where can i find an index fund i keep reading about?

earlgrey_3

dunstonh wrote: »

trail tends to be 0.35%-0.5% for trackers. Fixed interest funds and property funds often pay less than trackers yet you never see comments about advisers not using those as they pay less trail.

When you say trails "tend to be" does that mean all? Some of the worst all-share trackers charge 1% managment fee so only the rogues would recommend those presumably. I assume they pay the best trail commission.

Scottish Widows UK All share is one of the best performers and has annual management charges of just 0.25%. F&C FTSE All Share Tracker charge 0.3%. How much trail fee would an advisor get for selling those or perhaps the Scottish Mutual All-share?

dunstonh wrote: »

Thats exactly the thing. Where a tracker is available that fits the need then it should be considered. I think a good area is your generic UK growth funds.

Agreed. There will be times when there's no alternative. Otherwise there's no point in paying more than you have to for something you don't need.

Aegis

earlgrey wrote: »

Though not according to Patricia C. Dunn, former CEO, Barclays Global Advisors they don't: "Investment managers sell for the price of a Picasso what routinely turns out to be paint-by-number sofa art."

I think it is very important for investors to look at costs and realise how high they are and how they affect their return.

Agreed. Costs are important when they directly impact on returns. However, as I've said on numerous occasions, I'd rather have a gain of 20% and pay a 5% charge than have a gain of 12% and pay no charge at all. The end result is what really matters in the long run, not the charging structure. Focusing too much on the charges could result in a lower overall return.

Charges should be the final deciding factor in a like-for-like comparison, but outside that it should always be the overall return estimate.

You may be very lucky to get a return of 8% over a period with inflation reducing than to nearer 4% in reality. To then split that return 50-50 with the fund manager when it's your money and you take all the risk is a little lop-sided. If he loses you money he still takes his cut from your capital.

At 50/50 splitting of 8% growth, you'd be paying an AMC of around 4%. Even if you meant 2% (i.e. splitting of the real return), you'd still be looking at a high AMC, presumably without rebated trail commission. My managed funds are typically around the 1-1.25% AMC mark, meaning that if they grow by more than 2.5% in a year, I'm keeping more than half of the growth they generate. Something I'm more than willing to sacrifice for the extra value I feel the management team adds to my investments.

It's made even worse when managers are rewarded for taking risks with our money but without suficient downside for them if they get it wrong. The most recent example was Adam Applegarth of Northern Rock.

I agree, but Applegarth is not a fund manager, nor is he ever likely to be. Yes, he allowed his company to be ruined by signing off a totally inappropriate business model, and the direct shareholders suffered for it, but I can't think of any recent examples where a fund manager did the same. I know that funds do occasionally have to close, and I appreciate that the resulting loss can be horrible for the investors, but these risks are mitigated by the diversification inherent in a collective investment, and can be mitigated further if the fund manager perceives the risk and bails out (unlike the two hedge funds that were at least close to being the majority shareholders when NRK was nationalised... those managers ignored all the warning signs and too a huge risk anyway)

For the investor regardless of the apparent performance it can be hard to judge the risk until it all goes wrong. For any fund manager to beat the index they have to take a position.

True enough. They have to be excellent short or medium term traders in addition to being good investors. And I think that the best ones do this exceptionally well.

I think we'd agree that what we'd both like to see is less of the sales patter when it's a serious business for many people.

No question!

What I'd ideally like to see is an objective comparison between index funds and managed funds. When I first decided to invest, I was nearly swayed by the Motley Fool's guide to investing (i.e. put it all in trackers). Later on I discovered that their article was actually extremely misleading, and outright wrong at times, and tried to find something more objective. Unfortunately this seems impossible because damn near everyone is apparently on one side of the fence or the other!

I'd suggest asking for Martin to look into it, but I don't think he's a huge fan of investment strategy articles, for good reason probably!

earlgrey_3

Aegis wrote: »

At 50/50 splitting of 8% growth, you'd be paying an AMC of around 4%. Even if you meant 2% (i.e. splitting of the real return),

Yes I meant the real return. The return before inflation is meaningless.

Aegis wrote: »

My managed funds are typically around the 1-1.25% AMC mark,

Well below the average for managed equity funds so probably very helpful. Many with TERs of 2% plus (management + other fees) and I read somewhere that fees had risen by around 6% in recent years.

