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Aegis

jon3001 wrote: »

Index trackers will spread your and other investors' money over a broad range of companies to to capture the market average performance at a low cost. Some people will prefer managed funds to trackers. The downside risk is that managed funds general charge more per year and most don't beat the average.

I see this statistic a lot, and feel it's very unfair to say this without additional information. Yes, there are a lot of managed funds, and many fail to beat the average, but if you remove the bank funds (generally terrible performers) then you actually find that the majority of the remaining funds beat the average, and therefore the trackers.

If you limit your research to a steady 1st or 2nd quartile performer over the last 10 years (where possible) then you will generally beat trackers on the actual returns, even if the charges are higher.

The other thing to consider, of course, is that when a market goes belly-up, the managed funds can pro-actively react to the changing conditions, while a tracker will generally just follow the market blindly into the plummet. That to me is worth the extra "cost" (in inverted commas because while the cost is higher, all my funds are currently outperforming trackers by more than enough to offset the cost!)

caliston

Most brokers will allow you to have a savings plan that invests £50/month and, while they can be a bit sniffy if you want to stop after only a few months, you might be able to. Doing it this way can also iron out some market fluctuations - see 'pound cost averaging' or 'dollar cost averaging' for how this works.

Nationwide offer a plan for investing in funds from £20/month, but their selection of funds isn't great and you may pay more in initial charges than a discount broker. [Edited to add: in fact they only sell their own funds, so I wouldn't bother with them if I were you]

Also there are 'multimanager' 'funds of funds', where in effect someone else has done the diversification for you. However charges can be quite high, and there's no guarantee they're any good.

[Deleted User]

The problem is index trackers are weighed down by underperforming stocks.

A good managed fund can follow economic cycles as long as they are not constrained by being ethical or biotech or some other random sector while being a bear market. But a biotech fund at the start of a bull run on biotech would be nice, but if your not following it the more generalist funds with a good manager will suit. With discount brokers the management fees aint much different either

dunstonh

Crickey Aegis, I thought I was reading one of my posts there

If you are investing to save on charges and not investing to make money then you should really go the whole hog and not use unit trusts for trackers. It seems totally pointless. Investment Trusts/ETFs make more sense when used in tracker form rather than UTs.

The_Fiddler_2

dunstonh wrote: »

Crickey Aegis, I thought I was reading one of my posts there

If you are investing to save on charges and not investing to make money then you should really go the whole hog and not use unit trusts for trackers. It seems totally pointless. Investment Trusts/ETFs make more sense when used in tracker form rather than UTs.

Could you explain in a little more detail what you mean by your post above.

Thanks :beer:

jon3001

I did a bit of superficial research...

Aegis wrote: »

If you limit your research to a steady 1st or 2nd quartile performer over the last 10 years (where possible) then you will generally beat trackers on the actual returns, even if the charges are higher.

Well - I looked on Morning Star under the sector 'UK Equity Large Blend'. You'll also find a number of trackers occupying those quartiles when ranked on 10 year performance.

Aegis wrote: »

The other thing to consider, of course, is that when a market goes belly-up, the managed funds can pro-actively react to the changing conditions, while a tracker will generally just follow the market blindly into the plummet. That to me is worth the extra "cost" (in inverted commas because while the cost is higher, all my funds are currently outperforming trackers by more than enough to offset the cost!)

Browsing thru the top 10 funds (which were of course managed) under 'UK Equity Large Blend' they all seemed to have suffered as badly as the as the index during the 2000-2003 downturn. Some more so.

jon3001

dunstonh wrote: »

If you are investing to save on charges and not investing to make money then you should really go the whole hog and not use unit trusts for trackers. It seems totally pointless. Investment Trusts/ETFs make more sense when used in tracker form rather than UTs.

Even if they only have £500 to invest? Aren't ITs/ETFs gonna kill them with trading costs?

munk

Crikey, this thread got busy all of a sudden

On the point of investing a small amount in a diversified portfolio of funds, I had the need to spread £2000 across 10 different funds today with Hargreaves Lansdown (HL). The dealing broker there explained that they could do this (£200 investment per fund), although it would depend on how much volume of trading had occurred in each of the requested funds that day - ie if others had invested £800 or more on a fund that had a minimum investment of £1000, then my £200 holding would be possible because it'd take the volume of sales in that fund for the day through HL to over £1000 (he didn't mention specifics though, just the general concept).

