Tracker funds 'short changing' 5m investors

As many as five million investors are losing out by sticking with index tracking funds, according to new analysis.

Funds tracking the stock market have proved popular in recent years through offering low fees and benefiting from bull markets.

However, recent downturns in the FTSE 100 have seen the returns fall from such funds.

Data from Moneyspider.com show Legal & General’s UK 100 Index tracker has fallen 11.47 per cent in the past 12 months – making a £5,000 investment last year today worth £4,426.

Scottish Widows’ UK Tracker is down 13.14 per cent and Virgins UK Index Tracker is down 14.27 per cent.

Tony Ahearne, at Moneyspider, said: "Index funds have long been popular with investors because they invariably have low charges due to there being little or no fund management involved.

"But in this investment climate a tracker can only go one way, and that is down. There is little point paying low charges when you are being rewarded with below par performance."

Over tracker funds, Mr Ahearne now points to actively managed funds to produce far better returns.

A £5,000 investment placed in the Manek Growth actively managed fund a year ago would now be worth £8,607.

“Good active fund managers have been able to exploit the many factors contributing to the current downturn, avoiding companies exposed to the credit crunch or relying on consumer spending and instead weighting towards mining and energy stocks,” said Mr Ahearne.

He added a good manager will be in a position to re-position portfolios in response to fast changing market conditions – unlike a passive tracking fund which will follow the herd down.

“While the actively managed funds cited in our tables are not purely UK focused, the story remains the same – an active fund manager can diversity into appropriate stocks to reflect the investment climate, which a tracker cannot do," Mr Ahearne said.

“So at least in a managed fund the investor has a fighting chance. While our figures show that even the best of the actively managed funds have lost ground over the past year, over the five year period the growth has been little short of spectacular for the top actively managed funds."

Three of the best UK All Companies actively managed funds

	1 Year	5 years	Moneyspider rating	£5,000 investment after 5 years now worth
Renburg UK Mid Cap Growth	-5.54%	111.208%	A	£10,560
Liontrust First Growth	-4.18%	76.35	A	£8,817
Manek Growth	-18.05%	72.15%	A	£8,607

Three of the best index tracking funds

	1 Year	5 years	Moneyspider rating	£5,000 investment after 5 years now worth
Scot Wid UK Tracker A	-13.1409%	46.3926%	C	£7,319
L&G UK 100 Index E	-11.4741%	43.0898%	D*	£7,104
Halifax UK FTSE All Share Index Tracker C	-11.277%	53.42398%	C	£7,671

(Source: Moneyspider.com August 27 2008)