Best Index Fund?

Sciolist

I want to put money into an index tracker. I have a mini cash ISA, but I understand it doesn't matter much if you have a maxi share ISA or not, as capital gains tax allowance is enough that you won't be paying tax for a long time anyway.

My understanding is that it's impossible to predict which managed funds actually outperform the market due to insufficient sample size of historical data. It's therefore essentially a gamble, so I'd prefer to put money into an index tracker where I am simply gambling on the amount the market goes up or down instead of whether a fund beats the market.

I intend to put something like £3 or £4k into this. What's my best plan?

dunstonh

I have a mini cash ISA, but I understand it doesn't matter much if you have a maxi share ISA or not

If you paid into the mini cash ISA in this tax year then you cannot have a MAXI. It has to be a mini.

My understanding is that it's impossible to predict which managed funds actually outperform the market due to insufficient sample size of historical data. It's therefore essentially a gamble, so I'd prefer to put money into an index tracker where I am simply gambling on the amount the market goes up or down instead of whether a fund beats the market.

Fundamentally correct. However, you havent said what index. Plus there is ample data.

FTSE all share trackers will always tend to be mid table in performance. FTSE 100 and FTSE 250 trackers will go from top performers to bottom performers depending on the performance of large cap and mid cap companies. So even with a tracker, you are still trying to predict what part of the index is going to be right for you.

Single fund investing is old fashioned and usually leads to lower returns over the long run as you have all your eggs in one basket. You should consider splitting the investment to allow some diversification.

Also, if you dont mind the higher risk nature of a tracker fund (compared to a similar UK growth managed fund) then you may prefer to use ETFs instead of unit trusts as it will be cheaper.

Aegis

Sciolist wrote: »

I want to put money into an index tracker. I have a mini cash ISA, but I understand it doesn't matter much if you have a maxi share ISA or not, as capital gains tax allowance is enough that you won't be paying tax for a long time anyway.

If you plan to invest more over the years you might want to consider getting in to an ISA now. After all, if you invest £3k each year for 10 years and it does well, you could potentially end up with a monstrous CGT bill at the end of it. You can still get a mini stocks and shares ISA this year if you have already used your cash ISA allowance.

My understanding is that it's impossible to predict which managed funds actually outperform the market due to insufficient sample size of historical data. It's therefore essentially a gamble, so I'd prefer to put money into an index tracker where I am simply gambling on the amount the market goes up or down instead of whether a fund beats the market.

It's by no means impossible to predict which funds will outperform the markets. If you pick funds with an experienced fund manager who repeatedly outperforms his index, you are essentially predicting that they will beat the index, and more often than not they probably will.

Admittedly it's definitely got an element of chance in there, but so does picking an index tracker. The best index tracker in the UK Equity sector can easily outperform the worst by 100% or more from what I've seen.

The other side to consider is that trackers have no downturn protection. As soon as the market starts to fall, so will the trackers. An active fund can shift into more defensive stocks to try and lessen the effects of a correction/bear market, and are therefore extremely useful in a time of uncertainty if you pick well established fund managers.

Avoid bank funds like the plague though

purch

ETF's SHOULD be a cheaper alternative, and by their structure SHOULD also track the chosen index more closely, and because they are very transparant you can easily see whether the chosen fund is trading at a discount/premium to NAV

There are a huge number of Index's tracked, so choosing which Index to track, that best suits your profile can be just as difficult as choosing a Managed Fund

The other side to consider is that trackers have no downturn protection

That is very true, although you are paying extra in fees for the 'skill' and experience of the Manager protect you, and there is no guarantee he/she will do so.

However it does bring into play another advantage of an ETF, in that they are priced in 'real time' and are very liquid so you can sell out very easily and at a price you choose.

nrsql

>> Also, if you dont mind the higher risk nature of a tracker fund (compared to a similar UK growth managed fund)

Well the managed fund should have the disadvantage of charges and the risk included with the managers so I'm not sure the tracker should be considered higher risk. (there's a lot of propoganda about this as some people profit from managed funds so want to promote them - think about that when you read analysis).

>> An active fund can shift into more defensive stocks to try and lessen the effects of a correction/bear market, and are therefore extremely useful in a time of uncertainty if you pick well established fund managers.

They can but will they? And will they miss out on the recovery? You are comparing choosing a manager (and monitoring) against choosing and index (and monitoring). I would say that the monitoring bit carries less risk with the index but it's debatable.

As to the historic data - there has been a long period of growth in most markets which probably isn't applicable to the near future - in fact I'm not sure there has been a period anything like this in the recent past.
I would be cautious about any managed funds that have dne well over the past few years and look to see how they are positioning themselves now.

Liz_the_Whizz

sciolist,

When I first started getting interested in investing two years ago, several financial sites advised getting an index tracker as a first step.

So I put my stocks and shares ISA money for that year into the Fidelity Moneybuilder UK Index Fund. It tracks the FTSE All Share Index and has a very low annual management charge of 0.3% (Total Expense ratio).

I have not since added to it, preferring instead to invest in other actively managed funds as I have got more into it. I have also periodically thought about switching out of the tracker for something better.

As dunstonh says, a tracker is always going to be a mid-table performer and true to form in 2007 the Fidelity Moneybuilder UK Index fund came exactly midtable on the Citywire fund performance tables for the UK All Companies sector (115 out of 331 funds).

http://www.citywire.co.uk/Funds/Home.aspx

But that still means it beat 116 other funds, most of them with far higher management charges. The worst performers (sadly many of the ethical funds amongst them) made a loss over the year, with the worst delivering a "return" of -13.3%.

So I still have a little place in my portfolio for my tracker, for now at least. It may not be the best investment, but it has always been positive - so far at least;).

