MONEY COMMENT
Trackers Beat Fund Managers Yet Again

By Cliff D'Arcy
January 19, 2004

One thing we constantly harp on about here at the Fool is the importance of investing. By investing, we mean putting money into the stock market over the long term - at least five years, and preferably more. That's because shares tend to beat other mainstream investments, such as property, bonds and cash, over long periods.

If you don't feel comfortable picking your own shares, you can invest in a fund, where you hand over your money to a fund manager, who invests it alongside other investors' contributions. Most UK investors give their money to 'active' fund managers, who then make their own decisions on which shares to buy and sell on our behalf.

At the Fool, we think giving your money to almost all active fund managers is a mistake, because these highly paid people don't actually give you very much for your money. In fact, after accounting for the 'Ferrari factor' (in the form of surprisingly high upfront and annual charges), most active fund managers fail to beat the market as a whole.

We believe that most UK investors would be much better off putting their money into simple, low-charging index trackers, which passively track the stock market up and down with little human intervention. Low-charging funds boost the amount of your money that starts working for you right from the start, which gives you a clear short-term advantage.

For example, including dividends, the benchmark FTSE All-Share index, which tracks the value of over seven hundred of the UK's biggest companies, rose 20.9% last year. However, three-quarters of funds in the All-Companies sector failed to match this performance over this period. In fact, the average UK actively managed fund rose by 17.1%, after taking charges into account, while the average UK index tracker increased by 17.4%.

When picking a tracker, beware of fund management groups that charge as much for computer-managed trackers as they do for actively managed funds! When it comes to trackers, the lowest-charging trackers are usually the best trackers. You should look for one with no initial (upfront) charges, no exit (withdrawal) charges and low annual management charges.

For example, the Legal & General UK Index, which you can buy though the Fool, has annual management charges totalling 0.53% a year, making it one of the cheapest All-Share trackers around. For the record, it returned 20.0% in 2003, which is a lot better than most trackers and managed funds, Boo Boo!

One final tip: don't forget to keep the taxman at bay by putting a tax-free ISA wrapper around your tracker.

More: Visit our ISA Centre | The UK's Cheapest Index Trackers