20th December 2008

Sir,

I have serious concerns about Jason Britton's article "Trackers are crackers" (Money, December 13/14). First, the evidence to back up the premise of the article was shockingly thin. Serious academic studies for the most part arrive at a very different conclusion to this article.

Second, the average active manager should not be compared to the average tracker. There is no reason why rational investors would use expensive trackers (even though they are out there). The best (ie, lowest-cost) trackers, such as L&G UK Index and Fidelity Money Builder Index should be the benchmark the active managers have to beat.

Third, the academic evidence shows that the great majority of active managers fail over the long term simply because of the huge costs they add. The funds of funds advocated by Mr Britton are the worst of all worlds! They add another layer of charges and from the cost perspective it's like active management failure squared!

Finally, regarding the argument that you get what you pay for. This is true in some cases, but absolutely not in the world of finance where results are random and luck and skill are indistinguishable. The fund management industry is a great example of market failure. The key problem, as economists know, is asymmetric information. Everyone pays more or less the same in management charges but the investor has absolutely no idea in advance what performance he will actually get for his money. The obvious strategy is to go for the managers with the best record but the academic research also shows this is no help because there is no performance persistence – yesterday's best manager is not tomorrow's.

The history of investment is about the transfer of wealth from the investor, who takes the risk, to the investment industry in the form of high charges. Hedge funds have taken this art form to a new level. Articles like Jason Britton's help to perpetuate this state of affairs.

Lee Dunn
Senior Financial Planner
Paradigm Norton Financial Planning Ltd