Index trackers....best buy ???

carnet

The average TER on an active fund is 1.6%, bond fund 1.3%, tracker fund 0.9% [Source: Bestinvest]

The typical annual commission rebate available on an active fund is 0.25% so, the net cost will be 1.35% (less if you factor in the stamp duty and selling costs of individual stocks).

It all boils down to whether or not you think having a hard-headed, experienced professional manager using his acquired skill and knowledge to make dispassionate decisions as to what and when to buy and sell is worth 1.35% per annum to you.

Ed obviously doesn't.

Many investors do.

al_yrpal

Ed,

Everyone has their style, and your UK centric approach, concentrating on low charges obviously satisfies you. But as Carnet says there's a big wide world out there. I remember returning here from China and HK a few years ago, and realising that I lived in a backwater. In America you get a feeling, not present here, that its a real land of opportunity. This summer in Kenya I noticed a Masai warrior's digital watch, and listened to him answer his mobile phone. Stuff happens out there too.

Carnet
You had better read Martin's advice on where to trade your funds - you are paying considerably more than me, I pay £20 up front regardless of deal size, and have 50% of the annual charge rebated, not just 0.25%. If I used Cofunds through Chartwell the £20 charge disappears too.

EdInvestor

carnet wrote:

Not exactly what I would call a diversified, well balanced portfolio

I do have other investments, this is just the equity portion.

Currency fluctuations can work either way.

Really? How? I only have one home currency (at the moment anyway)

Blue chips historically underperform their mid/small cap brethren.

Yes but small caps are too risky for a person of my age and attitude to risk.They are much more suitable for much younger people (like you?)

You have all your eggs in the equivalent of one, less well diversified, albeit slightly cheaper, UK Equity Income Fund, without the benefit of an experienced manager with the professional knowledge and skills to make the buy/sell decisions - for the sake of saving perhaps just over 1% per year.

No, as I said I have other eggs in other baskets, but I prefer the equity basket to be as low risk as possible. I am quite sure I am saving a lot more than 1% a year on the yield alone (and 1% is quite a lot for the size of my fund anyway).Equity income funds are hardly rocket science to manage after all, since you rarely need to trade, and from what I've seen my portfolio is more diversified than some (it's certainly considerably more diversified and lower risk than a tracker.).

carnet

al_yrpal wrote:

Ed,
Carnet
You had better read Martin's advice on where to trade your funds - you are paying considerably more than me, I pay £20 up front regardless of deal size, and have 50% of the annual charge rebated, not just 0.25%. If I used Cofunds through Chartwell the £20 charge disappears too.

Are you sure you get 50% of the annual charge rebated ?

AFAIK, annual commission paid to intermediaries is normally the AC less 1% (which is retained by the fund managers).

As the typical AC is now 1.5%, half the commission ie the rebate to the investor, is 0.25%.

On a AC of 1.25% it is normally 0.15%. A few fund houses such as Aberdeen charge 1.75% on some of their funds and the rebate is 0.375%.

I don't pay any up-front charge, apart from an IC ranging from, typically, NIL to 0.5%.

dunstonh

AFAIK, annual commission paid to intermediaries is normally the AC less 1%.

Typically, 0.5 on stockmarket funds, 0.1-0.35 on gilts/fixed interest and usually nothing on property. It does vary from time to time with some fund supermarkets.

carnet

EdInvestor wrote:

I do have other investments, this is just the equity portion.

Yes, but anything outside this one small island ?

Really? How? I only have one home currency (at the moment anyway)

If you are investing abroad in Sterling it can work either way, for or against you - if its not hedged.

Yes but small caps are too risky for a person of my age and attitude to risk.They are much more suitable for much younger people (like you?)

Doubtful (although depends on your definition of "much younger" ). The fact that I have oft said that I've been investing for 20 years (and didn't start in either my teens or twenties) should provide a clue .

