Question: FTSE All-Share Index funds look more attractive to me…..go on, tell me how the UK Equity Fund market can out perform!
Nick Kirrage - Schroders
The first thing to note is that by buying an equity index tracker you will never outperform the index after taking away management fees. By buying an actively managed fund, despite fee's being higher, you at least have a chance to outperform the index after fees. Additionally, an index fund's returns are very exposed to the results of its largest constituents. It may be the case that these companies have become large as they are expensive (e.g. Vodafone in 2000) and irrespective of their size are a poor investment.
So how to outperform the index? Three things are fundamental to achieving this. The first, and most obvious, is that to outperform the benchmark you have to be different from the benchmark. Too many portfolios look exactly like the index with a large number of small variations. You have to start with a blank piece of paper and then buy what's attractive, not just what happens to be in the index. Secondly it's important to have a strong understanding of valuation. "Good" companies are not necessarily good investments, the most important factor is how much you pay for these investments. Failing to understand this can lead to expensive mistakes. Finally, and most importantly, the key to successfully outperforming the index is taking a long term investment horizon. Too much focus on short term results will lead fund managers to make poor choices. Imagine trying to drive your car at 50mph looking 2 feet in front of the bonnet. By looking further ahead you can make more measured judgments. The same is true of investment.
Leigh Himsworth - Gartmore
I assume this is asking why I believe an active managed fund will outperform an index tracker fund? Well, to be honest, I have read much research that proves the contrary - that the average actively managed equity does not outperform the market at all. This is where the job of a good professional investment adviser is critical. It is very important to do your homework and look for a fund manager who has the ability to outperform. Past performance is not a guarantee of future performance, so it is crucial that areas such as independent fund research are referred to. If you cannot find a fund manager that you feel comfortable will outperform, then an index tracker may well be the best option. Don't put your faith in an ‘average' fund manager.
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