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

masonic

12tonelizzie wrote: »

[Which raises the question: if it's not that hard, using Morningstar/Trustnet ratings and maybe even the H-P Wealth 150, to pick a basket of managed funds across a sensible spread of sectors which will outperform trackers... then why are the indexing advocates so committed to warning us about managers? As I've mentioned in several posts here, the FT Guide to Investing, which I would have expected to be unbiased, and which must be a first read for many fledgling investors, is very manager-skeptic and suggests that small investors stick to trackers.]

I think it is probably a combination of things. To some extent, the pro-tracker arguments have been imported from the USA, where the situation is different because their tax system is biased in favour of trackers.

Another factor is that it is safer to recommend a tracker because it is simple and it only performs badly when the market performs badly. Nobody (hopefully) is disappointed with the performance of their FTSE all share tracker when it follows the FTSE index downwards, whereas novice investors are less inclined to make allowances for managed funds in falling markets. Recommend that people buy managed funds and you risk criticism from those who see short term losses or poor performance (and of course criticism is expressed by people far more commonly than praise).

A third factor is that many of the investment guides written are for newbies, and common wisdom is that newbies start off by investing in the developed markets - trackers often make sense when you just want basic exposure to a developed market.

Xbigman

The thing to remember about HYP is that there are rules that are very sensible and that the vast majority ignored. The idea was to diversify across 15 companies and sectors.

So investors bought RBS and Northern rock because one was a mortgage bank and the other was a general bank. Then they bought a life insurer and a general insurer. A housebuilder, a general builder and a building material supplier.
Cue a credit squeeze/house price crash and 7 out of 15 shares tanked. Some HYPs saw capital losses over 50% and worse dividend drops.
The HYPs that were put together more conservatively saw limited capital drops and the dividends held up. Which was the idea.

Myself, I've done far better with value investing than I did with HYP (or I'm likely to do with a HYP in future) but when I hit retirement I'll still go HYP for the simple reason that it gives me an income (dividends) whilst with value I'd need to take an income (decide when to sell).
Needing to make a profit from value is much more stressfull than wanting to make a profit, whereas a boring steady performing HYP sounds more my cup of tea when I need income.




X

Ark_Welder

By coincidence: Capital Hill on... passive versus active investment, courtesy of Baillie Gifford

Linton

12tonelizzie wrote: »

Ref advocacy of growth funds:

Thanks, but now we're back on tipster territory. 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. (Btw I was in the library the other day and found "Fundology" by Chatfeild-Roberts, and the book I want needs to be a LOT better than that!)

NO. The problem with tipsters is they push a particular share. Any one share may or may not do well.

Funds hold a large number of shares and so are not dependent on chosing THE share. A fund's performance relative to its sector average may be difficult to predict, but sectors are easier.

For example is it pot lock whether the oil sector collapses or not? I am happy to take a bet it wont. Do you believe China and other Emerging countries will get richer over the next 20 years? Again I am happy to bet they will.

Will the UK economy rise spectacularly in the next 10 years - I am happy to predict it wont. However I am also happy to predict that it wont go bust and stop paying interest on its bonds.

The way to approach investing I believe is top down:

1) Decide what you want to get from your investment - steady income or long term growth. If you want both - in what %'s of your portfolio?

If you want long term growth, are you prepared for wild fluctuations in the meantime with the expectation of better long term results or would you prefer steady a less spectacular results. OK what % of your growth portfolio.

You now have divided your total investment funds into 3 (or more)
portfolios, each with a definite objective.

2) For each portfolio consider what sectors would be likely to provide the objective. For example if one portfolio requires spome growth but a strong emphasis on capital preservation you need to be in bonds and gilts. If you can leave your funds for 10-15 years and dont mind fluctuations, think about Emerging Markets and Resources.

3) Now the easy part - for each sector chose perhaps 2 of the best funds in that sector. Best is likely to be large, a well known fund manager (company or person), a successful track record in the bad times as well as the good. You could even decide best is low charges.

4) Set up your portfolios, track their progress, and change those funds which are not meeting their portfolio's objective.

See - you are not chosing funds at random and hoping to be lucky. You have clear objectives and can see whether those objectives are being met.