No, as I said I have other eggs in other baskets, but I prefer the equity basket to be as low risk as possible. I am quite sure I am saving a lot more than 1% a year on the yield alone (and 1% is quite a lot for the size of my fund anyway).Equity income funds are hardly rocket science to manage after all, since you rarely need to trade, and from what I've seen my portfolio is more diversified than some (it's certainly considerably more diversified and lower risk than a tracker.).

How can you be sure you are saving a lot more than 1% on the yield alone ? That does not make sense to me. All you can say with any certainty is that you are not paying 1.35% AMC.

Generally there is a trade-off between yield and capital growth. In recent years this has been addressed by a small number of equity income fund managers such as George Luckraft and Ted Scott who have utilised what is now referred to as the "barbell" approach, whereby the fund invests in large companies at one end and smaller companies at the other in order to provide both income and growth.

Your approach strikes me as being far too narrowly based, and hence riskier, than the one I've followed for a long time.

I currently have 43 funds covering most, if not all, the bases - in some of the larger sectors perhaps even more than one fund following different investment approaches. They are the most promising funds in their sectors/asset classes/geographical areas going forward that my research has been able to identify on a number of criteria. All are subject to constant monitoring and comparison and will be switched as and when necessary. Weightings are also kept under continual review as circumstances dictate.

At the end of the day, its all about bang for the buck ie. returns on the investment. If I couldn't beat the relevant indices by a considerable margin over most, if not all, time periods I'd give the whole thing up tomorrow.

hobbesandco

I would be happy to invest in mutual funds if over the long term (I'm talking 20+ years here) the average mutual fund beat index trackers which they don't. I'm also not one to want to switch funds every year either, trying to chase the best fund managers. And I'm still not convinced they'd work out cheaper than index trackers. How can they? When you buy a mutual fund you're paying the fund managers and/or a financial adviser if you used one and/or broker. Even if you get commission back how do they make money? How is it profitable for them then if they're cheaper than index-trackers?

I accept the argument you can't be too cost fixated. I would much rather have a mutual fund which performs far better than a tracker even if it means paying 1% more. BUT if you do a lot of research to find out which funds are doing well, or which fund manager is the most talented wouldn't you be better off researching individual shares?

One last comment. There has been a lot of emphasis on the importance of diversification and I agree that one's portfolio should mitigate risks; on the other hand, too much diversification is not a good thing as you end up diluting the assets which perform well.

EdInvestor

Carnet and Al

You might be interested to read this research done for the FSA on retail fund charges.

http://www.fsa.gov.uk/pubs/occpapers/op06.pdf

EdInvestor

I currently have 43 funds covering most, if not all, the bases - in some of the larger sectors perhaps even more than one fund following different investment approaches. They are the most promising funds in their sectors/asset classes/geographical areas going forward that my research has been able to identify on a number of criteria. All are subject to constant monitoring and comparison and will be switched as and when necessary. Weightings are also kept under continual review as circumstances dictate.

This sounds far too much like hard work to me.

At the end of the day, its all about bang for the buck ie. returns on the investment.

Indeed. A portfolio like mine made 11% pa incl dividends on average each year for the five years up to last month, which is a stunning return considering what has happened to the markets over the period. It completely trashed the index on the capital and cash on the yield.

Of course returns have been much higher over the last 2-3 years but I don't expect that to last.Won't complain if they do,mind

I'm quite happy with the international exposure I get through the shares I own and I'm also happy not to have to bother with the currency risk. It really is very noticeable when you hold shares and watch the way the markets behave how interconnected they all are these days.It's been like that for quite some time.

I imagine it would be possible to maximise returns by doing some overseas investing - Japan has revived recently for instance. But it involves quite a lot of research and you have to use funds.I prefer shares. I've had a small side punt on the UK E&P oil sector this year, which has done nicely ( and adds a bit of international exposure as well.)

I might have a look at the investment trust sector which has low charges and seems to be coming to life after the zeros scandal now.

Anybody else interested in ITs?

How does this discount to NAV business work?

dunstonh

Ed, OP6 is nearly 6 years old. Back then charges were much higher than today and things have moved on a bit since then.