Active or Tracker Funds?

We have discussed the ways you can invest your hard earned cash many times over the last 12 years, and recently we also covered MiFID II.

This aims to ensure that in order to restore consumer confidence after the 2008 crash, European markets are safer, efficient and transparent.

From our point of view, this entails being very clear about the risks of investing, and, where we can, minimising the risk of our clients not achieving their goals in life.

We interpret the word transparent to mean that you the client know in advance all the costs of what you are buying.

Of course, when it comes to how to invest in the stock market you will often be bombarded with advice and tips on the ‘best’ way to do this.

And picking funds based on their historical performance is certainly no guarantee of future positive returns.


Those of you with long memories will remember when the traditional insurance companies’ own funds were the only real choice when it came to investing.

From the early 2000s the option of using platforms meant that financial planners / advisers had access to many very low cost institutional funds that up until that point were only accessible to the very rich with substantial amounts to invest.

This meant that we could now build portfolios for our clients that were more robust, consistent and at a lower cost.

It also meant we moved away from ‘active’ fund managers, who aim to beat the market however over time and after costs invariably don’t deliver (there are exceptions).

Now, we simply track the market using asset class passive funds, albeit in a sophisticated way.

Over the last decade it has been interesting to observe that more and more planners have realised these truths, and are now using this ‘new world’ way.


These subjects came to mind with a few recent articles in the press, with the first from trade journal Money Marketing:

“Fund manager Baillie Gifford has hit out at the active fund management industry for failing to put capital into the hands of the companies that deserve it.

Baillie has launched a campaign for “actual” investing, where managers target tangible, sustainable activities to generate long term growth as well as positive shareholder returns.

The firm says that instead of this purpose, active management “has been hijacked by many fund managers who think active means ‘activity’ and simply being different from an index” and that “activity has more to do with trying to outsmart other fund managers, rather than with the creative deployment of capital.”

Baillie acknowledges that while passive delivers better post-fee performance than active managers on average, it fails to allocate capital to innovative companies.”

Our summary here is that the passive route has the potential to give better returns when investing, say in an ISA.

However, their view is that active investing is more to do with looking for innovative companies for your money – but of course this will usually be with higher risk.

Then there was a New Model Adviser (another trade journal) article:

“Discount broker Hargreaves Lansdown plans to cut down the number of funds on its ‘best buy’ list as it seeks to push down fund management fees.

New Model Adviser® understands the Wealth 150 list, which currently offers Hargreaves clients discounts on 90 funds from a range of managers, could be cut down to just 40 funds.

New Model Adviser® has learned Hargreaves Lansdown is currently reviewing the number of funds on the Wealth 150 and Wealth 150+. The platform intends to cut down the number as part of a bid to further squeeze fund managers’ charges through negotiations.”

So more pressure on sales companies and fund managers to cut their charges.

And in Portfolio Adviser Magazine:

“Tracker funds under management stood at £194bn at the end of September, accounting for 15.4% of overall industry funds under management, compared with 14.5% in September 2017.

Laura Suter, personal finance analyst at investment platform AJ Bell, said: “Tracker funds saw the biggest inflows, with a whopping £1.1bn being invested in them in the month.

The news won’t be welcomed by active managers who have been struggling to hold onto assets. According to Morningstar data, investors pulled more than $86bn (£67bn) from active managers globally in the third quarter.”

Again in Money Marketing:

Investors have more money in under-performing funds than ever before, according to Tilney’s latest list of “dog funds”.

The latest edition of the bi-annual list of under-performing funds features the highest number of dogs in its history. The 111 funds featured hold a combined £54.6bn in assets – the highest number recorded since the list was first issued in 1994.

The Spot the Dog report includes funds that fail to beat their benchmark for three consecutive 12-months periods by five per cent or more.

Bestinvest managing director Jason Hollands says:

“In each market the difference in return between the best and worst performing funds is huge. These differences in fortunes cannot be explained by variations in fees but come down to the decisions taken by the managers as to which companies to invest in. It is therefore vital for investors to choose their funds very carefully.”

But of course, it is very much a gamble whether or not you end up choosing a good fund!

Looking Ahead

And there is the rub. We have learnt that it’s easy to look back at performance, but it’s impossible to predict the ‘winners’ consistently 10-20 years ahead.

So more advisers and investors generally are seeing the advantages of Tracker Funds, which just 15 years ago accounted for only a small percentage of the market, and are at around 15% now.

With trackers, you simply buy the market at a low cost in ratio to your risk preference, and then hold, ignoring the siren voices of sell sell sell (which isn’t always easy to do) when markets fall.

We also advocate rebalancing periodically, so that the risk you are taking does not deviate from your original starting point / preference.

Take Action

Low cost passive investing is here with its proven track record, so our suggestion is:

Don’t speculate, instead invest over the long term.

Spending time now on your overall investing strategy really could save you thousands of pounds over the coming years.

And make sure none of your money ends up in the ‘dog’ list, so now may be a good idea to review what you have to ensure you are not losing out.

If you’d like a confidential chat about your options, feel free to drop us a line.

Graeme Urwin

My passion is to help senior doctors and dentists organise their finances to create their own strategy to achieve their goals in life. I do this impartially as I charge fees. Outside of work the words that best describe me are: family man, squash, badminton, jogging, travel, reading, archaeology, genealogy, writing a book on Robert the Bruce. I live in the hills of Northumberland in Rothbury and believe in living the life you love.

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