Pension Corner with BWCI
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A READER noticed she had active and tracker investment funds available in her workplace pension plan. She wondered what the difference was.
An actively managed fund is one where the investment manager aims to select the better companies and avoid the poorer ones.
Tracker funds (also called passively-managed funds) invest in all the companies in the index they are designed to track (like the FTSE All-Share).
This method sounds like it will deliver a less-than-average performance after the fees are taken, so why are trillions of pounds invested in trackers?
There are two reasons. The first is that there is a world of difference between trying to do something and succeeding.
Many active managers were caught out by the impact of the financial crisis, Covid-19, President Trump’s tariffs etc. The evidence over the years is that active managers, in general, struggle to deliver superior returns consistently.
Secondly, the costs of doing their extensive research have to be covered, so the fees are relatively high.
In contrast, tracker fund managers have generally succeeded at matching index performance and incur very little cost in doing so. Their fees are typically one-third to one-tenth of the active manager’s. They have delivered more reliable performance and, after fees, generally better than the average active manager.
The difference in fees (and any underperformance) can make a huge difference to pension savings. A pension balance of £100k today will be worth about £321k if it grows at 6%pa over 20 years. The impact of an extra 1% pa of fees reduces this to about £262k.
Therefore, whether it is an employer thinking about the funds they offer members, or members weighing up their investment choices, it is worth checking on fees and performance.
