Want 5% on £300k

dunstonh

to be fair i've read numerous times that active management isn't worth the extra fees.

Most of which is based on US research. A lot of that doesnt apply to the UK. US managed funds find it very difficult to beat trackers due to taxation disadvantages. Those disadvantages dont apply to the UK.

AM would have to outperform the market by 3% just to get the same as a tracker.

Yet typically, tracker funds tend to be mid table. So just under half the funds manage to do it.

Yeah I like property as an investment. But I don't think 300k is enough to buy property. I certainly don't think buying flats to rent out is a good investment. I do like the likes of British Land and Land Securities though

Thats you looking at direct property but if you cant afford it then you have property funds that can do the same.

I wouldn't rate fixed income as an investment, inflation is 4.4% and 10 year gilts have a redeption yield of 3.5% (or it was last time i looked). That certainly doesn't look like a good investment. i think all those pension funds being forced to buy gilts distorts the market making it a duff investment

You are just looking at one type of fixed interest investments. There is more to it than that.

The problem is that the FOS consider that the typical UK consumer is cautious in their investment approach. Shares (in general and in isolation) are higher risk. So, if the investor isnt using lower risk investment areas they are either going to invest above their risk profile or require a greater holding of cash to compensate and interest rates are dire.

Rollinghome

Certainly there's risk in property investment but if anyone doesn't quite get the risk in equities then they need to look at Japan again.

People there who invested in equities over 20 years ago will still find today that their investments are worth less than a quarter of their previous value. Just as it looked as the situation might improve a natural disaster struck. There's no rule that says the same couldn't occur for other reasons in any other market or several.

Equities are a risk investment and the risk is that they could go badly wrong even over the long term. That's not a theoretical risk but a real one.

Which is why diversification into asset classes other than equities as suggested by Mike88 is so important.

jamesd

darkpool wrote: »

1. You could invest in more than 20 shares. With nominee accounts it really is very easy to look after a large portfolio. There is very little paper work.

The work is the constant monitoring of the markets because even the best shares are subject to significant unpredictability and it's regular for even FTSE 100 companies to go bankrupt or otherwise fail badly. The pros relieve you of the need to spend the time doing that.

darkpool wrote: »

2. The professionals don't seem to be that good at investing. I think it a widely accepted that active management does not deliver better returns than trackers.

It's one of the most controversial claims there is. It's usually supported with claims about average performance while ignoring the reproducibility of under-performance that lets people avoid the consistent under-performers. The studies are usually in the US, where the outperformance of managed funds before tax became an underperformance (on average) because the US has a greater tax rate on holdings of less than a year, something the UK doesn't have. The studies also typically ignore changes in manager (human), a good indication of an impending reduction of performance, and assume you hold the same fund continuously instead of switching between funds based on the economic climate and the way managers of different inclinations do better at different times.

I use some of each type.

darkpool wrote: »

3. You buy shares in the likes of Unilever and Shell and you do get emerging market exposure.

How much of that exposure is to smaller growing companies in those markets? None is the answer that comes to mind: those are large companies, not small companies, and aren't located in those markets. It's also not just about emerging markets, what do you know about smaller companies in Europe or the US? How do you plan to get a suitably diversified mixture of high yield corporate bond funds, say? You can in theory hold a thousand different investments directly but it's a lot easier with funds and there's nothing wrong with doing some of each.

Rollinghome

There has been UK research including the report for the FSA which most IFAs will be aware of. The conclusion was that the public should be encouraged to invest using tracker funds as high management charges and commission payments caused the majority of managed funds to under-perform.

It was also pointed out that management charges for funds was way higher in the UK than in the US, often twice as high, which made the situation here worse. Contributary factors for the under-use of tracker funds in the UK was that advisers were paid far higher levels of commission for selling managed funds and the high levels of advertising both paid and unpaid - ie free pushing of funds in the newspapers.



The graph shows returns for the FTSE all-share index, the average return on UTs in the UK All Companies sector, yellow, and the return for Invesco Perpertual Income, one of the most successful UK funds.

So while the majority of unit trust funds underperform the index, if you are lucky enough to pick one of the few that does out-perform you might do better. Unfortunately the study for the FSA found that out-performance rarely lasts and often the best performing funds over one period can be the worst performers over the next.

Due to the problem of commission bias there's always been a lot of misinformation from the industry and advisers which doesn't help investors make an informed choice. With luck the situation will improve following the RDR in 2013 which will ban commission payments to IFAs. I've noticed already that commission-based IFAs who were liable to tell outright porkies to discourage the use of trackers are already improving as they prepare for post-RDR.

jamesd

That report also found that under-performance persisted, meaning that you can avoid those funds.

Nobody should be surprised that funds that do well in one period can do badly in the next. There's a cycle in economic growth/recession and you'd want different funds for each part of the cycle. You wouldn't want to hold a fund like Invesco Perpetual Income during a stock market boom when its manager was taking a cautious view, unless you wanted downside protection, as many retirees who hod it do. I certainly didn't want much of it in 2009 and 2010.

If you're not going to bother looking and adjusting you're a good candidate for using a tracker fund.

Now show the ten year performance of Invesco Perpetual Income compared to a FTSE tracker, not to the index itself, so you have charges and tracking error included in the comparison. Or the five year with a real tracker fund.

Or twenty year. Or since it launched back in 1979. They publish the ten year, 8.28% annual growth while the FTSE was more like 2.5% and a tracker would be perhaps half a percent under that on average. But you already know that IP Income took a cautious view so it did less well over the last five years than usual compared to the FTSE.

