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Index Investing: Darren Cooke of Red Circle Financial Planning

Index Investing: Darren Cooke of Red Circle Financial Planning

Darren Cooke, director of Derbyshire-based Red Circle Financial Planning, believes that while active funds can sometimes add value, in many sectors they do not over the longer term. He said sectors in which active management falls short include some ‘bond sectors and developed market equity sectors: specifically the US, Asia and some UK’.

Cooke said passive investing could deliver results at much lower cost in those sectors. ‘But I will use active management in any sector if I feel the cost is justified by the performance,’ he said.

Small is beautiful

Cooke said there were some areas of UK equities in which active management could add value, but there were very few managers who would provide a consistent return over a long period of time.

‘Most so-called star managers will perform over a short period,’ he said. ‘But there are also tough times when the performance is not there to justify their cost.’

Red Circle Financial Planning, where Cooke is the only financial planner and makes the investment decisions, uses passive trackers of the FTSE All Share and FTSE 250 indices.

But in the UK Equity Income sector, Cooke will go active, although he has also used passives as a complement.

Cooke’s riskier portfolios will generally have some exposure to UK smaller companies, and in this space he uses some trackers, but he tends to look more for active managers, who he believes can add more value in this sector. He believes active management becomes less attractive for investment in the shares of large companies.

Filtering and selection

Cooke uses FE Analytics to assist with his fund selection process, filtering down the potential universe of funds before conducting research on each individual fund. He looks at costs, how well the fund is rated by FE and Morningstar, and he assesses the fund’s performance, concentration ratios and whether it can be bought on the platforms Red Circle currently uses.

He also keeps abreast of any changes, finding that most recent news on charges has been welcome.

‘Costs on trackers tend to be going down, not up. It’s a competitive marketplace at the moment,’ he said.

He also conducts a regular headline review of client portfolios to monitor performance and has a formal review on a quarterly basis.

HSBC FTSE 250 index

‘The HSBC FTSE 250 index is pretty good on cost, particularly compared to its 250 market competitors,’ said Cooke. ‘Despite the bad publicity banks have had in the past few years, HSBC has good brand recognition.’

The fund tracks the FTSE 250 index, which includes the 101st to 350th largest companies, by market capitalisation, listed in London. The index’s highest weighting, at more than 30%, is to financials.

‘It’s a little high on financials – that’s the nature of the 250 index,’ he said.

  • Total costs: 4/5
  • Tracking error: 5/5
  • Overall usefulness: 4/5
  • Firm’s allocation: 10%

Vanguard FTSE UK all share index

‘The Vanguard FTSE UK All Share Index is very cheap,’ said Cooke. ‘It had a small entry cost, but this was just changed,’ he said. ‘The annual management charge is very low at 0.08%.’

Cooke said Vanguard was well established in the market, though not so well known in the UK.

Comparing this fund to the one above, he said his clients were far more likely to have heard of HSBC than Vanguard.

‘Vanguard does not enjoy immediate name recognition,’ he said. ‘But it is a large American organisation, and people seem reassured by that.'

  • Total costs: 4/5
  • Tracking error: 5/5
  • Overall usefulness: 4/5
  • Firm’s allocation: 5%

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