By Anthony Harrington

The Scotsman
Wednesday 25 September 2013

Share index trackers may have smaller fees but a good wealth manager is worth investing in

In a world of low returns, where cash in the bank attracts rates of interest that are below the level of inflation, it seems a "no brainer" to invest in products that attract 100 per cent tax relief and that have the lowest possible fees associated with them. Zero tax means investing via a pension or an ISA account, while the lowest fees are associated with passive investment "tracker" funds.

Trackers are funds where you buy a share of a basket of assets that, taken together, mimic the particular index they are tracking be it the FTSE All Share or the German DAX. Compared to an actively managed fund, where the investment manager selects stocks and buys and sells on the basis of stock performance, the fees are low.

As the name suggests, tracker funds follow the index up, which is great, but they also follow it down, which is not so great. This is why many wealth managers prefer to put their clients into actively managed funds despite the fact that the fees are higher. Alan Steel, founder of Alan Steel Asset Management, says that over the last 20 to 30 years, active managers have outperformed tracker funds consistently.

He says: "The whole argument about fees and the benefits of selecting funds with very low fees is a total red herring. What clients care about is the return they get after fees." ......

...... Steel says Neil Woodford, fund manager at Invesco, returns 14 per cent a year net of fees, and there are several other fund managers, such as Harry Nimmo at Standard Life Investments, with equivalent performances. It's all a question of knowing which managers are performing well.

Steel says "I work off what I call 'the rule of 72.' If you take a fund's return, and divide it into 72, that tells you how long it will take you to double your money. If you are getting 0.5 per cent return on your cash in a bank deposit, for example, it will take you 144 years to double, while at 14 per cent, it will double in just over five years."

The key he suggests, is to invest in a fund that specialises in blue chip corporates with a track record of constantly improving their dividends through all phases of the economic cycle. ......

Quote courtesy of The Scotsman
Wednesday 25 September 2013