Follow that bear: tracker funds claim supremacy as the stock market slides

But as Virgin finds fault with the stock pickers, Melanie Bien reports that investors would be better off finding a good active manager

Investors in tracker funds are having their loyalty tested by the poor performance of the stock market. Attracted to these funds in the first place by their low charges, investors are finding that as they track an index, there is little chance of positive returns when shares are doing so badly.

Investors in tracker funds are having their loyalty tested by the poor performance of the stock market. Attracted to these funds in the first place by their low charges, investors are finding that as they track an index, there is little chance of positive returns when shares are doing so badly.

Even so, a new report from Virgin Money, which offers a tracker fund, reveals that 60 per cent of active fund managers in the UK performed worse than the stock market last year. The research suggests that while tracker or passive funds aren't doing brilliantly, active ones are doing even worse. And investors in these are paying more for the privilege.

"The myth has persisted that a fund manager will give you better returns in a bear market," says Gordon Maw, a director at Virgin Money. "We now know that tracker funds beat the majority of managers whichever direction the market is heading in."

However, while 40 per cent of active managers outperformed the stock market, no tracker funds can say they did the same. "Trackers always underperform the market once you allow for charges," says Donna Bradshaw, director at independent financial adviser Fiona Price & Partners. "After all, they have running costs which their index doesn't."

Fans of active management naturally disagree with Virgin's claim that come bull or bear market you'd be better off with a tracker. Rob Page, marketing director at New Star Asset Management, which runs a number of active funds, says: "The findings are rubbish because if you look retrospectively at the active fund universe, a number are closet trackers anyway. If you strip out the 75 per cent of funds which claim to be actively managed but aren't, you are left with active pickers such as us, Fidelity and Artemis. And decently managed active funds will outperform in a bull market, annihilating the performance of a tracker."

He believes this is even more the case in times like these. "In a bear market, a tracker is the worst place to be," he says. "If you are tracking an index, you will track it going nowhere quickly. You are much better off with a good fund manager with a long active track record."

The tracker versus actively managed debate has been raging for several years. Tracker funds are famed for having no initial set-up fee – which can be as high as 5 per cent on an active fund – and low annual fees because they aren't run by a manager. Instead, a computer program follows an index or basket of shares. Many investors favour trackers because they are not subject to the whims of an active manager.

However, active managers argue that while investors may be paying more, they are actually getting better value for money. Annual management fees may be 1.5 per cent or so, compared to 1 per cent or under for a tracker, but the active fund manager picks stocks which he or she believes are going to do well. A tracker has stocks in its fund simply because they are listed on a certain index, irrespective of whether it's a good time to invest in those companies.

Trackers might also invest in quite a limited range of stocks, so increasing the risk. For example, the 12 largest shares in the FTSE All-Share account for over 50 per cent of the entire index – a very small fund universe. And while a tracker will have to hold these stocks simply to follow the market, an active manager will try to outstrip it.

Even Virgin agrees. "Every fund manager worth his salt has a brief to beat the market," says Mr Maw. "Ours is to track it as closely as possible."

There is the potential for big returns if you pick the right active manager. If you don't, of course, you could lose money. However, trackers lose money as well – as we are seeing now.

Even though they are not low risk, as your investment can be wiped out if the market takes a dive, trackers remain popular investments. They might be useful for first-time investors in the stock market, although a better alternative would be a broad UK equity fund with a good track record.

"If you do go for a tracker, go for a cheaper one than the Virgin product," warns Ms Bradshaw at Fiona Price & Partners.

Many people are attracted to trackers by their low charges, so make sure you don't pay more than you need to. Investors often don't realise there is a difference in fees, with Virgin charging 1 per cent per annum compared with M&G's 0.3 per cent. Given that trackers do nothing but follow an index, there is little reason to pay over the odds.

