Index tracker choices and ISA wrapper

windy71

In the first quarter of next year I'd like to start investing and have heard the index trackers are a good place to start. I've heard the FTSE Allshare or FTSE 250s have pretty good growth returns typically. But I'm not sure how to go about finding one with a low(est) TER and charges. There are some links I found on google that took me here but they were all to old posts from 3-4 years ago. I'd be very grateful for any advice on the subject, especially about putting the index tracker in an ISA (of which I kow even less haha).

Ch

coastline

try here..

http://monevator.com/category/investing/passive-investing-investing/

barak

windy71 wrote: »

In the first quarter of next year I'd like to start investing and have heard the index trackers are a good place to start. I've heard the FTSE Allshare or FTSE 250s have pretty good growth returns typically.....

I just don't understand the obsession with tracker funds.

This is not properly researched, but a very quick look at FE Trustnet's UK All Companies performance charts suggests that over 1 year 102 funds outperformed the best fund with 'tracker' in its name - over 3 years 106 and over 5 years 82. [EOE] Over 10 years the figure could be even higher.

Amongst those top funds will be a number that achieved their position by sustained management and consistent annual discrete performance - rather than being there through having had an exceptional 'lucky' year. Those are the funds that I look for.

jimjames

barak wrote: »

I just don't understand the obsession with tracker funds.

This is not properly researched, but a very quick look at FE Trustnet's UK All Companies performance charts suggests that over 1 year 102 funds outperformed the best fund with 'tracker' in its name - over 3 years 106 and over 5 years 82. [EOE] Over 10 years the figure could be even higher.
or.

But how many of those in the 1 year 102 outperformers are actually in the 5 year 82 outperformers, potentially not that many. And a 10 year one could be even lower so it does take out an element of risk of getting an underperforming manager.

nicknameless

barak wrote: »

I just don't understand the obsession with tracker funds.

This is not properly researched, but a very quick look at FE Trustnet's UK All Companies performance charts suggests that over 1 year 102 funds outperformed the best fund with 'tracker' in its name - over 3 years 106 and over 5 years 82. [EOE] Over 10 years the figure could be even higher.

Amongst those top funds will be a number that achieved their position by sustained management and consistent annual discrete performance - rather than being there through having had an exceptional 'lucky' year. Those are the funds that I look for.

Isn't the theory (empirically supported) that prospectively selecting managed funds that consistently beat the market index, as opposed to those that do so in the short term by chance alone, is not that easy, and so in that zero sum game charges are king, and thus index trackers offer the best theoretical return with their low charges?

bowlhead99

Yes nicknameless, that's right. Imagine an economy with two shares, Tesco and Sainsbury. Each has issued only three shares, valued at 10 each; the whole value of the market is 60.

Over one year Tesco shares give a total return including dividend and valution increase of 100%. Sainsbury gave 50%.

Manager A invests entirely in Tesco shares. He employs a whizzkid to make this decision and charges 10% fees on your 20 investment and so turns your 20 into 40-2=38, for a 90% return.
Manager B invests in Sainsbury shares. He similarly charges 10% fees on your 20 investment and turns your 20 into 30-2=28, for a 40% return.
Manager C is a tracker and just uses a computer to track the market with one of each. He only charges a tenth of the management fee and turns your 20 into 35-0.2 = 34.8, for a 74% return

The optimum move, if you don't know which manager's strategy will work best in the next year's environment, is to buy the tracker. If you diversified with both active managers you'd end up turning 10 into 19 with one and 10 into 14 with the other. Total proceeds = 19+14 = 33. Not as good as 34.8 because you paid 2 fees instead of 0.2 fees. The tracker only beat 50% of the funds but it beat it significantly, and gave a better result than putting a small amount into all of the funds in the market.

In the example given, 82 funds beat the cheap tracker over 5 years. How many were beaten by the tracker? And by how much. Likely at least 82, maybe more - remember to count the funds that aren't even in the list any more because they performed so badly.

Example: I want to invest a chunk of my portfolio in shares of US businesses because I recognise 50% of the world's listed companies by value are there and I want broad exposure to the currency and the economy. Should I invest in F&C North American? It returned 23.2% in the last 5 years. Or how about Allianz US Equity? It made 28.9%. Both are huge names and know what they're doing, but maybe one favoured banks and one favoured Apple ; do I have any clue if they'll make the same choices next time, or whether those choices will be right next time?

