Index verses Tracker Fund - Which is better

nxdmsandkaskdjaqd

By comparing a Tracker Fund and Managed Fund is it possible to work out which fund would perform better when taking into account the TER’s.

When viewing the performance charts, the managed fund over 5 years has outperformed the tracker fund by some 17%.

But which is the better fund?

Cumulative performance
HSBC American Index Ret Acc
3 months 13.24%
6 months 22.43%
1 year 7.9%
3 year 71.67%
5 year 27.25%

Threadneedle American Ret Acc GBP
3 months 11.88%
6 months 20.43%
1 year 8.67%
3 year 75.06%
5 year 45.5%

Data from HL.

Linton

The TER is already included in the published performance figures - you arent charged an extra bill.

So in your example over 5 years the managed fund has performed better by approx 17%.

westy22

The 5 year view can be largely discounted as HSBC slashed their AMC in 2009 from about 1.5% to less than 0.30%. Therefore, I would suggest that the 3 year view will be the closest to current reality - that view shows that there was a 3.39% advantage to Threadneedle. The Threadneedle account has a TER of 1.68% and the HSBC a TER of 0.28%.

My conclusion would be that there is very little in it in terms of fund performance over that 3 years but, depending on the size of the holding, the £2 per month HL platform charge could tip the balance one way or another.

Ilya_Ilyich

5 years is too short a timescale for meaningful equity fund comparison anyway.

dunstonh

America is one of those markets were using a tracker can make more sense unless you are looking to invest in a more focused area of the US market (e.g. smaller cos, value etc).

mr_fishbulb

Ilya_Ilyich wrote: »

5 years is too short a timescale for meaningful equity fund comparison anyway.

If it's just an index tracker, wouldn't 5 years be long enough to see how well it tracks the index?

dunstonh

mr_fishbulb wrote: »

If it's just an index tracker, wouldn't 5 years be long enough to see how well it tracks the index?

Its probably better to include a full economic cycle if you intend to invest and forget. That puts it closer to 8-10 years.

However, if you are going to be more active in your investment monitoring and you have the knowledge required to understand economics and investment strategies then you can look at it on a much shorter timescale as you may decide when the best time to move between the different focused areas you want to invest in.

I suspect that if you have to ask which is best then you should go with tracker (or a portfolio fund that controls asset allocation for you).

mr_fishbulb

dunstonh wrote: »

Its probably better to include a full economic cycle if you intend to invest and forget. That puts it closer to 8-10 years.

However, if you are going to be more active in your investment monitoring and you have the knowledge required to understand economics and investment strategies then you can look at it on a much shorter timescale as you may decide when the best time to move between the different focused areas you want to invest in.

I suspect that if you have to ask which is best then you should go with tracker (or a portfolio fund that controls asset allocation for you).

Think we're getting our wires crossed here

Ilya Ilyich said that 5 years is not long enough to compare funds. I accept that is the case with managed funds as you need to see how the manager performs in the down turns as well as the upswings.

But my question was do you need to have over 5 years worth of data when you are assessing an index tracker fund? How many years data do you need to see before you can be satisfied that it closely tracks the index?

SnowMan

Think of an experiment where you have 36 unbiased dice. You throw throw each of the 36 dice twice each. One of the dice comes up 6 twice.

So which is the best dice to bet on to come up 6 next time?

You should be able to reason that as the dice are unbiased that you have in 1 in 6 chance of a 6 coming up with any of the dice. So it is irrelevant which dice you pick.

But of course there is still the tendency to pick the dice that has come up with 6 twice, there might just be a bias you reason.

That is the sentiment that the fund management industry relies on. A lot of evidence suggests that there is no relation between past performance and future performance and so there is no reason to choose the fund that has done well in the past 5 years.

Worse still the charges on the past performing fund may be higher to reflect the fact that the manager has done well, which will be a drag on future performance, think of it as the odds being reduced on the dice that has come up 6 twice.

Now the key to deciding what to do is coming to a view as to whether past performance does correlate positively with future performance. To do that you have to look at the evidence. This is an example of a study that suggests there is no relationship.

If you think there is no relationship between past performance and future performance in the sector in which you wish to invest, or that the effect is too miniscule to act on, you go for the fund with the lowest charges (e.g. a tracker).

MrMalkin

mr_fishbulb wrote: »

But my question was do you need to have over 5 years worth of data when you are assessing an index tracker fund? How many years data do you need to see before you can be satisfied that it closely tracks the index?

I think he was saying 5 years is too short to compare the managed fund to the index fund, not the index fund to it's index.

But I suppose the answer to your question would be 'as long as possible', bearing in mind changing management charges - hence why the relative poor performance of the HSBC fund before 2009 should be looked in in light of the higher charges it had before then.

Linton

mr_fishbulb wrote: »

Think we're getting our wires crossed here

Ilya Ilyich said that 5 years is not long enough to compare funds. I accept that is the case with managed funds as you need to see how the manager performs in the down turns as well as the upswings.

But my question was do you need to have over 5 years worth of data when you are assessing an index tracker fund? How many years data do you need to see before you can be satisfied that it closely tracks the index?

With an Index fund you do need to assess the index itself and so need one or more economic cycles. For example if the fund manager is more cautious than the index you will only see that by comparing the index and the fund performance for an extended period - the manager will underperform in the good times and over perform against the index in the bad.

This incidentally suggests a counter to Snowman's assertion that there is no correlation between future and past performance. If the fund manager just happened to provide a steady 5% return year after year then the correlation of performance against the index would indeed be pretty low, but that's because of lack of correlation between future and past performance of the index. And yet a steady 5% return would clearly be a very high correlation between past and future managed fund real performance.