We consider a new investment fund that claims to combine the best attributes of a tracker and an actively managed fund.
We've never liked fund managers at The Motley Fool. They're normally paid big salaries and often perform poorly. That's why we've always preferred tracker funds instead.
So you might be surprised to learn that a former Fool writer, Rob Davies (f.k.a. TMF Essex), is now working as a fund manager. Shock Horror!
But hang on.... it's okay. Rob isn't running a traditional, actively managed fund. His fund is more like a tracker except that its weightings are driven by dividend payouts rather than share prices and market caps.
How it works
Rob's fund is called The Munro Fund. The fund buys shares in every company in the FTSE 350 excluding investment trusts and any company that is not expected to pay a dividend during the next twelve months.
So this is similar to a conventional tracker, except that a normal tracker would buy every share in the 350. Of course, a normal tracker doesn't buy each company in equal amounts. Instead it buys proportionately more shares in companies with larger market values.
Let's imagine that the total market value of all the companies in the FTSE-350 is one thousand billion pounds, and Marks & Spencer
(LSE: MKS)
is currently worth 10 billion pounds. A FTSE 350 tracker would then invest 1% of its funds in M&S. (1000/10 = 1).
However, the Munro Fund takes a different approach. It looks at analyst forecasts for next year's dividend payouts and then uses those forecasts to weight the positions in the fund.
Let's imagine that all of the companies in the FTSE 350 are expected to pay out a total dividend of 50 billion pounds next year, and M&S is expected to pay out one billion pounds. In this scenario, the Munro Fund would invest 2% of its funds in M&S.
Why bother?
Well, the attraction of dividends is that they are pure, hard facts; they're not opinions and can't be fiddled by clever finance directors.
What's more, conventional trackers can become over-invested in 'sexy', over-valued growth stocks as their share prices keep on rising. This happened back in 2000 with shares such as Vodafone
(LSE: VOD)
and Baltimore.
And income-based investment strategies have often performed well in the past. Read Jeremy Siegel's impressive book, The Future For Investors, or take a look at Fool UK's very own Stephen Bland (TMF Pyad). Stephen's High Yield investing strategy has delivered impressive returns since he created his first High Yield Portfolio for The Fool back in 2000.
The success of income investing makes sense to me because in the end capital will go to where cash is being generated. So I think there's a decent chance that Munro could deliver modest out-performance when compared to a 350 tracker.
I also like the simplicity and transparency of the Munro approach.
Any downsides?
In a bull market where growth shares are performing particularly well, you might expect a traditional tracker to beat The Munro Fund.
Currency movements could also make a significant impact on performance as some companies in the 350 pay dividends in dollars. On top of that, The Munro Fund is slightly riskier than a typical tracker as it owns shares in fewer companies.
You also need to look at charges. If you buy units direct from The Munro Fund, you'll pay an annual management charge of 0.75%. That's much lower than the typical fees for an actively managed fund, but many mainstream trackers charge less. Read The Top Ten Trackers for more information on that.
So there's trade-off here. You'll be paying modestly higher charges than for a tracker, in return for the chance of modest out-performance compared to the market. I suspect some Fools will want to take that chance.
You can hear Rob Davies talking about his new fund in Money Talk Podcast: One Fool And His Dividend Tracker
More: Perfecting The Index Tracker | Get Yield At Low Cost | Exactly What Are You Tracking?
