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Paul Farrow: Are trackers the answer to a lack of good active managers?

When I worked at Money Marketing in the late 1990s I could not wait to get my hands on the so-called investment patch. It seemed the most exciting area to me, even though it would not deliver front-page leads every week. That was more likely to be written by the hack covering the regulation beat and the perils of the IFA.
The investment beat also had the best perks. After all, the stockmarket was booming and fund managers had plenty of cash to spend. They had VIP boxes at Twickenham and Wembley Stadium and a jaunt to Henley was not uncommon.

I would not be bought – I am far too cynical for that – but fund managers definitely tried to put me off the scent of index tracker funds.

Their argument was that so-called passive funds that simply track a stockmarket could not add extra value – only managers who were selecting their own stocks could. Any survey from Virgin, which was making a push at the time, was dismissed outright as poppycock.

Of course, the active fund managers’ argument would have been sound had it not been for one point I have come to realise over time – that many active fund managers consistently fail to add value.

I recall one fund manager telling me that passive investing forces a manager to invest badly. Sadly, many active managers can do this of their own accord just as well. Even the active advocates admit that decent active managers are hard to find.

Indeed, many of the fund managers recommended today by IFAs were being advocated a decade ago. Neil Woodford’s name is one that is always aired by the proactive brigade and he has been delivering the goods for many years. However, there are more than 2,000 funds on the market. This means an awful lot fail to make the grade – but they charge annual fees as though they do.

The stockmarket turmoil has put increasing focus on fees, although few investors would give two hoots about fees if they were getting bumper returns year in year out. And for obvious reasons, active fund managers charge more than tracker funds.

Even vocal city stalwart Terry Smith has added his voice to the passive debate. He argues that investing has all become too complicated for savers. He reckons structured products and exchange-traded funds are a disaster waiting to happen and that most investors would be better off buying cheap tracker funds.

When I suggested to him that such a comment would irritate active managers and financial advisers, he retorted: “I do not care if they argue that trackers will underperform. Most active fund managers underperform and by a far greater margin, because of higher charges.”

I agree that if you can find a decent fund manager they will serve you better than a tracker, which will always underperform the index because of the impact of fees. This is where financial advisers earn their crust. Good fund managers are hard to find but if you do find them, clients will be chuffed to bits.

Yet I can also understand why many investors without the time or inclination believe they are being short-changed by the higher-charging active fund managers, and are therefore looking to trackers.

Market volatility should be an opportunity for active fund managers to prove their worth. If they are adding value, it would seem they are not getting the message across.

Paul Farrow is personal finance editor at The Telegraph


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. The trouble is the active fund managers tend to be favoured by IFAs as they provide:

    1. A narrative upon which they can hang their “advice” on – recommending a tracker is like going to a personal shopper and them bringing out Asda value range.

    2. Cover in that any under performance can be blamed on the fund manager rather than the IFA – with a tracker there is no such hiding place.

    Talking of under performance then it would be interesting to note the performance of IFA portfolios against tracker funds – or fixed baskets of mixed asset trackers. Trouble is that I’m not aware of any IFA that independently publishes their investment performance other than bragging about a few choice selections they have made in the past – which reek of survivorship bias and selection.

  2. Hindsight – what a wonderful thing.

    There are lies, damn lies and statistics.

    I am sure that anyone worth their salt can use statistics and past performance to validate the use of trackers/passive funds or actively managed funds.

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