do equity trackers count as growth (rather than value) investing?

12tonelizzie

do equity trackers count as growth (rather than value) investing?

masonic

HYP, value and growth are strategies that focus on the investors opinion, respectively, that the share will generate a high income, the share price is undervalued, or the share will experience rapid growth. Trackers just use the relevant index to determine what to invest in. Trackers will coincidentally include some shares that could fall into each category. At different times a tracker might be biased towards either value or growth.

Dividends for tracker funds work in the same way as other funds - the fund receives income from its constituent shares and distributes it to the investor (or not, in the case of accumulation units).

It's not clear whether you are considering investing in your own portfolio of high yielding shares, or just buying 'income' orientated funds, but if you can come up with strategic reasons why combining HYP with your current passive investments would enhance your portfolio, then it is as valid as any investment strategy can be. Replication is something you would need to look for and ensure you are happy with the overall exposure where there is overlap between the investments.

jamesd

Equity trackers are mostly growth, though the FTSE has a fair dividend.

HYP is mostly not worth doing. A couple of years back during a discussion here I worked through the numbers to compare the Fool HYP1 to the Invesco Perpetual High Income fund. The fund was the clear winner.

In the US the HYP approach is of more value because the US has higher taxes on holdings of less than a year and also taxes funds on growth as it happens. Here neither is true, so funds aren't as disadvantaged as they are in the US. There's a similar effect for managed vs unmanaged funds: in the US managed beat unmanaged on average before taxes but not after taxes. Not that you'd pick an average fund, it's easy to eliminate the consistent poor performers an select from the rest.

When looking at the Invesco Perpetual Income and High Income funds do remember that the manager took a cautious view in 2009. That greatly hurt five year average performance. It was a time when optimists were best off not holding it. But if things had turned out differently it could have been a very different story. Picking managers for your view of the economic situation matters. Don't pick a cautious one if you don't want to be cautious. Woodford didn't do the right things to capitalise on the opportunities in 2009 and later. A FTSE tracker would have done better and a recovery fund like M&G Recovery better still. But that's hindsight, he could have turned out to be right. He may be right over the next two years, my crystal ball is cloudy. I'm more optimistic than he seems to be but I'm also not investing mostly in the UK, so we're looking at a different investment universe.

The sector averages aren't good to use for picking managed funds. The first step in picking managed funds is to eliminate those that are consistently dogs. Then you can start to pick from the more decent remaining options. This means that the average understates what you can expect to get from the weeded average that remains.

For ETFs or tracker funds you'd carry out a similar exercise, eliminating the ones that consistently underperform due to high charges. But the differences between tracker funds are less than between managed funds, so the reward for weeding is less in the tracker area. Still worth doing.

masonic

12tonelizzie wrote: »

So e.g. a FTSE All-share tracker's dividend will fluctuate as its constituency varies from growthy to valuey? Presumably dividends were low back when the FTSE was full of bubbly dotcoms.

Yes, what is in the FTSE index will determine how it is biased. For a more recent example, when the banking sector imploded, that will have had a significant effect. I'm not sure if you appreciate that high yield and value refer to two different approaches. HYP is about finding companies that will pay large dividends, but value is about finding companies whose share prices appear generally underpriced in some way - high yield can form part of this strategy, but there is more to consider than the dividend yield alone.

Re UK value, I plotted on H-L (1) iShares UK FTSE Div Plus, (2) the UK Equity Income sector, and (3) Invesco Perp Income & High Income (which as I understand it are 'star' equity income funds).

Over certain periods there's not all that much between them, but over 5 years the ETF has delivered -8.5% (eek), the sector 16.5% and the IP funds 30%. Can I take the 'sector' figures as an objective average across all funds? And is this a fair comparison with the ETF? If so, it's a pretty good showing for managers. And presumably Invesco comes up trumps because Woodford did the right things during the credit crunch?

Investment styles such as 'high yield' have some subjectivity to them. They are active management styles and can be approached in different ways. A passive investment might be looking at past yield alone to determine what to invest in, whereas an active manager will consider the potential future yield based on a number of other factors and will seek to preserve the capital value of his investments, which a tracker may have no mechanism to do.

Woodford certainly did the right things at the start of the credit crunch (when I held the fund), but as jamesd points out, he took an overly cautious view afterwards and I sold my holding as a result (possibly waiting a bit too long to do so!) That is a good example of the fact that active funds need to be reviewed regularly.

