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In the last three months, Scottish Widows' FTSE All-share tracker fund has out-performed four-fifths of the managed funds in the Investment Management Association's all-companies sector. Several FTSE 100 tracker funds have also done well compared to their actively-managed equivalents. This is because the index has been driven up by a boom in mega-cap oil and mining stocks; the non-resource market has been lacklustre. Any fund that was under-weight in this handful of stocks - and most were - therefore under-performed the index.
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Now, you might think this fact is mere history, and doesn't justify holding tracker funds now (past performance being no guide to the future, and so on). If - or rather when - the commodity bubble bursts, mega-cap miner and oils will slump, and tacker funds will therefore under-perform.
The trouble is, though, that no-one knows when the bubble will burst, or how much damage it'll do to the likes of Rio Tinto and BP when it does, and still less how much bigger the bubble will get before it bursts (see Supercycle doubts).
What's more, the burst mightn't be disastrous for mega-caps generally. Falling commodity prices would allow interest rates to fall, to the benefit of banks, which are also heavily represented in the UK's main share indices.
Indeed, history shows that it's rare for mega-caps to under-perform for long; big companies become big by knowing what they are doing. Research by Isaac Tabner of the University of Stirling has found that, over the long-term, capitalization-weighted indices beat equal-weighted ones. That's good for trackers relative to active managers.
Truth is, though, the beauty of trackers (aside from their lower costs) is that they save us the need to think about these questions. Tracker funds allow us to make decent money without thinking. They economize on knowledge and rationality - which are very scarce resources.
Of course, there'll always be some funds that beat them, at least over short periods. But these often do so by taking additional risks (such as value risk, which has not paid off lately), and are almost impossible to indentify in advance. Trackers save us the bother of trying to do so, and allow us to forget about financial markets and get on with more important things.
Read more of Chris's columns on his IC home page...
...or read his blog at http://stumblingandmumbling.typepad.com
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
