To track or not to track the index

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New (and old) investors are often advised to buy equity index tracker funds rather than actively managed equity funds. A tracker fund will hold shares in order to closely replicate the index it is aiming to track. This avoids any good or bad choices of which shares to hold. It is claimed that trackers beat most actively managed funds because they eliminate the risk of bad choices, but they also charge less in fees.

I have held tracker funds in the past for these reasons but now prefer to hold actively managed funds. If you are new to investing and have limited funds then a tracker is probably a good option for you. It reduces your choice of fund and means you can be very diversified with only one fund. I began investing in equities in 1986 using actively managed unit trusts. In about 1988 the first index tracker funds were launched in the UK and I bought some. I sold my last tracker fund in 2009.

I prefer to hold actively managed investment trusts. I do, however, regularly compare their performance to the index and to the available tracker funds. For the ten years to 31 January 2019 the FTSE All Share Index total return was £264 from a £100 investment. On a quick look I found eight UK All Share tracker funds with ten-year results and these ranged from £221 to £262 and the average was £249. Looking at investment trusts in the UK All Company and UK Equity Income sectors there were thirty-six trusts with ten-year results and these ranged from £192 to £620 and the average was £320. Twelve of the trusts had results lower than £264, but only seven had results below £249.

I currently hold six UK trusts from these sectors that I have held for over ten years. Their performances ranged from £251 to £562 and the average was £334. So, on a ten year view my active funds have mostly bettered the index and the available trackers.

I have chosen to measure against the FTSE All Share Index. Arguably one should measure against a global index and one should use global trackers to diversify across the world. On a quick look I found five global equity tracker funds with ten-year results and these ranged from £290 to £322 and the average was £311. Looking at investment trusts in the global and global equity income sectors there were twenty-four trusts with ten-year results and these ranged from £258 to £1,096 and the average was £425. Six trusts had results of £311 or lower.

I currently hold two global trusts from these sectors that I have held for over ten years and the average performance was £351. The arithmetic average of the eight trusts I have held for over ten years is £338. This bears comparison to the global trackers. I am therefore encouraged in continuing to follow my own individual approach. I still think trackers could be useful for new investors, for investors unable to diversify across several managed funds, and for those unwilling to risk picking the wrong managed funds. I’m prepared to take that risk in my own individual way.

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