| By :
Ray Prince
Readers of Financial Tips will have seen many articles that we have written talking about how to invest your money. It goes something like this: Check if you even need to invest more by having your planner build you your own financial forecast. After all, if your big picture looks very good, why not spend more/semi retire/gift to children and therefore reduce any inheritance tax issues? Presuming investing is sensible, then: check your capacity for risk buy your risk assessed funds that make up your portfolio at the 'wholesale' price through a Wrap Platform (Admin Centre) Use lower cost passive funds that track the market Be as tax efficient as possible by using tax wrappers, like an ISA Rebalance and review each year to ensure your risk levels remain the same as when you started So lets look at some tracker funds, which are becoming ever more popular. By their very nature, they are supposed to track a given market. Trackers tend to be cheap because you don't have to pay for the stock selection expertise of a fund manager. With a fund managed by a manager, hoping he/she can beat the market, there inevitably will be extra costs, not least of which will be the costs of buying and selling shares. So trackers should cost less, and since they aim to replicate the market return, logically their performance should come somewhere in the middle of the thousands of competing active funds. Sounds logical doesn't it? So how do trackers actually measure up against managed funds? Well, if we look at the UK market, and the UK All Companies sector, a fund here will hold most of their assets in UK shares, and their aim will be the growth of capital. There are, according to a recent study by lovemoney.com, 321 funds in this sector, and the results over a 5 year period were: % growth 5 year sector ranking Tracker fund 5 years out of 321 funds HSBC FTSE 250 Index 40.2% 32 Halifax UK FTSE All Share Index 30.6% 70 L&G UK Index 28.7% 82 F&C FTSE All Share Tracker 27.8% 87 M&G Index Tracker 27.7% 89 Gartmore UK Index 27% 90 Fidelity Moneybuilder Uk Index 26.7% 93 Scottish Widows All Share 26.6% 94 AXA UK Tracker 26.5% 97 Liontrust Top 100 25.9% 103 So, this study echoes many others done over the years. Far from being somewhere in the middle of the rankings, because of their very low costs, trackers regularly OUTPERFORM managed funds! To further emphasise this, we read a recent Wealth Management article in the Mail On Sunday. An ex fund manager was 'spilling the beans', and was sharing his thoughts on why active fund management was fatally flawed. His name is Alan Miller, who has been a fund manager at Gartmore, Jupiter and New Star. His remit was to beat the returns of the stock market, but he became increasingly disillusioned, not only with the difficulty of beating the market regularly, but with the realisation that the average investor is "astonishingly badly served". He bases this on what he calls the five 'truths': High annual fees have no correlation with superior returns. Quite often the most expensive funds are the worst performers. When they reach a certain size, most retail investment funds become more cautious and end up tracking the market. Of course, they may still charge high fees. Few fund managers regularly outperform the market. Essentially, the average fund manager will deliver a return equivalent to the index - minus costs. The more an active manager sells and buys shares, the more likely his fund will underperform because of higher costs. Many funds are too complicated to justify even higher charges. They should keep it simple. So the 'poacher turned gamekeeper' view is very clear and perhaps it's time to AVOID active funds. What we find quite depressing, however, is that he then goes on to advocate the type of trackers that we have been advocating for 6years now, saying that he only recently stumbled across them! The Financial Tips Bottom Line Academic evidence abounds that Active Managed Funds DO NOT deliver over time, and they are usually expensive. Don't be caught out - it will most likely cost you. ACTION POINT If you are invested in managed funds thorough your ISAs, Pensions or Unit Trusts, really think about the reasons you bought them. Where they sold to you years ago? Have you reviewed them recently? Investigate the costs and performance of your funds. If you have an adviser, ask them why you are invested in them. Above all - take action!
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