There are times when tracker funds outperform the average UK equity fund but these times are becoming more rare because 42.6 per cent of the All Share index is accounted for its 10 biggest shares and Government regulations mean it is now more difficult for bigger companies to outperform mid-cap and smaller companies.
Isis has produced figures showing that 83 per cent of index funds performed below average in the UK all companies sectors over one year, 71 per cent over three years and 84 per cent over five years. Over longer periods, smaller companies and equity income funds generally outperform UK tracker funds, at present by substantial margins.
Over 10 years, the average UK all companies fund rose by 64 per cent, UK equity income sector by 91 per cent and UK smaller companies by 94 per cent.
Isis quite rightly points out that the real challenge for fund managers is to avoid quasi-trackers which stick closely to the constituents of the indices but charge more.
I believe that those who wish to invest a large proportion of their assets in the UK stockmarket should spread their risk among around 10 UK funds, some investing in smaller companies, some in income shares and some in a mixture of bigger, mid-cap and smaller shares.
The trusts I like best at present are Framlington UK select opportunities, Fidelity special situations, Rathbone special situations, Insight UK dynamic, Framlington equity income, First State British smaller companies, Liontrust first income, BWD microcap, Isis stewardship income and Jupiter undervalued assets. I would expect this portfolio to outperform the FTSE 100 and FTSE All Share indices by a substantial margin in the foreseeable future providing the fund managers remain the same.