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Passive pursuit

One of the ways I ensure my CPD log is up to date is to attend G&N investment trust seminars. There are a number of reasons for this. First, they are conveniently held in the heart of the City, not far from where I have an office. Second, those presenting are investment trust managers and I have a soft spot for this, the granddaddy of the professional investment management movement.

A further reason to attend is that a lot of old hands will be present – people who have experienced more than a few market cycles. The views of investment trust managers are worth hearing because, unlike those managing open-ended funds, they do not have to sell. The money they manage has already been raised.

With managers expressing views on Asia-Pacific, UK mid cap, American equities and environmentally friendly companies, there was much opinion available. F&C’s Peter Dalgleish made a strong case for the continuing flow of economic power East, even if he felt that markets were well up with events.

It was not that Kenny Harper and Gary Jones from Aberdeen were short of opinions – rather it was that the trust they represented was an index tracker. You do not find many index-tracking investment trusts about, although there are some. The Edinburgh US tracker trust has been around for a long time but only adopted the passive approach a decade or so ago. Following the fortunes of the S&P 500 index, it has a tracking error of less than 0.1 per cent and a TER of just 0.38 per cent. I find the choice of promoting this trust at this particular time interesting.

Passive funds have largely been ignored by the IFA community, perhaps because those that pay commission are expensive, while the cheap options such as exchange traded funds and investment trusts do not pay commission. All this will change, of course, as RDR starts to redraw the map of adviser remuneration.

With Vanguard entering the arena, I sense a change coming. Platforms are already examining how to accommodate cheaper investment vehicles such as ETFs and advisers would do well to take note of the cost advantages of these funds.

As Kenny said at last week’s seminar, promoting active funds on the basis that 25 per cent of managers beat the index (as Fidelity did in a recent article) is all very well but don’t forget that means 75 per cent failed to do as well.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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