I think the right approach may be to realise how much fees hit returns over the years, look carefully at what you are paying, and make sure you get good value. Also look at whether the performance is really due to better skills than the majority of fund managers who under-perform the indexes or by taking risks with your loot.

nicko33

Anyone know much about the RAFI (Research Affiliates Fundamental Index) Indices? Their indices are weighted not by market cap, but by fundamental values e.g. size, cash flow, dividends, book value

Some LSE listed ones are available from Lyxor

cheerfulcat

earlgrey wrote: »

I think the right approach may be to realise how much fees hit returns over the years, look carefully at what you are paying, and make sure you get good value. Also look at whether the performance is really due to better skills than the majority of fund managers who under-perform the indexes or by taking risks with your loot.

You might find this post by a one-time fund manager interesting. In particular he notes that

Why do unit trusts underperform? Because in my personal experience they are limited to a low risk portfolio performance v the index, and the chunky fees and expenses charged on them doom them to underperform the index after fees. It's generally true that the better individual managers in any house will prefer to manage institutional mandates, and so unit trusts will often be managed by lesser individuals.

And also

Are there any unit trusts which can regularly outperform? Yes, focus funds, the new retail innovation which seem to be similar to institutional risk levels and are marketed with risk warnings, though they have even larger fees than ordinary unit trusts. I'm very happy to own good chunks of Gartmore UK Focus and Invesco Perpetual UK Aggressive and some others like them, which I think will continue to outperform the index after fees.

FWIW.

earlgrey_3

Thanks CC, interesting stuff.

He also writes:

Traditional active unit trusts are essentially a cr*p product, and I think demand for them will fall apart in the next decade, but you can't blame their managers for trying to obscure the truth and so keep the show on the road for as long as possible.

Wouldn't hold my breath for that. In recent years they've actually increased the charges for most managed funds - thankfully offset to some extent by the discounts at fund supermarkets. Too often seems to be an over-estimation of the real returns without realising just how high a proportion of real returns end up with the managers and others.

Was a time when I paid bank charges every month on my current account. With efficiencies from computerisation etc., current accounts are now mostly free and with some actually paying interest (if not in real terms). In those days typical fund management charges seemed to be around 1-1.25% and might have expected them to move downwards for the same reasons as bank charges. Instead, we've had the reverse with charges rising to a typical 1.25-1.60%. Despite increased charges, we still have the majority under-performing the indexes after charges.

The trackers show just how much charges affect returns. Those with charges of 0.25% or so show a 3 year return of +42%. Those like Gartmore UK Tracker charging a whacking 1.0% (with presumably the full 0.5% being paid as a trail commission) returned just +35% over 3 years. I don't see how any decent adviser could pretend selling such a fund could be in the client's best interest but presumably Gartmore wouldn't be offering the commission otherwise.

Jake'sGran

I have never invested in a tracker fund as they seem quite

Aegis

Jake'sGran wrote: »

I have never invested in a tracker fund as they seem quite

Indeed?

StevieJ

If you have UK equity income funds (may I add by top fund managers) I do not think you will particularly be cheering their defensive qualities in a falling market compared to trackers. I must add one exception being Invescu Perpetual who on their own admission made some very fortunate calls.
I think the transparency of trackers is something to be admired i.e. if the market goes up 1% this is reflected in your fund.

dunstonh

I have never invested in a tracker fund as they seem quite

...boring? So boring you fell asleep whilst typing

If you have UK equity income funds (may I add by top fund managers) I do not think you will particularly be cheering their defensive qualities in a falling market compared to trackers.

Lets go back to 2000 and look at the sector average of UK Equity income (so not to pick Inv Perp)

12th May 2000 to 12th May 2008

L&G UK Index tracker:: 31.9%
L&G UK 100 Index tracker: 9.2%
UK Equity Income sector average: 59.5%
Jupiter Income (as one of the top selling Eq Income funds of that year): 91.8%
Inv Perp Income (i know but lets face it, its in most people's portfolios): 151.0%

Whilst the last 12 months has seen the uk equity income sector average be -9.8%, its not that far from the trackers loss at -3.1%. You dont invest for the short term.