Confused about trackers

apollo9

I am a little confused about trackers. In a market where there is more volatility would active funds not be bette than trackers?

I understand that over the long term trackers and active funds are about the same, but say over the next 10 years, shouldn’t the latter do better?

I ask as I am wondering whether I should just move my whole portfolio into a couple of trackers - VLS 60 and equivalents or seek out active funds like Woodford.

Thanks

Thrugelmir

apollo9 wrote: »

In a market where there is more volatility would active funds not be bette than trackers?

What's your reasoning behind your thoughts?

apollo9

My reasoning, albeit naively, is that an active fund manger should be able to select the companies likely to perform better than index, while a tracker would only represent the index and therefore not do as well (in terms of increased gains and limited losses).

System

Why do you think an active manager can beat the market? About 50% do better and 50% do worse!

bostonerimus

apollo9 wrote: »

My reasoning, albeit naively, is that an active fund manger should be able to select the companies likely to perform better than index, while a tracker would only represent the index and therefore not do as well (in terms of increased gains and limited losses).

That is the reasoning used with active funds at all times in a market cycle. If you believe it you'd be a fool to use trackers. Of course if you a more of a pessimist you could also argue that active managers have the opportunity to mess things up and do worse than a tracker......prime examples of both outcomes are seen with Fundsmith and Woodford Equity Income.......

Audaxer

apollo9 wrote: »

My reasoning, albeit naively, is that an active fund manger should be able to select the companies likely to perform better than index, while a tracker would only represent the index and therefore not do as well (in terms of increased gains and limited losses).

There is a lot of debate about which is best. You should have a read of this regarding the benefits of passive investing:
http://monevator.com/category/investing/passive-investing-investing/

bowlhead99

apollo9 wrote: »

My reasoning, albeit naively, is that an active fund manger should be able to select the companies likely to perform better than index, while a tracker would only represent the index and therefore not do as well (in terms of increased gains and limited losses).

By that logic, the active fund manager should also be able to to select the companies likely to perform better than an index when the market is less volatile, while the tracker would only represent the index and therefore not do as well when the index is just chugging along flattish and a bit boringly.

So, if your logic is correct, it is better to always use active funds because they can select the best stocks, whether to guard against investing in badly-priced companies that fall, or to identify and invest in the keenly-priced companies that will go up more than the average.

However, what you always find is that some active managers will 'beat' the indexes and others will not. Some will quite deliberately position themselves to fall less drastically when the index is falling, and some will position themselves to rise more emphatically when the index is rising, but it can be tricky to do both. By its nature, an index is reflective of a weighted average of what is happening to the share prices, and given a share price is a function of who is buying it and selling it, the chances are that for every person who makes an active decision to buy something that turns out to be a good idea, there is another person who made an active decision to sell it to that person which turned out to be a bad idea.

So, you can't just say that active management will be best. The right active management will be the best and the wrong active management will be the worst, and both the best and the worst managers will charge you a fee for performing the active management for you.

You are right of course in what you might be inferring that if you do not want to follow an index downwards, the only way to avoid the fall is not to hold the index but to either not hold the asset class at all (e.g. just stay in cash) or to hold something other than the index proportions that will hopefully go 'less downwards', and hope the manager didn't get it wrong and pick things that went 'even more downwards'.

There are some fund managers that specialise in constructing portfolios of stocks or other asset classes with lower anticipated volatility than an index. One of the reasons people don't just take the market average is because they don't want the market average. They might want lower volatility, or more volatility, or higher income, or corners of the market where index funds don't really exist due to impracticality or lack of demand. So there is plenty of choice for everyone. I am one of the people who uses active management more than passive management, as I don't want to just take the result of the index for better or worse. But I don't always use active funds exclusively.

But you probably need to examine your logic further.

dunstonh

apollo9 wrote: »

My reasoning, albeit naively, is that an active fund manger should be able to select the companies likely to perform better than index, while a tracker would only represent the index and therefore not do as well (in terms of increased gains and limited losses).

Managed funds have an investment strategy. That strategy wont be the same as the tracker (otherwise what is the point). That means it will be taking a different level of risk.

More often than not it is actually the risk level that dictates the returns. A more defensive managed fund will underperform the tracker in growth periods but outperform in negative periods. A higher risk managed fund will usually outperform in growth periods and underperform in negative.

On top of that, you then have manager discretion. However, the manager still has to act within the remit of the fund. If the fund manager's remit is large cap UK equity with no more than 5% in cash then they have to stick with that even if large cap UK equity is the worst place to be.

ChesterDog

VLS 60 isn't a tracker, it's a fettered multi-asset fund.

VWRL is a tracker - an ETF tracking the FTSE All-world index..

VRXXA is a tracker - an index fund tracking the FTSE Global All-cap index.

bostonerimus

A better title for this thread would be "Confused about actives"

buyhighselllow

Actively managed means you have to pay them a load more in fees. Track the market unless you can genuinely pick a star fund manager..and that is surely harder than picking a star stock !?