If you fancy an index tracker, the FTSE100 trackers did better in 2007 than the All Share ones (you can spot several in the Citywire table in the top 100). I keep reading in the 2008 predictions that we should all be in large caps (mine's a Burberry;) ), so maybe that's the way to go. Just look for the cheapest charges.

Or alternatively, look for a fund that does the same job as per this Morningstar article:

http://www.morningstar.co.uk/UK/funds/article.aspx?lang=en-GB&articleID=54173&categoryID=13

And in the last line, there it is again - Fidelity Moneybuilder UK Index. Perhaps I'll keep it after all;)

Happy investing

dunstonh

Well the managed fund should have the disadvantage of charges and the risk included with the managers so I'm not sure the tracker should be considered higher risk.

They are a tad higher on risk in general due to that lack of downside protection or the ability to turn defensive. That can also be a positive on the upside though if the manager remains defensive at the wrong time.

there's a lot of propoganda about this as some people profit from managed funds so want to promote them - think about that when you read analysis

There is a lot of misinformation on trackers. i.e. claiming they outperform the majority of managed funds (when they dont), IFAs dont get paid on them (when they do) and that they are low risk (when they are not).

There are pros and cons to trackers and managed funds and as long as you know them, you can utilise them in a diversified portfolio. However, you wouldnt want all your money in them.

I would be cautious about any managed funds that have dne well over the past few years and look to see how they are positioning themselves now.

In other words, they are adapting to what they believe is ahead. Something that a tracker cannot do.

As I said, pros and cons to both. You should not make any investment decision based on charges as the first priority. Charges are secondary to where you want to invest. Where is the most important thing.

nrsql

>> They are a tad higher on risk in general due to that lack of downside protection or the ability to turn defensive.
Not if you factor in the other differences though. I'll agree that is a possible factor but I don't think it's a major one and is outweighed by others.
The question here would be how much would you be willing to pay for the managers to make these decisions (right or wrong).

>> In other words, they are adapting to what they believe is ahead.
No - not what I was saying at all.
"In other words, are they adapting to what they believe is ahead?"
Something that is inbuilt into trackers because they won't have ploughed funds into popular shares. Hence they should be mid table so you will avoid the poorly performing fund.

>> There is a lot of misinformation on trackers. i.e. claiming they outperform the majority of managed funds (when they dont),
Matter of opinion. You also need to look at the other side of the argument. I would say there is more misinformation in favour of managed funds than trackers.

Think about whether it is more important to you to avoid a bad fund or to pick a good fund i.e. is average performance better than good + bad.
A bit of maths will show whether a bad period has more effect than the good.

jon3001

Aegis wrote: »

Admittedly it's definitely got an element of chance in there, but so does picking an index tracker. The best index tracker in the UK Equity sector can easily outperform the worst by 100% or more from what I've seen.

Were these tracking the same indices or different ones?

If it's the former then it's safe to say someone did a bad job of tracking the index and they should be avoided.

If it's the latter - then yes, expect different results. Most people just wanting broad coverage will go for a FTSE All-Share tracker. A FTSE-250 tracker will have more in common with a smaller companies fund.

Aegis wrote: »

The other side to consider is that trackers have no downturn protection. As soon as the market starts to fall, so will the trackers. An active fund can shift into more defensive stocks to try and lessen the effects of a correction/bear market, and are therefore extremely useful in a time of uncertainty if you pick well established fund managers.

Is this peculiar to a particular sector (e.g. UK). I've still got L&G Japan Index tracker (why oh why? ). Comparing it to its managed peers its hard to see that overall they've really added much value there.

Indeed over 5yrs the tracker is placed at 11/49 (i.e. top quartile) on CityWire, Sector: Japan
http://www.citywire.co.uk/Funds/Home.aspx

Aegis

jon3001 wrote: »

Were these tracking the same indices or different ones?

If it's the former then it's safe to say someone did a bad job of tracking the index and they should be avoided.

If it's the latter - then yes, expect different results. Most people just wanting broad coverage will go for a FTSE All-Share tracker. A FTSE-250 tracker will have more in common with a smaller companies fund.

The latter. Of course, the spread is nowhere near as wide if you include only funds from the same index, but there is still some spread because of the optimisation methods that exist for the various funds.

Is this peculiar to a particular sector (e.g. UK). I've still got L&G Japan Index tracker (why oh why? ). Comparing it to its managed peers its hard to see that overall they've really added much value there.

Indeed over 5yrs the tracker is placed at 11/49 (i.e. top quartile) on CityWire, Sector: Japan
http://www.citywire.co.uk/Funds/Home.aspx

That's a pretty good finish for a tracker all in all! Top quartile. Not great growth over 5 years though... Though some analysts think that 2008 might be Japan's year, so best of luck with that!

Most of the time the trackers occupy the 2nd and 3rd quartiles from what I've seen, while the bank funds take up most of the 4th and the well-established fund managers have spots in the 2nd and 1st, though sometimes they slip lower in bad years.

dunstonh

Most of the time the trackers occupy the 2nd and 3rd quartiles from what I've seen, while the bank funds take up most of the 4th and the well-established fund managers have spots in the 2nd and 1st, though sometimes they slip lower in bad years.

Thats a fair generalisation. All share will be around middle by its nature. FTSE 100 and FTSE 250 will float between top and bottom depending on how large caps and mid caps are performing. Its been such a long time since the FTSE100 has been any good (about 14 years) but recent trends seem to be towards the large caps due to the credit crunch which has hit the mid/small caps much harder. So, expect the FTSE250 trackers to fall to the 4th quartile (will already be there in short term) and FTSE100 tracker to move to 1st/2nd quartile.

So, you can see, it isnt all about just picking a tracker and being done with it.