This is why I disagree with those people who blindly advocate trackers. Chosing the fund is the last thing you do, only when you have done the asset allocation.

Ark_Welder

Linton wrote: »

For example if one portfolio requires spome growth but a strong emphasis on capital preservation you need to be in bonds and gilts.

This may not necessarily hold true over the next few years once interest rates start to rise: there may be a capital loss. There is a greater chance of this for funds (and individual bonds) where the current redemption yield is lower than the running yield.

jamesd

Yes, swapping between similar funds works. You can even swap between two FTSE trackers and HMRC will still consider it to be a disposal that triggers CGT calculations.

For managed you can pick similar managers some of the time, or can decide that you want to take the chance to adjust your view or risk tolerance. Sometimes there's no good equivalent, then you get to decide whether the alternative is good enough for the minimum holding time or whether it's better to wait and risk more tax to get better returns.

I suppose I could expand a bit on total return vs yield or growth. While total return is the main thing that matters, some people based on tax wrapper and tax rates can prefer one or the other, usually capital growth is preferred because of lower CGT rate than income tax rate. Inside a pension or ISA it doesn't really matter much. A bit easier to take regular income from income because you don't have to do manual sales from time to time but not something I'd want to sacrifice much total return to get.

Ark_Welder

Swapping between funds in an attempt to mitigate CGT could trigger charges on the balances involved: dilution levy, dilution adjustment and stamp duty reserve tax. Not necessarily for every transaction (some may be absorbed by the fund), but they may mean that you invest less in the new fund than you had in the old.

Do some platforms charge a switching fee? I think Cofunds did, or that may be broker-specific.

Another point to note is that you may be out of the market for a day whilst the swap is taking place: i.e. the sale is made at the valuation point on a dealing day, but the proceeds are not reinvested until the valuation point on the following dealing day. If the market moves against you then you might miss out on a rise - and vice versa, of course.

dunstonh

Do some platforms charge a switching fee? I think Cofunds did, or that may be broker-specific.

Its platform and broker specific. Cofunds charge 0.25% on fund switches (but not on bed & ISA where its not classed as a switch but a purchase). Most of the other decent platforms have gone clean nowadays (i.e. no switch charge, no initial charge) unless the fund has a specific charge (like dilution levy or soft closed).

bed&ISA can easily make up the benefit if there are small charges involved.

Ark_Welder

12tonelizzie wrote: »

Can I just make sure I get this right? You buy into a nice fund in 2001. By 2006 it's grown £6k. You swap to a similar nice fund within your H-L account, with no dealing fees but being out of the market overnight. Your £6k is below the 2006 CGT limit. By 2011 the holding has grown by another £6k and now you sell it. You've grossed £12k since 2001 but the second fund 'only' grew by £6k so you escape CGT again.

Correct, no CGT - assuming that this is the only fund that has been sold, i.e. the CGT allowance is not per fund. Another point to note is that although CGT is not due in either of these disposals you would still have to file the disposals with the Revenue if the total proceeds of all your disposals in the tax year exceed 4 times the CGT allowance, so £40400 for last tax year and £42400 for the current tax year.

cloud_dog

12tonelizzie wrote: »

Can I just make sure I get this right? You buy into a nice fund in 2001. By 2006 it's grown £6k. You swap to a similar nice fund within your H-L account, with no dealing fees but being out of the market overnight. Your £6k is below the 2006 CGT limit. By 2011 the holding has grown by another £6k and now you sell it. You've grossed £12k since 2001 but the second fund 'only' grew by £6k so you escape CGT again.

There is an additional stippulation for CGT if you were to re-purchase the same investment the following day, and that is that you must not re-purchase the investment within 30 days.

Example.... Buy Fund A 2001, sell it in 5th April 2006 making £6k profit, you buy back in to Fund A on 7th April 2006, in 2011 you sell making a further £6k profit.

In the above scenario, in 2011, you would be charged CGT on £1900; this being the profit above the £10100 CGT limit for 2011.

If in the above scenario you had bought back in to Fund B no CGT charge would be incurred.

If in the above scenarion you had bought back in to Fund A but on the 6th May 2011 no CGT charge would be incurred, i.e. 30 days would have elapsed.