However I should also say that a lot of sucking of teeth was involved on the broker's part initially! I also think the fact a total investment of £10,000 in all was involved helped sway him - the £2000 between 10 funds was only part of a larger investment of £10k, the other £8k would also be split between those 10 funds at a later date.

Have to give a big thumbs up to HL as well for their phone support - got through to someone within 3 rings or so. The CS adviser was spot on - at first thought I'd got some receptionist(!) but she quickly understood what the issues were, checked/fixed a couple of things, verified security and then after maybe 30 seconds on hold I was put through to the dealing broker who was also very helpful, concise and on the ball.

5/5 so far for my experience with HL (shame their email support is so slow though! ).

Aegis

dunstonh wrote: »

Crickey Aegis, I thought I was reading one of my posts there

If you are investing to save on charges and not investing to make money then you should really go the whole hog and not use unit trusts for trackers. It seems totally pointless. Investment Trusts/ETFs make more sense when used in tracker form rather than UTs.

Well, my research into the difference between index trackers and managed funds was in part inspired by a similar interaction between you and someone else at some point over the last few months. At that point, I decided to find out for myself what the statistics actually showed, and went to one of the bigger supporters of trackers, namely the Motley Fool website.

There were a couple of articles there where the shear level of statistical distortion (perhaps not intentional) shocked me, as they were supposed to be written in a factual manner. An example of this is where they claim that "half of managed funds fail to beat the index" and then go on to praise trackers without once mentioning that by attempting to replicate the market exactly, 100% of ideal trackers would by definition fail to beat the index too.

Then of course, they failed to mention a manager's added value, relative performance in varying market conditions, the magnitude of the difference in returns between good trackers and good managed funds, etc.

It just struck me as more of an opinion piece about charges rather than a good reason to pick one over the other. After looking into that, I did a little more research and went for a portfolio of solely managed funds for my modest portfolio, so I'm grateful to both the Motley Fool and this forum for giving me good inspiration to do my own research.

I'd also recommend a similar approach to anyone else. Doing your own research into a subject makes you much more able to make a well-informed choice. It will really pay off in the long run!

Aegis

jon3001 wrote: »

Well - I looked on Morning Star under the sector 'UK Equity Large Blend'. You'll also find a number of trackers occupying those quartiles when ranked on 10 year performance.

In some sectors you will see such occurances. In others, you won't see a tracker even in the 2nd quartile for such a timespan (from memory, feel free to correct me if it's not the case).

I did a look on the citywire fund data site recently for someone who claimed that trackersdidn't have much of a spread of performances, and demonstrated that the top tracker in the UK All Companies outperformed the bottom one by 100%. The issue then is selection. How do you pick one tracker over another when the stated goal of all trackers for one particular sector is essentially the same? I'm not an expert by any means, but I can't see how you pick a tracker except by replication method, which would either be full replication or sampling, I believe.

Conversely, when picking a managed fund you can look at a variety of characteristics if you so choose. Number of years outperforming the market, beating the average managed fund for that sector, level of outperformance of indices, company weighting, manager experience, risk level, etc.

Essentially my belief is that managed funds leave you with a lot more direct control of your portfolio and its risks, and with a little research offer the very real possibility of beating the index year on year.

Of course, you have to keep working at it and revising your selections as the funds and markets change, but that should be encouraged anyway, I feel!

Browsing thru the top 10 funds (which were of course managed) under 'UK Equity Large Blend' they all seemed to have suffered as badly as the as the index during the 2000-2003 downturn. Some more so.

I don't have year on year performance data for my funds before 2002-03, but during that year I believe all of mine that existed back then (I have a couple that didn't) outperformed the declining index, some turning a small profit, others retaining their value in a falling market, others declining, but less so.

That all boils down tot he skill of the manager at dealing with a bear market. The more skillful managers can turn that situation to their advantage, while trackers have no such resources. In a bear market, the ideal strategy for trackers would be to stop using them, but the problem then switches to possibly lost opportunities. Recently someone posted an interesting poitn about what happens if you miss just the 10 best trading days for a fund over a 5 year period... It can be quite astonishing!

I think I've rambled enough for now.