-2.08%
8.96%
33.08%
Fundsmith Equity
1.09%
0.94%
11.58%
15.88%
17.40%
-12.14%
13.72%
51.66%
Figure 7: Performance of a selection of managed funds. Source: Hargreaves Lansdown
There’s a further variation on managed funds that I’ll use in an example later on and those are hedge funds. These are higher risk and use a number of different investment strategies beyond just buying and selling shares. They can produce high returns but this higher risk means they’re mainly for wealthy investors with a minimum investment of high net worth.
Tracker funds
If funds are less risky than individual shares but cost more to invest in, is there a middle ground? Enter automated tracker funds. Every share sits in a market or index – for example, the Financial Times Stock Exchange (FTSE), which has an index of the top 100 UK shares (FTSE 100); or Standard and Poor’s (S&P 500), which lists the top 500 shares on all US markets. Automated tracker funds seek to replicate the market or index and therefore have low costs as they involve little human intervention (known as passive investing) and ongoing costs are fractions of a per cent against an actively managed fund, which could be 0.5–1.5%. As a general rule, the world’s economies are growing and therefore nearly all markets have increased in value, particularly when looked at over the long term. And although a tracker fund can never truly match the index (since it’s following or copying end of day positions), they track sufficiently closely, particularly the larger funds. Provided you’re investing for the long term, you can take advantage of low cost and growth with a tracker.
In 2008, Warren Buffett issued a challenge to the hedge fund industry, which in his view charged exorbitant fees that the funds’ performances couldn’t justify. One such hedge fund (Protégé Partners) took on the million-dollar bet and lost. Buffett’s contention was that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over ten years. While there’s a place for active fund management, there’s also a compelling case for passive tracker investing. It’s one that I’ve been drawn to over the years and now forms a significant part of our portfolio. They’re also easy to understand and don’t require a huge amount of knowledge to be able to select the suitable tracker, and we’ll use the S&P 500 as an example in later chapters.
To demonstrate this, compare the data in the Figure 8 for two trackers against the managed funds in Figure 7. Simply put, they cost less but deliver more. That’s why I like them.
Fund
Yield
Fees
2018/19
2019/20
2020/21
2021/22
2022/23
5 Year
UBS S&P 500 Index
1.23%
0.09%
6.09%
11.93%|
25.77%
2.62%
9.98%
68.57%
Fidelity Index World
1.61%
0.12%
4.69%
