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Do you ever need a fund manager? Neil Woodford makes a crass comeback

News that disgraced fund manager Neil Woodford is planning a comeback has enraged savers and raised eyebrows among investors.

Once touted as Britain’s most talented stock-picker, Woodford went from a hero of the investment world to notorious villain.

His reappearance has infuriated the thousands of investors who lost their savings. It also reignites the debate over the wisdom of the fund management model.

Comeback kid: Once touted as Britain’s most talented stock-picker, Neil Woodford went from a hero of the investment world to notorious villain

For decades, investors have looked to fund managers for market-beating returns, and paid hefty fees to them. Yet the Woodford scandal shows how that can go wrong. Perhaps for that reason, there has been a boom in low-cost index or tracker funds that follow the stock market.

Investment platform Hargreaves Lansdown reports a 60 per cent rise in customers buying index funds since 2018. 

Tracker funds now account for 18 per cent of the UK fund industry - up from 7 per cent ten years ago - with more than £250 billion invested.

So are tracker funds the cheapest, safest way to grow your money? Or are investors too quick to overlook expert advice?

MAN VS MACHINE

The Woodford affair cuts to the heart of a debate over the logic of two fund types: active versus passive. 

Actively managed ones, as run by Woodford, are operated by professional fund managers, who choose which shares to buy.

To test their success, active funds are benchmarked - to the FTSE All Share Index, for example. A high-performing fund might beat its market by 5 per cent plus, per year.

Cheaper alternative: Tracker funds now account for 18 per cent of the UK fund industry - up from 7 per cent ten years ago - with more than £250bn invested

A manager will charge an annual fee - typically about 1 per cent - for running the fund. In theory, it should be covered by the fund’s earnings; but not always. 

A gripe for retail investors is that they have to pay fees on underperforming funds. Meanwhile, a passive fund, also called an index or tracker fund, usually follows the performance of an index itself. 

By spreading investors’ cash proportionately over the index, the fund will grow - or shrink - in line with the market.

Due to cumulative performance - where gains are reinvested - growth can be significant over longer periods of time.

A £10,000 investment in a FTSE 250 Index fund five years ago, for example, would be worth more than £14,000 now. The same investment in a U. S.-focused S&P 500 fund would have returned over £21,500.

These are often cheaper than actively managed funds — annual fees can be as low as 0.1 per cent — and it may be for this reason that they are popular with retail investors.

10-YEAR MARATHON

An oft-touted theory is that, over time, the market will always outperform the individual investor.

In 2007, American investment mogul Warren Buffett bet that no investor could pick five funds that would collectively outperform the S&P 500 over ten years.

A £10,000 investment in a FTSE 250 Index fund five years ago would be worth more than £14,000. The same investment in a S&P 500 fund would have returned over £21,500

Only one hedge fund investor was brave enough to take up the challenge, but lost and ended up making a seven-figure donation to Buffett’s chosen charity. This isn’t conclusive proof that markets will always beat managers, but does makes a point.

Some investors are critical of passive investing and point out that index funds by their nature don’t try to work out if firms are over or under-valued, they just invest in line with the index. Such funds also tend to ignore smaller firms, which some believe can grow more quickly.

The other side of the coin, though, is that investors avoid the kind of untested companies that tanked Woodford’s fund.

MIX AND MATCH

Forall the merits of active versus passive, for many investors the ideal portfolio may well contain a mix of both.

Even if you prefer a passive model, you will still have to make choices, for example which markets to invest in and which tracker funds to pick.

In addition, the markets have their own characteristics. The oil and banking-dominated FTSE 100, for example, differs markedly from the technology-heavy S&P 500.

Given the differing performance of world stock markets, it’s a good idea to have your money spread across different indexes.

The more cautious among us may also want to look at bond index funds, which invest in safer assets such as government debt.

Whichever indexes you choose, it’s important to compare the exact fee structure of tracker funds.

Even a 0.5 per cent variation in fees will make a big difference over the years.

If you’re not comfortable making those decisions yourself (and don’t fancy taking independent financial advice), low-cost alternatives do exist.

Vanguard’s LifeStrategy funds are intended to provide a one-stop shop for investors looking to invest a lump sum.

These funds spread investors’ money across various index funds, including stock markets and bonds. By doing so, they essentially create a pre-diversified portfolio of index funds, performing in line with world stock markets.

A £10,000 investment in the LifeStrategy 60 per cent Equity fund five years ago would now be worth about £15,000.

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