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No debate

Doing a spot of judging a few months back for the HeadlineMoney Awards – and of course I would not dare break the organiser’s ruthlessly enforced code of silence as to the particular category – I came across the heart-rending story of a journalist who had lost money investing in the stockmarket.

This was interesting for two reasons, the first being that – cue the violins – journalists usually are not paid well enough to be able to dabble in shares. Furthermore, the hack in question was bemoaning the fact that, after almost 10 years of patient dripfeeding, his investment was worth less than he had paid…into a tracker fund.

You will already have worked out this investment must have been made in 1999, when most of the world’s developed markets had been doing very well, thank you very much, and the feeling was beginning to emerge among members of Her Majesty’s financial press that anybody willing to pay the extra fee for active management was seriously deranged.

This was the heyday of the great active versus passive… oh, what’s the word? Contretemps? Brouhaha? Dialectic? Oh no, that’s right, it was the heyday of the great active versus passive debate, which to my mind reached its zenith in the summer of 2000 with that seminal report in the Sunday Times, which I have mentioned here before.

Oh, you know the one – this is the time of year when fund managers are to be found on the banks of the Thames washing down lobster with bottles of champagne? That’s right, the one about active fund managers being a bunch of baby-eating pirates with fewer morals than the stoatiest of stoats.

Now, I would not for one moment suggest the thinking of my fellow scribblers was in any way influenced in the late 1990s by the relentless rise of Virgin Money, but there is something reminiscent of those heady days now that US investment colossus Vanguard is bringing no fewer than 11 tracker funds to the UK.

The last week or so has also seen another US giant buy up index-tracking specialist BGI and, as I have written elsewhere – having shamelessly stolen the idea from Motley Fool – when a group with the active management pedigree of BlackRock decides now is the time to be boosting business on the passive side, its competitors probably ought at least to be referring back to their five-year plans.

If that is not enough for you, former New Star manager Alan Miller has been suggesting that the age of the star fund manager is over and that the way forward is all about exchange traded funds – and shame on any of you who might be thinking this minuscule change in positioning has anything to do with his new company basing the bulk of its investment strategy around ETFs.

To be fair to the new generation of index-tracking champions, today’s passive funds are cheap as chips compared with the old ones but, of course, that is not the only consideration – nor, arguably, even the main one. As we all know, total expense ratios are the key number, tracking error can really help sort the wheat from the chaff and it doesn’t do any harm to take a look at fund sizes either.

As for the active versus passive “debate”, next time you come across an article suggesting there is such a thing, rip it up into tiny pieces and send them off to whomever wrote it. One does not exclude the other and there are some very fine arguments for running the two together in the same portfolio.

After all, as long as you have chosen the right provider, you will not underperform the market by that much with a tracker, while the one guarantee they do bring is you are definitely not going to outperform with one. Perhaps the analogy I’m after is gin and tonic – either one will do the job to a greater or lesser extent but you’d generally do better mixing them together.

When push comes to shove, I’ll take the gin over the tonic but, unless you have to write, say, a 700-word investment column, there is no active v passive debate – there is not even a debate about whether there should be a debate.

Julian Marr is editorial director of


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