Help ! Money has more than doubled !

jamesd

masonic wrote: »

Surely, the performance of the index should equal the average performance of the funds making up that sector, e.g. 50% of funds should outperform the index by definition.

Two different things. The index is the index being tracked - the weighted average of the share prices of the companies making it up.

The sector average is the average of the funds in the sector. Half of those funds will beat the sector average.

But there's no inherent relationship between the index being tracked and the average of the funds in a sector. It's possible for all funds in a sector to outperform the index or all to under-perform it. Buyers and sellers not using funds plus costs mean that it's not a zero sum game.

Throw a lot of trackers and closet trackers in there and the ones doing active good managing rise to the top and those are the ones that buyers with a free choice from the whole market should be considering (after allowing for style differences - value investing might under-perform growth at times but that won't necessarily make a value fund a bad idea if you think a market drop is coming).

masonic wrote: »

how can a tracker fund outperform the sector average by such a significant margin as to put it in the top 25% of funds as implied above.

By having lots of closet trackers with higher costs and poor tracking performance in the mix. Think bank funds, closed life insurance funds and such. There's no rule that requires there to be even one decent fund in a sector and all could conceivably be so bad that a tracker beats them. But it's not likely.

Imagine every fund being heavily into growth stocks then the market falling dramatically. A tracker could outperform all of them in this case because they might all be more vulnerable to a drop than the index. But add a few value funds to the mix and life gets more interesting.


BigBelly, the problem is that you can predict future relative performance based on past performance. That is, you can identify the managers who are good and the ones who are poor and pick the former. Those good managers will consistently outperform the bad ones in a particular sector. Hence my suggestion that you try it yourself with the global growth sector.

You still can't predict how each sector will go, when the market will next crash or a whole host of other things. And you certainly can't project past growth to continuous future growth, hence the FSA warning.