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dunstonh

A lot of people believe that index trackers are better than managed funds.

Usually for the wrong reasons though.

Here are a number reasons for considering index trackers:

The vast majority of managed funds fail to beat the index over the long term.

That is incorrect and is often a common error made by people.

Charges are usually a lot lower.

Not as much as they used to be. Managed funds are generally cheaper than they used to be and the gap has closed. Although trackers will always be cheaper.

Fund managers come and go so a market leading fund can be good one year and pants the next.

So can a tracker if the index you are tracking is pants.

Financial advisors and financial institutions rarely recommend trackers as they don't make as much money out of them as managed funds.

It may apply to some but not others. I make exactly the same whether I recommend trackers or managed.

BigBelly

dunstonh wrote: »

That is incorrect and is often a common error made by people.

Really? So is the following nonsense?

http://www.fool.co.uk/isas/information/index-trackers-managed-funds.aspx

9 out of 10 managed funds don't manage to beat the index over the long-term. Yes, you did read that correctly -- 9 out of 10! Astonishing, isn't it. As trackers lag the index a little, the figures comparing their performance to managed funds aren't quite as impressive, but they are still significant. All the research that has been carried out has shown that the average tracker still beats 3 out of 4 managed funds over the long-term.

dunstonh

It is factually incorrect, yes.

Find me a FTSE all share tracker or FTSE100 tracker that has performed above mid point in the UK All companies sector the last 18 years.

jamesd

BigBelly, trackers grew to be popular in the US where it is apparently harder to beat the index. It doesn't seem to be the case for UK managed funds, though - too many do consistently beat the index.

You're right that many managed funds don't beat the index, but that's also usually consistent, so you can avoid them and pick those that are consistently in the top 25% or better. Then the average one not doing better just doesn't matter because you don't ever buy the rubbish ones and you sell as soon as the manager changes and it might become rubbish.

Charges are often lower for trackers but the better managed funds deliver more performance than that so you end up with more performance, not less. Just look at the trackers and compare the results in the charts. Easy enough for anyone to do this and see that trackers just don't deliver as well as the better managed funds.

Fund managers change just as company directors change. When the manager changes, go elsewhere until the new manager has established a good record or follow the old one and see if the old one keeps up the good work in the new job.

Financial institutions do seem to recommend trackers or closet trackers quite a bit - it seems to be part of why buying from banks doesn't do so well. Most financial advisers are forced to recommend what their work sells, so it's not surprising that they don't recommend the good ones. Better to look at what IFAs or investment managers suggest. Or look at the results yourself and pick those with a good record. Or better, both...

I'm not in the business and have read the arguments of both sides and I'm not going to buy a tracker except possibly for something with a really low performance - perhaps the safest of corporate bonds or gilts, where the charges could be greater than the difference in performance. I've seen the difference between good managed fund and tracker performance and it's clear which does best.

debbie42, click on the column title and Trustnet will sort by that column. If the column you want isn't there, use the Customise button on the left to add it. It's useful to add the individual year performance so you can more easily see if a fund has an inconsistent record - it's the sort of thing that can be masked in the cumulative three or five year results.

BigBelly

dunstonh wrote: »

It is factually incorrect, yes.

Find me a FTSE all share tracker or FTSE100 tracker that has performed above mid point in the UK All companies sector the last 18 years.

Are there many (any?) trackers that have been going longer than 18 years?

What about the first part of the statement from the Fool? What percentage of managed funds have beaten the index (100 or All Share) in the last 18 years?

Is it reasonable to assume that tracking error should be better in the future than in the past?

BigBelly

Have there been any studies analysing returns by switching to the best performing managed fund from the last year every year?

baby_boomer

dunstonh wrote: »

It is factually incorrect, yes.

Find me a FTSE all share tracker or FTSE100 tracker that has performed above mid point in the UK All companies sector the last 18 years.

How many trackers of the FTSE All Share index can you name which have been going for 18 years.

Any?

You should know better than to post a potentially misleading statement like this.

And please don't compare FTSE100 trackers and the All Share Index without explanation. The All Share Index, and any associated trackers, has outperformed the FTSE100 in recent years.

jamesd

BigBelly wrote: »

Is there any reliable analysis on whether the best performing fund in one year performs better than the index (after charges) in the next year?

The one I did and posted about here was for global growth funds. I recommend trying it yourself, recording the ranks of the top ten in 2002 until now. You'll find that the top ten five years ago were a good predictor for above average performance in subsequent years, once you eliminate any where the manager changed.

BigBelly wrote: »

If so, then it would be worthwhile to change funds every year.

Maybe. It's worth checking each year because performance may change but it doesn't mean that a change will be appropriate. Looking out for manager or sector performance changes is probably more significant if you want to make money, since the best sectors change over time.

The standard Fool argument relies on you being daft and picking average or worse funds, then compares trackers with them. I've never deliberately tried to pick an a average or worse fund and I hope you don't either. Those are where people buying from banks or pension funds and not looking at how their fund is doing end up: poor performance, closet trackers with high fees and such.

I recommend not buying into the Fool argument but looking at the numbers yourself. You'll find that past performance of individual fund managers is a good predictor of their future relative performance in that market condition (growth market like dot-com boom, value market like after it).

If you run the numbers for global growth you'll probably find that interesting. If you try it for another segment - say Europe - you might want to post the results for discussion.

BigBelly wrote: »

Have there been any studies analysing returns by switching to the best performing managed fund from the last year every year?

That's not a useful comparison. You'd switch when the manager changed, regardless of when it happens. To whichever was best with a manager with a consistent record at that point. The annual review would be to check that that manager was doing well or to form a view about whether market conditions had changed to favor a different management style.

nellykim

I am following the links given, and trying to make sense of the useful advice given here. I have already ordered, just now, the Fundology book, recommended by jamesd ( thanks)

Menwhile I will go back to the links and try to digest some of the information, but I must say that it does seem complicated. The Income, with Growth looks good.

One thing I dont get is that you say I need to spread the investment. I suppose this is because of the risk of losing it all if it doesnt work out ? I must admit I like the idea of holding an investment for a long term, with a CHANCE of a good return ( although it WOULD be a high risk)

Will keep on keeping on, and thanks to you all !

debbie42

BigBelly wrote: »

Have there been any studies analysing returns by switching to the best performing managed fund from the last year every year?

I've seen some figures comparing returns from trackers with funds on here in the past few months. Might be worth a search: I don't have the link to hand, but it was on this board.

That Motley Fool reference was the one I was referring to earlier on.