Investors short changed by tracking funds on road to nowhere

Cheap and cheerful index tracking funds are short-changing investors to the tune of thousands of pounds, warns online data analyst Moneyspider.com.

Popular due to their low charging structures and steady performance in bull markets, index trackers– which typically shadow the performance of key indices such as the FTSE 100 Index – have nose-dived as global stock markets continue to suffer in the current slowdown.

Major funds such as Legal & General’s UK 100 Index have fallen sharply in the past 12 months – a £5,000 investment is today worth just £4,426, reflecting an 11.47 per cent drop.

Also plummeting is the popular Scottish Widows’ UK Tracker, down 13.14 per cent: an investor putting £5,000 into the fund one year ago now has just £4,342 left from the original investment.

Virgin’s hugely popular UK Index Tracker is down 14.27 per cent over the past 12 months. A £5,000 investment in this fund would have fallen to £4, 287 in the year to the end of July 2008.

But a well managed fund can make a big difference to investment returns over a relatively short time frame.

A £5k lump invested in Manek Growth - the UK All Companies’ sector’s best performing fund over 1 year (source: Moneyspider.com August 20 2008), would see a positive return of 18.05 per cent, meaning a return of £5,902 over the past 12 month period.

And over a five year period, the top performing Rensburg UK Mid Cap comfortably outperforms tracker rivals shadowing UK company shares, returning £10,560 on £5k, compared to just £7,104 delivered by L&G’s hugely popular UK 100 Index.

“Index funds have long been popular with investors because they invariably have low charges due to there being little or no fund management involved,” said Moneyspider.com’s Tony Ahearne.

“But in this investment climate a tracker can only go one way, and that is down. There is little point paying low charges when you are being rewarded with below par performance,” he added.

So why is this gap in performance currently making itself felt?

“Good active fund managers have been able to exploit the many factors contributing to the current downturn, avoiding companies exposed to the credit crunch or relying on consumer spending and instead weighting towards mining and energy stocks,” said Ahearne.

A good manager, added Ahearne, will be in a position to re-position their portfolios in response to fast changing market conditions – unlike a passive tracking fund which will follow the herd down.

“Around five million investors currently hold tracking funds, which are marketed as easy to understand, low cost investments. But in this market they are bad news, as our data reveals.

“While the actively managed funds cited in our tables are not purely UK focused, the story remains the same – an active fund manager can diversity into appropriate stocks to reflect the investment climate, which a tracker cannot do.

“So at least in a managed fund the investor has a fighting chance. While our figures show that even the best of the actively managed funds have lost ground over the past year, over the five year period the growth has been little short of spectacular for the top actively managed funds.

“And that is the key difference between these two radically contrasting investment styles,” added Ahearne.

Moneyspider.com is designed to appeal to investors at all levels, is a comprehensive yet easy-to-understand fund monitoring tool delivering personalised reports, including valuations and ratings on each investor’s individual fund, all updated on a daily basis.

Moneyspider.com has no registration fee and the service not only rates the performance of each of the client’s own funds but also shows a comparison with the top five funds in the same sectors. It also shows the top-performing funds from all sectors, so Moneyspider.com investors can see where the real profits have been.

“Keeping a close eye on your fund’s performance is crucial in these uncertain times - in rapidly changing market conditions, as we are currently experiencing, knowing how a specific fund in which you are invested is performing and – equally important – how other funds compare, is simply good financial common sense,” said Ahearne.