Linton

jamesd wrote: »

Equity trackers are mostly growth, though the FTSE has a fair dividend.

HYP is mostly not worth doing. A couple of years back during a discussion here I worked through the numbers to compare the Fool HYP1 to the Invesco Perpetual High Income fund. The fund was the clear winner.
.....

When looking at the Invesco Perpetual Income and High Income funds do remember that the manager took a cautious view in 2009. That greatly hurt five year average performance. It was a time when optimists were best off not holding it. But if things had turned out differently it could have been a very different story. Picking managers for your view of the economic situation matters. Don't pick a cautious one if you don't want to be cautious. Woodford didn't do the right things to capitalise on the opportunities in 2009 and later. A FTSE tracker would have done better and a recovery fund like M&G Recovery better still. But that's hindsight, he could have turned out to be right. He may be right over the next two years, my crystal ball is cloudy. I'm more optimistic than he seems to be but I'm also not investing mostly in the UK, so we're looking at a different investment universe.

Disagree. The purpose of an HYP, as originally defined, is to provide a low maintenance potential replacement for an annuity with at least partial inflation tracking. It's no great problem to get a yield > 5%. The High Income Fund Yield is under 4%. To then complain that growth is less than some other funds is missing the point.

Also - you seem to be saying that the High Income fund is the better way to go, but then say that Woodford made the wrong call in 2009. Perhaps you should rework your numbers.

Agree with your last point though. My view is simple - if you want income go for income, if capital growth is what you are after go for growth. For UK based growth consider a good specialist growth fund such as M&G Recovery. I have held this for 17 years - average annual return a tad under 8%.

Linton

12tonelizzie wrote: »

.......
Re UK value, I plotted on H-L (1) iShares UK FTSE Div Plus, (2) the UK Equity Income sector, and (3) Invesco Perp Income & High Income (which as I understand it are 'star' equity income funds).

Over certain periods there's not all that much between them, but over 5 years the ETF has delivered -8.5% (eek), the sector 16.5% and the IP funds 30%. Can I take the 'sector' figures as an objective average across all funds? And is this a fair comparison with the ETF? If so, it's a pretty good showing for managers. And presumably Invesco comes up trumps because Woodford did the right things during the credit crunch?

The behaviour of the iShares UK FTSE Div ETF provides a good example of why a tracker (which is what an ETF is) is not the answer to all investing problems. The trouble with blindly chasing high yields is that yields may be high because the company is successful and is returning some of its gains directly to shareholders (good) or it may be that the company is a struggling dog whose share price has collapsed, a collapse not yet reflected in the cash value of dividend (disaster). A simple tracker cant tell the difference.

But as I said in my previous post - if you are judging quality by capital growth IMHO you should be looking at funds focussed on providing it.

dunstonh

Disagree. The purpose of an HYP, as originally defined, is to provide a low maintenance potential replacement for an annuity with at least partial inflation tracking. It's no great problem to get a yield > 5%. The High Income Fund Yield is under 4%. To then complain that growth is less than some other funds is missing the point.

Although it is not as efficient in the UK as it is in the US as we can use capital growth under the CGT allowance to realise gains tax free which can then be used to provide an income as a capital withdrawal.

Sticking religiously to HYP means you can be doing things inefficeintly from a tax point of view. Nothing stops you building a portfolio with some growth in it though but being heavy in income generation. Then you get the best of both worlds.

masonic

12tonelizzie wrote: »

(And if the sectors are true whole-sector averages, then surely it's still of note that the equity income sector as a whole massively outperformed the FTSE UK Dividend+ Index?)

It certainly is of note. It means that the index is not representative of the sector. A tracker based on that index is not going to do the same job as an equity income fund.

I don't mean this as blanket cynicism or managed-bashing, but this (and the fact that you experienced posters disagree with each other so much) is exactly why, as a beginner, I think I'm sticking mainly to my trackers. There seems to be fundamental truth to the manager-bashing brigade's point that if managers have to be super-skilled to predict the future, how on earth can someone like me have the super-super-skill to predict which one will have the better predictions??

You make a decision to go with a tracker because you want to guarantee you will get an average performance. You may not think you will be able to outperform over the long term, or you aren't willing to go to the effort you believe will be required in order to do so. It is perfectly reasonable to make that decision. However, if the tracker fund doesn't give you guaranteed average performance, then it's time to reconsider the passive approach.

