investor to decide when to buy in and when to get out. They aren't supposed to be a long-term buy-and-hold. What they're offering is just exposure to a sector of the holder's choice.

If I want a long-term buy-and-hold and I don't want to pay attention, I want to pay a manager (or an IFA) to be doing that for me, because somebody should be.

Would be nice but the tracker will give performance depending on the index. The managed fund will depend on the manager - a lot more possiblility for over/underperformance (+charges). I would say you need to pay a lot more attention to the manager anf fund house or ifa than you would in the tracker situation.
With a tracker you have to take a view as to whether the sector will prosper, with a managed fund you need to look at whether the manager is still active and whether his views (which may have changed) still reflect the market.

I would say trackers are more for lazy investors than managed funds.

Are you looking to increase profit or reduce losses?
Note - viewed in percentage terms an equal gain followed by loss (or loss followed by gain) will end up with a net loss. If you work on 10% gain/loss per year you will end up losing 10% over about 20 years. The important thing is to make sure that gains are greater than losses.

My opinion
Would go for the all share rather than ftse 100.
For far east I like
Aberdeen Asia Pacific & Japan
Lazard Emerging Markets
First State Gbl Emg Mkts Ldrs

With the amount you are investing you could easily pick 2 funds per sector (e.g. ftse 100 + all share).
Could also balance something very speculative with something safer
I like Investec Cautious Managed for something with supposedly less volatility.

jimjames

Personally I'd suggest the HSBC All Share tracker and HSBC FTSE250 tracker as it gives a wider exposure to all sizes of company on the UK market. You would expect the FTSE All share to do that but as it is weighted by market capitalisation large companies dominate it. The FTSE 250 tracks the next 250 companies below the FTSE 100 so gives a wider spread with the potential for higher growth. A common explanation is that it is easier to grow profits from £1m to £2m than from £2billion to £4 billion.

For your far east/emerging markets the funds suggested above (First State Leaders) and Aberdeen Emerging are both well regarded.

I disagree that trackers are not for long term buy & hold, I think they can form the core of a portfolio that will give good performance long term. If anything they are better long term than buying a managed fund that you have to constantly check to ensure it is performing and has less chance of beating the index over the long run.

Looking at the UK All companies sector on Trustnet, over the last 5 years the sector average is 25.2% growth, the FTSE AS was 30% and the HSBC AS tracker was 29.3% so the index and tracker both beat the average of all funds in the UK companies sector.

Averages don't tell the whole story though. Out of 310 funds in this sector 86 beat the return from the index over 5 years but this means that 224 failed to beat the index. If you were in one of those funds you would have been better off with the HSBC tracker. The returns varied from 117% gain to -17% (ie a loss of money)

Will the fund that gained 117% be top in the next 5 years? Who knows but the chances are fairly slim.

For some less developed markets trackers make less sense as fund managers have more opportunity to research companies to add value but for UK/US I believe a tracker is a very good way of long term exposure to these markets.

dunstonh

Personally I'd suggest the HSBC All Share tracker and HSBC FTSE250 tracker as it gives a wider exposure to all sizes of company on the UK market.

The FTSE250 is more volatile and higher risk. The OP has mentioned medium risk edging to high in his posts. Judging by the funds the OP has looked at in #17, it suggests a higher risk approach is now being looked at.

I would like to know in context what the OPs risk profile is and why it has moved up higher during the course of this thread before offering funds.

I would say trackers are more for lazy investors than managed funds.

I would agree. However lazy investors are also suited to use portfolio funds (fund of funds or controlled sector allocation fund). If you are going to be a lazy investor you shouldn't go with random fund picks or funds that require more closer management and manual rebalancing.