Critique My S&S ISA Selection

jamesd

jabbahut40 wrote: »

Why do people keep talking and recommending trackers on this forum? Is this just down to fund mgt charges or do trackers offer something else to portfolio diversity not covered by OEICS?

It's the new investment religion so has lots of passionate followers.

There's no compelling evidence that actively managed funds can't beat trackers but those who are fans of trackers ignore the flaws in the studies that support their views. Glaring faults like ignoring changes of human manager or ignoring the differences in costs and performance between active funds and just using averages. Use extreme caution when reading about studies that use averages only or ignore manager changes (and be cautious because some studies have used manager changes to mean management company changes, not human manager changes, so at first glance it appears that they are adjusting for manager changes).

What evidence there is suggests that it's more likely to be true that active managed funds can't outperform trackers for the biggest companies in the biggest and most well studied markets than in others. But only more likely to be true, not certainly true. That's because the basis of tracker theory is the efficient market hypothesis that holds that the market pricing of shares is perfect and always incorporates all known information. That's convenient but I don't know of anyone who believes that it is fully true, since everyone I know recognises that markets are often driven by emotions more than facts.

Trackers are more appropriate in the US than here because in the US they have a tax setup that has higher CGT for sales within the first year and the trades that a manager does are treated as the trades of the owner of the fund and tax has to be paid on them after an end of year report. That makes long term buy and hold strategies of particular interest in the US because the difference in tax treatment can sometimes eliminate the benefit of active management. In the UK there's no CGT difference based on how long something is hold and all you have to do is possibly report gains when you sell the fund, not whatever trades the fund manager does.

This is a very controversial area.

Trackers do have their uses, though. They are great for people who don't want to pay much attention to their investments, just put money in and forget about it. They are also good as core funds if you just want to get market results for part of the money. Then you could decorate around the edges with active funds or with passive funds in more niche areas.

I use both and recommend that you consider using the strengths of each.

Here's an example where I suggest either trackers or active managed funds depending on the investor.

An OEIC is a type of investment structure, like a unit trust. Trackers are often OEICs these days. The contrast is between actively managed and trackers.