It is often said that some managed funds behave like closet index trackers. Perhaps there are examples of index trackers that behave like poorly performing managed funds.

masonic

12tonelizzie wrote: »

So is there a better index for the equity income sector? Are they not both about squeezing yield out of UK equities?

I don't think there is a better index. Indices are based on very simplistic modelling techniques. Some sectors will be to complex to model accurately. This is probably the same reasoning behind some people saying they would only track well developed markets, and opt for managed funds for emerging or specialist markets.

I haven't decided that I'm not willing to go to the effort. I am willing to go to the effort. It took quite a lot of effort to go from zero knowledge and experience of investing to putting a basic tracker portfolio together. But the rationale and methodology were laid out fairly clearly in the FT Guide to Investing, Tim Hale's book, the Monevator blog and the Bogleheads site, plus hints and tips here. Whereas successful investing in managed funds seems to require a lot of experience (and/or professional tools and/or luck). But I'm learning all the time!

When I started investing 5-6 years ago, I went 100% passive for the first year (just some simple geography orientated trackers). I then started to look to managed funds with no prior knowledge or experience. In the vast majority of cases, my managed funds have done a lot better than their benchmarks so far. Either I have been extremely lucky, or investing in managed funds is not as hard as some people will have you believe.

sabretoothtigger

The FTSE was full of bubbly dotcoms.

It never was. Theres a couple tech stocks now but mostly FTSE means commodity which means the tracker is a growth fund I think. FT250 is growth even more, its at a four year high now and it sells companys that get too big

jamesd

Here's a link to the comparison between HYP1 and Invesco Perpetual High Income.

Linton wrote: »

The purpose of an HYP, as originally defined, is to provide a low maintenance potential replacement for an annuity with at least partial inflation tracking. ... To then complain that growth is less than some other funds is missing the point

I wasn't looking at just growth. The HYP under-performed by an average of £1,000 a year in combined growth and income, with income reinvested in both cases. Ignoring costs for HYP1, after all costs for the fund.

12tonelizzie wrote: »

Not sure I get your point. If it's an average, of course it's less than a good fund. Isn't it a reasonable starting point to compare a fund with its sector average?

It's OK to start but don't just use the sector average to compare managed to unmanaged because the gain from eliminating the dogs is greater for the managed side.

12tonelizzie wrote: »

(And if the sectors are true whole-sector averages, then surely it's still of note that the equity income sector as a whole massively outperformed the FTSE UK Dividend+ Index?)

Its of interest but if you want the best results you do need to consider that teh best funds might be in a sector with a lower average.

12tonelizzie wrote: »

This is the crux. What's the practical difference to me? I'm a basic-rate taxpayer and don't realistically foresee CGT problems. So I can draw dividend income or I can cash in units: the difference, other things being equal, is only one of admin faff and costs. As it is, I'm lump 'rich' and earnings poor. I'm dipping into capital to live. I want my lump to last as long as possible, and I hope to have a fair bit of it left when I reach retirement age in 15 years. I have no idea whether the best way to eke out my lump is to go for growth or reinvested dividends. Maybe a mixture?

Your interest is in total return, the combination of capital growth and income. It doesn't matter whether it's income or growth, it's still money you can have in your pocket whenever you want it.

If you did have a CGT problem outside a tax wrapper you could swap between similar funds each year to use your CGT allowance and stop a large gain from accumulating.

12tonelizzie wrote: »

This forum's full of "I've held X fund for Y years and it's given me Z return", but a little bird told me that past performance is no guarantee of anything and another little bird told me I have to do my own research. If someone fancies writing a good book on how to pick funds, please do.

Eliminate the consistent underperformers.
Read the views of the managers you're using and act based on whether you agree or disagree.

Both Masonic and I were reading enough about Mr Woodward's views to know that on the way out of the recession his fund wasn't the one to be holding if things were going in a strongly positive direction. Both masonic and I seemed to be of the view that it was going to be strongly positive and acted accordingly. At that point I was even borrowing money on 0% credit card deals to have more money to invest and exploit the situation.

Trackers are a good choice for people who don't want to do the work. They are also the starting point for comparison: if you don't think you can find a fund in a sector that will beat the trackers you might as well pick a tracker until that changes.

Most people don't want to do the work and won't do it. That identifies those "most people" as good candidates for using trackers. It's up to you to know whether you will do it or not and act accordingly.