Ah hold on, HSBC American Index delivered 31.1%. Probably no better underlying performance than Allianz but when HSBC or Vanguard will track for only 0.2% p.a.fees and expenses, rather than guess for 1-2%, the potential long term value of a 'passive' strategy can't be ignored.

For less mature markets, or niches (e.g. emerging markets, sector specific, smaller companies, technology) an active manager can make a difference and top quartile returns dwarf bottom quartile ones. For FTSE 100 and S&P500 you have already made the decision to invest in massive companies in economies with particular characteristics; why pay 10% extra over 10 years to fine tune this when you could instead spend the fees with individual fund managersfor specialist knowledge in riskier or specialist sectors? Or perhaps with a trusted IFA to allocate your portfolio between sectors and periodically rebalance.

bowlhead99

Also just as a side note - my post was getting plenty long anyway - I know barak said his sample was unscientific but probably searching for 'index' is as good or better than 'tracker'. For my American example this will pick up the HSBC C class index funds, or Vanguard equivalent, joint lowest for fees.

You don't want to get stuck paying 1% for a basic Virgin FTSE All-Share tracker when there are options at a fifth of the price. Finding the cheapest platform or broker to hold them is another discussion entirely;)

Finally OP, the FTSE UK All-share is a broader index than the FTSE 100, but is still dominated by the largest shares in the FTSE 100 which are the biggest of the 2000+ shares making up the whole exchange. The 100 probably has greater 'global' outlook being dominated by multinational oil, mining and financial services; but these massive companies are seen as having inherently lower growth potential than the next 250 down in the list. Simplistically the other all-share index components are more likely to double market share and perhaps also more likely to go bust.

westy22

Post 6 - Bowlhead99, that is a better illustration than many I have read in investing books and financial articles. Thanks.

HJC1972

Agree with Westy, Bowlhead. That is a very good analogy to highlight the differences between active managed and passive tracker funds.

The advice is a bit late for me as I've just signed up for a monthly ISA plan in Fidelity's new US index tracker fund which tracks the S&P 500. T.E.R is .30% so slightly higher than Vanguards but I'm in it now, so I'm gonna stick.

After reading your illustaration though I'm a little more confident I'm doing the right thing.

Linton

windy71 wrote: »

In the first quarter of next year I'd like to start investing and have heard the index trackers are a good place to start. I've heard the FTSE Allshare or FTSE 250s have pretty good growth returns typically. But I'm not sure how to go about finding one with a low(est) TER and charges. There are some links I found on google that took me here but they were all to old posts from 3-4 years ago. I'd be very grateful for any advice on the subject, especially about putting the index tracker in an ISA (of which I kow even less haha).

Ch

Going for a tracker does not free you from the necessity of doing your own research. The FTSE Allshare and FTSE250 are very different. The FTSE Allshare covers all shares quoted on the London Stock Exchange but because it holds shares in proportion to their total stock market value it is dominated by the largest companies, in particular those in the FTSE100. About 80% of an in investment in the Allshare index is going into the FTSE100.

The FTSE100 is dominated by large global companies - so by going for your FTSE Allshare tracker that is where you are saying you want most of your money to go.

The FTSE250 is comprised of the 250 companies below the FTSE100. This index is very much more dependent on the UK as opposed to the global economic situation. As the companies are smaller they are capable of more rapid growth and of course more likely to fail. So the FTSE250 is more volatile than the FTSE100 but has performed significantly better, particularly recently when it has exceeded its pre credit crunch highs, something the FTSE100 is some way from achieving.

barak

jimjames wrote: »

But how many of those in the 1 year 102 outperformers are actually in the 5 year 82 outperformers, potentially not that many....

Quite a number, it seems - here are just a few: Royal London Mid Cap Growth [1yr 22/269, 3yr 13/256, 5yr 5/239], Cazenove UK Opportunities B [5th, 7th, 6th], Unicorn Outstanding British Companies [21st, 4th, 4th], Barclays UK Lower Cap [15th, 11th, 15th] and so on.

As I said, I would always check the discrete annual performances of any fund to make sure that the overall performance figures are not distorted by a 'lucky year'.