We all want the best in life, don’t we? The supermarket value pack of ready-made lasagne looks delicious enough but don’t you feel duty-bound to go for the luxury version instead?
And rather than supermarket own brand bleach, you feel you owe it to yourself and your family to take the brand name bleach that “kills all germs dead” even though deep down you know bleach is bleach is bleach.
Could the same be happening in our approach to our selection of collective investment funds, otherwise known as OEICs and unit trusts, often within an ISA wrapper?
When it comes to choosing investment funds, the choice is often between a tracker fund and an actively managed fund. The tracker fund simply follows an index such as the FTSE All Share. Too plain vanilla for you is it? Are you tempted instead to go for an actively managed fund that tries to beat the market by cherry-picking a selection of shares that the fund managers believe will achieve the best returns?
If you choose your actively managed fund well, you could do well from your choice. For instance when markets are performing badly, a good actively managed fund that has a highly concentrated portfolio that differs significantly from the index could be worth its weight in gold.
But there’s the rub. Many so-called actively managed funds are essentially tracking the index but charge for active management.
Some reports say this amounts to one in three cases and there is now so much concern that the FCA has recently said it has concerns about closet tracking, leading it to consider a market study covering the entire asset management industry.1
Index-tracking funds exploded in popularity in the 1990s and over the past 20 years they have developed a loyal band of followers who believe that trying to pick a fund manager who will in turn try to beat the market is too much of a gamble to deliver consistent investing success.
Better information, campaigns against high fees and regulatory changes that have demanded more transparency on performance and charges have all made investors question the benefit of expensive active managers.