As the bulls predict a positive 2014 for the UK equity market, are you better off opting for a tracker fund or an active manager?
In his first public appearance since his shock departure from Schroders, star fund manager Richard Buxton predicted the FTSE 100 could reach record highs of 7,300 in 2014.
At the same time, the veteran stock picker dismissed tracker funds stating that "man has to be better than machine".
Buxton, who is now head of UK equities at Old Mutual Global Investors, is not the only person positive on the UK stock market.
A recent report from analysts at Citigroup also predicted that the FTSE 100 will hit a record high of 8,000 by the end of next year.
With such bullish predictions, the big question for the shrewd investor is whether to park money in "cheap" tracker funds or shell out for an active manager.
Pros and cons
Avid investors will by now be aware of the pros and cons of opting for either route.
Tracker funds are widely considered cheaper, and if the market is doing well, your tracker will reflect a well performing market.
However, it is important to remember that if a market goes up by say 10%, the tracker will not necessarily go up by 10% as few trackers exactly mirror the market. And the effects of fees need to be taken into consideration too.
Trackers can also suffer disproportionately if particular sectors that make up a major chunk of the index being followed go through a rough patch. If the tracker has a high allocation to banks, for example, it will run into trouble during a crisis affecting these institutions.
In addition, as there is no active fund management involved with trackers, there is very little way of manoeuvring to protect capital should the markets take a turn for the worse.
Opting for a fund manager to look after your money should, in theory, give you higher returns or at least protect your money in times of market stress - because active managers are said to hold an edge due to their ability to reposition their portfolio.
As a stock picker, Buxton unsurprisingly promotes the active route. While he says passive exposure to the UK equity market is better than no exposure at all as the outlook improves, he believes searching for a manager who can outperform the market is "worth the effort".
He says: "Index-tracking investment by definition means you have more exposure to shares which have done well (and so form a bigger part of the index) than those which have done badly (and hence shrunk within the index).
"Active managers use their experience and fundamental analysis of companies to identify which companies have better prospects going forward but which is not already reflected in their share price - and index weight. Intuitively, this feels more sensible than allocating purely by size."
However critics of active investing say not all managers outperform the market, and very few manage to protect capital entirely.
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