Here's the five year comparison:

Red is Invesco pewrpetual Income Acc, yellow is the HSBC retail FTSE All Share Index tracker.
Five year cumulative performance was 19.63% for IP Income, 14.15 for the tracker.

I don't know about you but 1% more a year seems worth having.

psychic_teabag

dunstonh wrote: »

Yet typically, tracker funds tend to be mid table. So just under half the funds manage to do it.

Is it the same funds that beat the tracker year-on-year, or in any given period is it a random set of the active funds that beat the tracker ? If the latter, so that an active fund occupies a random place in the table each period, then maybe being consistently mid-table is no worse than hopping about the table randomly.

ISTR seeing a report recently that only two active funds beat the index over some period. And an advert for M&G Recovery Fund in the weekend paper claimed it was the only UK fund to have consistently beaten the All-Share index for each of the last 11 years.

(FWIW I'm still sitting on the active vs tracker fence)

darkpool

jamesd wrote: »

The work is the constant monitoring of the markets because even the best shares are subject to significant unpredictability and it's regular for even FTSE 100 companies to go bankrupt or otherwise fail badly. The pros relieve you of the need to spend the time doing that.

It's one of the most controversial claims there is. It's usually supported with claims about average performance while ignoring the reproducibility of under-performance that lets people avoid the consistent under-performers. The studies are usually in the US, where the outperformance of managed funds before tax became an underperformance (on average) because the US has a greater tax rate on holdings of less than a year, something the UK doesn't have. The studies also typically ignore changes in manager (human), a good indication of an impending reduction of performance, and assume you hold the same fund continuously instead of switching between funds based on the economic climate and the way managers of different inclinations do better at different times.

I use some of each type.

How much of that exposure is to smaller growing companies in those markets? None is the answer that comes to mind: those are large companies, not small companies, and aren't located in those markets. It's also not just about emerging markets, what do you know about smaller companies in Europe or the US? How do you plan to get a suitably diversified mixture of high yield corporate bond funds, say? You can in theory hold a thousand different investments directly but it's a lot easier with funds and there's nothing wrong with doing some of each.

yeah ok, ftse 100 stock occasionaly go t1ts up. but it is rare, if you invest in 30 blue chips and one goes bust every 5 years it still costs a lot less than 3% annual fees every single year.

tbh i'm not convinced that putting a tiny fraction of my net worth into small companies is such a great idea. i agree if i really wanted that exposure i would get an investment/ unit trust though. i understand the fees would be 4 or 5%

darkpool

jamesd wrote: »

Here's the five year comparison:

Red is Invesco pewrpetual Income Acc, yellow is the HSBC retail FTSE All Share Index tracker.
Five year cumulative performance was 19.63% for IP Income, 14.15 for the tracker.

I don't know about you but 1% more a year seems worth having.

an interesting graph. does it include dividends though? if you take the dividend yield as 4% the active accumulation funds should really deliver FTSE + 4% a year to match the FTSE?

the fund management industry owns circa 90% of the UK stockmarket. so when these financial professionals decide to sell shares who do they sell them to? they must sell them to other investment firms? so how can the overall UK fund management industry deliver above average returns? they are just playing "pass the parcel" with shares and taking 3% a year for doing it.

dunstonh

Is it the same funds that beat the tracker year-on-year, or in any given period is it a random set of the active funds that beat the tracker ? If the latter, so that an active fund occupies a random place in the table each period, then maybe being consistently mid-table is no worse than hopping about the table randomly.

That is where the research and decisions go. If you eliminate the bank and insurance company funds and passive managed funds (which are effectively trackers with higher charges) then you are left with a much smaller number of active managed funds. You then need to decide if you want mid table consistency or the potential to out perform but with the knowledge you may not. That is a very personal decision. Sometimes you will be right. Sometimes you will be wrong. Ideally you aim to be right more than you are wrong but there are no guarantees.

One thing to be aware of, which james has covered, is that many managed funds have an objective that is not the same as the tracker. So, in one part of the economic cycle, they could be very attractive. Whilst in another part of the cycle they could be less attractive and even underperform. So, if you do go utilise managed funds, you really need to keep monitoring and be prepared to move them.

Certain mature markets are more attractive for tracker use. Other markets are more attractive for managed. Hence why you cant say one option is better than the other. If you are too in favour of one of the options then you lack balance and are letting bias dictate your investing and you will be compromising your investments.

Aegis

darkpool wrote: »

but the TER doesn't include all charges levied by a unit trust. It doesn't include dealing charges etc. I read once that unit trusts hold a share for an average 6 months. by the time you include dealing costs/ stamp duty and a cut for the market maker you'll have costs of circa 3% a year.

If you think paying someone 3% to look after your money is a good deal fair enough. I just object to the fund management industry misleading the consumer with terms like TER. TER is certainly not the total amount you pay.

You haven't shown that this 3% figure even exists yet. The TER is designed to include most of the costs of running a fund, including the dealing costs, auditor fees, etc, so I fail to see how a fund with less than a 2% TER could actually be keeping another full 1% of charges hidden from investors.

On top of that, you've contradicted yourself here. You claim that most of these fees are incidental costs of managing a portfolio, e.g. dealing costs, then you go on to have a go at investors who choose to "pay someone this 3% figure to look after your money". Even if this 3% figure exists, which I very much doubt, you are still only paying the fund management company the AMC and any performance fees (which are easily avoided) to look after your money. Anything else is most definitely NOT kept by the fund manager.

Instead of continuing with this so-far unfounded claim about rip off unit trusts, could you please cite your references for the 3% total expenses figure?