However, Mr Maw defends Virgin's charges. "We offer a range of services to our customers, such as the ability to contact us at weekends if they need to, and we put a lot of effort into our product literature," he says. "And everything we sell is 1 per cent, so people know where they stand. Our customers are comfortable with what we charge."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
books
Voices
Caustic she may be, but Joan Rivers is a feminist hero, whether she likes it or not
voicesShe's an inspiration, whether she likes it or not, says Ellen E Jones
Arts and Entertainment
The Doctor and the Dalek meet
tvReview: Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
Sport
Diego Costa
footballEverton 3 Chelsea 6: Diego Costa double has manager purring
PROMOTED VIDEO
Life and Style
3D printed bump keys can access almost any lock
techSoftware needs photo of lock and not much more
Arts and Entertainment
The 'three chords and the truth gal' performing at the Cornbury Music Festival, Oxford, earlier this summer
music... so how did she become country music's hottest new star?
Life and Style
The spy mistress-general: A lecturer in nutritional therapy in her modern life, Heather Rosa favours a Byzantine look topped off with a squid and a schooner
fashionEurope's biggest steampunk convention heads to Lincoln
News
Dr Alice Roberts in front of a
peopleAlice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
News
i100
Arts and Entertainment
Star turns: Montacute House
tv
News
i100Steve Carell selling chicken, Tina Fey selling saving accounts and Steve Colbert selling, um...
Arts and Entertainment
Unsettling perspective: Iraq gave Turner a subject and a voice (stock photo)
booksBrian Turner's new book goes back to the bloody battles he fought in Iraq
News
The Digicub app, for young fans
advertisingNSPCC 'extremely concerned'
News
i100
Arts and Entertainment
Some of the key words and phrases to remember
booksA user's guide to weasel words
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Law Costs

    Highly Attractive Salary: Austen Lloyd: BRISTOL - This is a very unusual law c...

    Network Engineer (CCNP, CCNA, Linux, OSPF, BGP, Multicast, WAN)

    £35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...

    DevOps Engineer (Systems Administration, Linux, Shell, Bash)

    £50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...

    Data Scientist (SQL, PHP, RSPSS, CPLEX, SARS, AI) - London

    £60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...

    Day In a Page

    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
    Fashion walks away from the celebrity runway show

    Fashion walks away from the celebrity runway show

    As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
    Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

    Meet the stars of TV's Wolf Hall...

    ... and it's not the cast of the Tudor trilogy
    Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

    Europe's biggest steampunk convention

    Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
    Don't swallow the tripe – a user's guide to weasel words

    Don't swallow the tripe – a user's guide to weasel words

    Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
    Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

    Daddy, who was Richard Attenborough?

    The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor
    She's dark, sarcastic, and bashes life in Nowheresville ... so how did Kacey Musgraves become country music's hottest new star?

    Kacey Musgraves: Nashville's hottest new star

    The singer has two Grammys for her first album under her belt and her celebrity fans include Willie Nelson, Ryan Adams and Katy Perry
    American soldier-poet Brian Turner reveals the enduring turmoil that inspired his memoir

    Soldier-poet Brian Turner on his new memoir

    James Kidd meets the prize-winning writer, whose new memoir takes him back to the bloody battles he fought in Iraq
    Aston Villa vs Hull match preview: Villa were not surprised that Ron Vlaar was a World Cup star

    Villa were not surprised that Vlaar was a World Cup star

    Andi Weimann reveals just how good his Dutch teammate really is
    Bill Granger recipes: Our chef ekes out his holiday in Italy with divine, simple salads

    Bill Granger's simple Italian salads

    Our chef presents his own version of Italian dishes, taking in the flavours and produce that inspired him while he was in the country
    The Last Word: Tumbleweed through deserted stands and suites at Wembley

    The Last Word: Tumbleweed through deserted stands and suites at Wembley

    If supporters begin to close bank accounts, switch broadband suppliers or shun satellite sales, their voices will be heard. It’s time for revolution