Investment Trusts v/s Index Trackers & ETFs

darkvader

Hi,

There has been a steady rise of interest on Index Trackers and ETFs recently plus a number of well known sites that promote Index Trackers/ETFs above any other investment vehicle, constantly hammering home the message that penny for penny, there are only a handful of managers who actually beat the index over the long term

For now, I will keep Funds & OEICs out of the discussion. A quick look on Morningstar and the 10 year performance on ITs labelled 5 stars with a Gold Rating paints an entirely different picture. Pretty much all top rated ITs with long term performance records have actually beaten the index, even with their annual fees included.

Am I missing something here?

I do understand that for the novice/lazy investor starting out, ETFs and Index Trackers 'maybe' better but I'd still recommend my friend to buy an IT (or a Fund) with a long history of beating the index. If you want index 'matching' returns then its better to invest in trackers and ETFs rather than spending a lot of time building your own portfolio of the best stocks one can buy

So have I got it completely wrong in picking some IT gems and building my nest to instead just buy some trackers knowing it is guaranteed that chances of beating the index are slim for ITs (and Funds) over the next 10 to 20 years?

Thanks
DV

Reaper

darkvader wrote: »

A quick look on Morningstar and the 10 year performance on ITs labelled 5 stars with a Gold Rating paints an entirely different picture. Pretty much all top rated ITs with long term performance records have actually beaten the index, even with their annual fees included.

It depends when they got their 5 stars. Ideally you should get a list of investments trusts that Morningstar gave 5 stars to 10 years ago, then see how they performed in comparison. Otherwise it's easy to pick winners with hindsight.

Linton

What do you mean by "The Index"? There isnt just one index, there are lots of them. And many sectors you could invest in dont have an index. Many ITs invest in niche areas or have a remit (eg wealth preservation) other than simple return.

So my approach is to decide what sectors I want to invest in for what purpose, and then find the most appropriate funds to use. Were one wanting to invest in FTSE100 companies for long term growth a tracker may well fit the bill, if one was after a high dividend income from the Asia-Pac area it probably wouldnt.

atush

True, each IT is different and may or may not have an index to compare to.

However, they can perform well over the decades. And I am a huge fan.

But they can use gearing so are not very easy to compare to trackers.

ChesterDog

Linton's point is very important.

When discussing ITs and funds, it is generally their 'benchmark' to which they are compared. Sometimes the niche nature of the investment remit means that the benchmark used may not really be an ideal match. Nor may it reflect directly on the performance of what you might regard as 'the index'.

Choose your sector, then choose the most attractive/appropriate vehicle with which to access it. Once you have covered many sectors (if you are in search of a well diversified portfolio), you will doubtless find you have a blend of different methods involved.

dunstonh

Am I missing something here?

You need to remember that ITs and ETFs have always been unbundled in pricing. Whereas until recently, OEICs were bundled (including the cost of distribution). So, remember that when looking at performance, you are not including cost of platform or buying costs. (as well as noting Linton's comments on benchmark).

jimjames

darkvader wrote: »

Hi,

There has been a steady rise of interest on Index Trackers and ETFs recently plus a number of well known sites that promote Index Trackers/ETFs above any other investment vehicle,

I think you're confusing the vehicle with the strategy.

A tracker can be an investment trust, unit trust (OEIC) or ETF.
A managed fund can be an investment trust, unit trust (OEIC) or ETF.

Investment trusts can use gearing which can amplify returns in good times but also are likely to have lower costs as they don't need to manage redemptions and purchases as a UT would and historically have had lower management fees too.

darkvader

Thank you all for the replies, I will try to respond and query back in one go

1. Yes, I agree ITs have their own niche benchmarks they try to beat so its not a true picture or a simple straightforward comparison of various ETFs and Trackers to ITs

2. There are ITs that are Trackers, I hope I was clear I am referring to specialist ITs that are managed by a team who are paid the extra fee by investors

3. I have looked at ITs and their 10 year performances plus the ratings as far back as they go on Morningstar. Leaving the ratings aside, I have looked at returns every year which were quite impressive.

4. My investment principle is clear, I'd like to average a bare minimum annual return of 8% to 10% over the next 15 to 20 years. Maybe a tracker will give me that but I'd rather invest in ITs to give me that extra shot of maybe getting 12% to 18% average over the same time frame. In this time frame, these well known ITs may reward investors with special dividends and shares, which a tracker will not provide

EDIT : My current monthly ISA portfolio is spread across 14 OEICs and 50% Developed and 50% Developing across the globe so a good mix. It has grown 8% over 2 years, not too great but bogged down specifically because 12% is in Blackrock Gold & General which is 20% in the RED

DV