For years there has been a debate over which is better, a cheap passive tracker or a more expensive actively managed fund. In the adviser world you have advocates for both.
RHL – Active Investing
Here at RHL, we fall into the active camp, and the performance of our strategies has compared very favourably with our passive competitors.
However, we do not totally discount tracker funds, but we do investigate and analyse them. Recently, we have being looking at funds for Asia Pacific region excluding Japan. We found that one of the candidates for selection as a consistent above average performer in the sector was a tracker fund. Strangely, one of the worst performers was also a tracker fund and yet they are both supposed to be tracking the same stocks sitting in this Investment Association sector. So why was there such a discrepancy?
The answer came from the index they were tracking. The two main index providers are MSCI (Morgan Stanley Capital International) and the FTSE (Financial Times Stock Exchange). Perhaps a little surprisingly, the two indices do have different constituents and therefore contrasting allocations to companies. As an example, the FTSE version gives a higher allocation to Chinese companies than MSCI.
When we looked closer at the MSCI tracker, we were shocked at the concentration in a small number of companies. The largest holding was over 20% of the fund and the top ten holdings accounted for almost 49%.
But this concentration becomes a common theme in trackers.
What does concentration look like?
If you were looking to track the MSCI World Index you may well think that it reflects every company on a listed exchange. It doesn’t. It tracks 23 developed markets only and does it cover Emerging Markets like China India or Brazil. Nor does it include smaller companies in the markets it does track. This is important as smaller companies have been proven to outperform larger ones over the longer term.
Regarding concentration risk, around 73% is in the USA and 34% of that is in the “Magnificent Seven.” So, around 25% of the index is in just these seven companies. (Source MSCI as at 30/09/2026)
Digging deeper still, it means that holding this tracker would have given big holdings in Tesla, Alphabet (Google) and Meta (Facebook.) As at the time of writing, they are off their peak by 25%, 22% and 19% respectively. There is no guarantee that an active fund manager would have avoided these losses, but at least you are in with a chance.
The moral of this story is to know what you own. Not all trackers are the same and many hold significant concentration risk, as it is known.
Here we believe in having portfolios that are well diversified. To paraphrase a world-renowned investor, “diversification is the only free lunch so eat heartily.”
If you would like to talk to us about your planning needs, please get in touch by emailing contactus@rutherfordhughes.com or calling 0191 229 9600. Website https://rutherfordhughes.com
The value of investments can fall as well as rise and past performance is not necessarily a guide to future performance. Your capital is at risk.
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Peter Rutherford
