Friday 21 September 2012

Managed Funds VS Index Trackers

Every year index tracker funds, on the whole, outperform their actively managed brethren. When you look at longer time frames this out performance becomes more pronounced as many active managers can get lucky in the short run, but are very unlikely to stay lucky for a 10+ year period.

'' A study by research firm WM Company found that 82% of managed funds failed to beat the market over the course of twenty years. While you may think that sounds bad, it's actually even worse, because this figure only includes funds survived for the whole twenty years -- many poorly performing funds are shut down or get merged into other funds.

This means that the chances of picking a fund now that will do worse than the market over the next twenty years is likely to be a lot higher than 82%, and is probably well in excess of 90%. '' -

Index trackers cost less too. Most managed funds charge 3%-5% initial fee plus approximately 1.5% annually, while index funds generally have no initial fee and only cost around 0.5% annually. This is because index funds obviously have much lower labour costs to pass on and they generally trade much less than managed funds so incur less trading fees. These savings when compounded for many years can make a huge difference to the end result of an investment.

On the whole then, index tracker funds appear to be a fairly sensible place to stash your cash if you are looking for stock market exposure.


There are a small minority of fund managers out there who have fantastic track records and have proved themselves well worth the extra fees incurred. Anthony Bolton to give one example, managed to return his investors on average 19.5% a year during his 28 year tenure at the Fidelity Special Situations fund (starting 1979). That would have turned a £10,000 investment into £1,470,000. The same £10,000 invested in a tracker over the same period would have got you only £346,644. (still not too shabby!!)

Managers of this calibre who can consistently beat the market over the long term are few and far between but it is well worth keeping your eye out for them. Mr Bolton is now managing the Fidelity Special Situations China fund, it's had a bit of a rocky start but after watching the video link below I gave him a bit of my money to look after.

Where are your investments and pensions invested? Are they in index trackers or managed funds? If they are in managed funds then it could be well worth finding out who exactly is managing them and if they have proved themselves worthy of the extra fees involved.

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