Tracker Funds - Professionally Administered

The point of a tracker is to use a very simple rule, buy companies within an index and do nothing with them until they leave and then sell them.

At first glance this sounds so simple that it is obvious that a professionally managed tracker is the way to go, but there is a catch in that not all trackers actually do what you may think they are doing.

Tracker Funds - Is it Doing What You Think It Is?

At first glance you may think that if you go and get a tracker fund then that fund will rise and fall by the exactly the same amount as the underlying market, but this is rarely the case.

The main reason for not exactly tracking the underlying index is cost, in the UK the tracker has to pay the same 0.5% stamp duty on share purchases that you do.

While you normally you don't get a bill for this as the cost is taken out of the value of the fund as a whole you are still effectively paying it.

This cost can affect the accuracy of the fund in mimicking the market in a number of ways.
  • It is not unknown for trackers to only purchase a portion of the shares in the index, possibly leaving out the smaller companies or ones likely to be dropped from the index.

  • The tracker doesn't update its portfolio when a share's portion of an index changes significantly.

  • The tracker doesn't update its portfolio immediately when shares join/leave an index.

But I Don't Want Shares In XYZ

If you look at any index you will see companies whose shares you may not like.

They are in a market that you think is dying, they have too much debt, "Everyone knows that Mr SomeoneOrOther is a bit of a chancer" etc.

With a tracker you have to buy shares in that company.

The purpose of a tracker though is to remove your rational/irrational dislikes and company XYZ may be the most successful company in the index.

I saw this argument recently and in the same article it mentioned that buying BooHoo in Jan 2015 would have shown a 10 times return, much more than any tracker and that is why the author avoids trackers.

This ignores the fact that Boohoo launched on The AIM in 2014 at 50p and dropped as low as 22p the time to buy to get this magic return.

It seems a bit weird to me to compare major company trackers and an AIM share as they have such different risk profiles.

Professionally Administered - Any Other Choice?

Even if you were to pick the FTSE 100 to track you would need at least £50,000 to be able to buy the shares personally without fees and stamp duty having too great an effect on profitability.

This simple fact means that most people who want to track an index have to buy into a fund.

Even if you could afford to buy the 250 companies shares in the FTSE 250 would you really have the time and inclination to manage it?

It is also probable that a professionally run fund will actually be cheaper than doing it yourself as when a share need to be bought or sold stamp duty will be the same for a fund and private investor but the fund may very well have lower dealing fees.