Index tracker funds are gradually becoming a more popular choice for investors in the UK.
At the end of November 2013, according to the latest IMA fund sales statistics, tracker funds held an overall share of total funds under management of 9.6%.
This compares to 8.9% a year earlier in November 2012.
Their growing popularity is driven by a desire by some investors to reduce the cost of running their portfolios, combined with a belief that many actively managed funds fail to achieve their objectives.
But what happens when index tracker funds go wrong?
There was an interesting article in The Telegraph this weekend, explaining how 50,000 investors have been ‘failed’ by tracker funds.
They highlighted several very large tracker funds which have failed to track their chosen market index closely, and subsequently lost investors thousands of pounds.
The article gives examples of the Halifax UK FTSE All Share Index Tracking fund – with 340,000 investors and £2.3bn of funds under management – which has delivered a 10 year return of 92.6%.
This compares with a 10 year return of 132% from the FTSE All Share Index itself during that ten year period.
What the examples in this article remind us is that some tracker funds are good at what they do, others are less so.
Charges play an important role here; not all index trackers are cheap and certainly many do not offer particularly good value.
Now we have moved into an environment of ‘clean’ fund pricing, the visible gap between tracker fund and active fund pricing has become much smaller, with it becoming apparent to investors that some tracker funds are now more expensive than some actively managed funds.
We continue to believe that the right approach for most investors is to use a mix of tracker funds and active funds, where appropriate.
Tracker funds tend to work well in larger, more efficient and well traded markets. Active funds can add value in smaller markets where local knowledge can be employed to exploit valuation disparities.
With index tracker funds representing nearly 10% of the UK funds market, we expect their popularity to continue to grow over the next decade.
But investors should keep in mind the importance of picking their tracker funds carefully; there are still active decisions to make with passive investing.
