Investors are ‘better off' with index trackers
Wednesday, 9 May 2007
It's of no surprise to us that index trackers offer private investors better value! This article appeared in the FT on 7 May..click here to see...Here was the last paragraph.
"...But the study supports the conclusion that, even if fund managers are skilled, investors will not benefit from that skill through higher returns. Only the fund managers will benefit, through earning higher asset-related fees as their funds grow.
"Any outside investor will earn the average return, so is better off buying the market," said Prof Tonks. "
There are a number of issues worthy of discussion in the article but I want to concentrate on the question of skilled management. What actually do we all mean by ‘skilled’?
Most people would assume that a skill is something you have learnt through dexterity and effort. It is essentially a form of professionalism. For example, the most skillful tennis players are professionals. You would not expect an amateur to win against the professional tennis player. But what about the world of fund management? One would expect the professional fund manager, who is paid by you to use his/her professional skills, to beat the market average. That’s why you employ them! But academic evidence shows that over time these skills are difficult to find. Very few managers actually beat the market rate of return. This means you need to rethink what are you actually employing a fund manager to do?
Let’s also be clear about some fund managers. They do beat the market average. This is excellent news but there is no benefit wahtsoever in identifying the manager who has beaten the market, the trick is to find the manager who is going to beat the market in the future. This is where the problem starts for most investors. Let’s continue our tennis analogy. It is fair to say that predicting that Roger Federer will be in the top 5 of the next tournament he plays..or more likely he will win it!...yet can you or your financial adviser pick a fund manager in advance with the same potential for success? Unfortunately, there is no system that offers you such a successful outcome.
Whilst the fund managers may be very knowledgeable and bright, are they actually skilled and professional enough to add value by beating market returns?
If such a skill is difficult to find, then as the headline says “Investors are ‘better off' with index trackers” is unequivocally a better option for most investors.
Categories: Index funds, Analogies, Research, Articles
posted by Murray Round Wealth Management @ 17:17,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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