Tracker Funds

There are two main methods of constructing equity investment funds: index tracker portfolios and managed portfolios. The index tracker fund holds a range of investments to try and mirror an index (for example the FTSE 100 Index or the Dow Jones Index) and produce the same growth.

The more numerous managed funds, on the other hand, stock-pick their own portfolio of shares in the hope of beating the return on the index. This means it has to make value judgements and employ a specific fund manager, or investment team, to select the stocks according to the management house’s philosophy.

There is no clear answer to which is best, and the proponents of each strategy will argue their case with conviction. Many managed funds fail to beat the indices over a three year period but most tracker funds also underperform due to tracking errors. A good compromise can be to hold trackers as a foundation and then look for outperformance from managed funds (the core/satellite approach).