Tracker Funds?

jamesjenkinsyates

I have decided to split my Pension portfolio between Tracker and Managed funds on Hargreaves Lansdown. Is it worth investing in these trackers funds. It seems so because it seems that often the managed funds after fees don't seem to beat the index anyway and with such low TER on the trackers it seems worth it. Does hargreaves lansdown charge more there side for tracker funds? what do you think?

Lokolo

HL charge on most tracker funds (0.5% a year), but not HSBC ones.

crimsonfin

you might want to read Tim Hale's Smarter Investing book. He basically spends the entire book (more or less) making the case for tracker funds over managed funds.

Lokolo

crimsonfin wrote: »

you might want to read Tim Hale's Smarter Investing book. He basically spends the entire book (more or less) making the case for tracker funds over managed funds.

Is it based on UK or US markets? Trackers based in US are different to those in the UK (according to King D)

dunstonh

Is it based on UK or US markets? Trackers based in US are different to those in the UK (according to King D)

Taxation being the key issue. In the US it is damned difficult for a managed fund to outperform a tracker. In the UK it is much easier which is why so many trackers tend to be mid table on performance.

The bottom line is that trackers give you mid table consistency. Managed offers the potential to outperform but also the potential to under perform. However, its a bit more than that as many managed funds have different investment objectives and strategies to the trackers. So, you would expect a difference from them.

in some areas, trackers make sense. In others, managed makes sense.

anyone who writes off one or the other option is clearly biased in opinion and quite happy to let their investments be compromised.

IronWolf

dunstonh wrote: »

Taxation being the key issue. In the US it is damned difficult for a managed fund to outperform a tracker. In the UK it is much easier which is why so many trackers tend to be mid table on performance.

Is there a reason for this? How is their tax system different?

I usually prefer trackers tbh, basically as a protest against the fund industry where the fund managers are rewarded regardless of whether they make money, or lose money!

But I dont invest in trackers, the even better way is to put in the effort, do your research and then pick the winners yourself.

Aegis

IronWolf wrote: »

Is there a reason for this? How is their tax system different?

I usually prefer trackers tbh, basically as a protest against the fund industry where the fund managers are rewarded regardless of whether they make money, or lose money!

But I dont invest in trackers, the even better way is to put in the effort, do your research and then pick the winners yourself.

Over here funds are not charged for their capital gains, instead investors pay a flat rate of capital gains tax when they crystallise those gains. In the US, capital gains are taxed per transaction, with a higher rate payable on shorter-term holdings. As such, a tracker fund is ideally positioned to make few trades and therefore pay less tax, while a managed fund has to either adopt a tracker position to minimise CGT (which will do worse than a tracker) or he has to do more but pay more tax than the tracker.

If I recall correctly, the majority of studies claim that the underperformance of managed funds compared to trackers is eliminated if you ignore the taxation of gains, with the average managed fund then marginally outperforming the average tracker.

There are some recorded studies over here on tracker performance compared to average or the persistence of returns with managed funds, but they are usually flawed either on the nature of the transaction (i.e. comparing advised costs on managed funds at zero discount vs tracker funds available with no initial charges) or the holding period (i.e. seeing what happens if you buy the top fund over the last 10 years, then hold it for the next 10 years without a review).

I'd actually be genuinely interested to see some decent studies done by statisticians who also know quite a lot about investments, not on the academic level but at the level where they realise that a fund with a 5% initial charge and 1.75% AMC can be bought for 0% initial charge and a reduced AMC of 1.5%.

Rollinghome

IFAs, who of course are paid commission by the managed fund-managers to sell their most expensive, i.e. managed, funds, tend to make a lot of the tax differences but far less of the fact that managed funds are even worse value in the UK because we have among the highest charges in the world. Anyone interested in balance would wish to point that out. Tracker funds pay IFAs very little or no commission.

Fortunately most are getting far less excited by the threat to their income by non-commission paying tracker funds now that all funds will be banned by the FSA from paying them commission by 2013 thus levelling the playing field.

I think we are likely to see far more use of low cost trackers with the ending of commission although some advisers may still prefer to recommend funds that require their ongoing "advise".

dunstonh

I'd actually be genuinely interested to see some decent studies done by statisticians who also know quite a lot about investments, not on the academic level but at the level where they realise that a fund with a 5% initial charge and 1.75% AMC can be bought for 0% initial charge and a reduced AMC of 1.5%.

I think RDR is going to make a massive difference here.

With managed funds stripping out adviser and platform cost, a 1.5% AMC fund now typically costs 0.75%. Plus, initial charges will be gone unless the fund itself has one.

With platforms charging explicitly, irrespective of type of investment held, this brings the cost difference of managed and trackers much closer.

Lokolo

Rollinghome wrote: »

IFAs, who of course paid are commission by the managed fund-managers to sell their most expensive, i.e. managed, funds, tend to make a lot of the tax differences but far less of the fact that managed funds are even worse value in the UK because we have among the highest charges in the world. Anyone interested in balance would wish to point that out. Tracker funds pay IFAs very little or no commission.

Fortunately most are getting far less excited by the threat to their income by non-commission paying tracker funds now that all funds will be banned by the FSA from paying them commission by 2013 thus levelling the playing field.

I think we are likely to see far more use of low cost trackers with the ending of commission although some advisers may still prefer to recommend funds that require their ongoing "advise".

How about those that receive full rebate - would you still say trackers are still the way to go?

And as the above says, for DIYers the post RDR crappy ma thing will strip out a lot of the commission.

Aegis

Rollinghome wrote: »

IFAs, who of course are paid commission by the managed fund-managers to sell their most expensive, i.e. managed, funds, tend to make a lot of the tax differences but far less of the fact that managed funds are even worse value in the UK because we have among the highest charges in the world. Anyone interested in balance would wish to point that out. Tracker funds pay IFAs very little or no commission.

Fortunately most are getting far less excited by the threat to their income by non-commission paying tracker funds now that all funds will be banned by the FSA from paying them commission by 2013 thus levelling the playing field.

I think we are likely to see far more use of low cost trackers with the ending of commission although some advisers may still prefer to recommend funds that require their ongoing "advise".

As usual ignoring the fact that there are a lot of IFAs out there who already charge a fee rather than a commission, therefore either rebate the trail commission in full or utilise units which don't have trail commission.

Come on, the IFA bashing is getting really old.