No place to hide

Don't fret about tracker funds when markets are intent on suicide

Fund managers hoping for a traditional last-minute wall of money to flood into their unit and investment trust PEPs ahead of the 5 April tax deadline have been left sorely disappointed in recent weeks.

Pre-general election jitters and the unrelated but widespread concern that UK and world stock markets are poised for a downturn have combined to blunt investors' eagerness. There's not much the unit trust industry can do about that nice Mr Blair arriving in 10 Downing Street, but it can address investors' fears about a stock market "correction".

The argument runs as follows: "OK, there might be a fall in equity prices. But if it should happen, it makes sense to look out for active fund managers who can pick meaty investment opportunities from the rest of the dross."

If markets commit collective suicide, tracker funds would be first in line, or so it is claimed. Trackers, it should be explained, invest in a real or a simulated basket of equities, based on the FTSE 100 share index or the broader All-Share index.

Does the argument work in practice? Not really. The tables below, courtesy of Hardwick Stafford Wright, the specialist statistics provider, tell the story.

In the 12 months beginning 30 September 1987, markets plunged world-wide. The All-Share dropped 18.84 per cent and 20 per cent for the FTSE 100, compared to an average 21.53 per cent in the UK equity and income sector.

During 1990, the All-Share index fell by 10.74 per cent and the FTSE 100 by 7.9 per cent, compared to 16.74 per cent for the same sector. Four years later, when the All-Share dropped by 6.59 per cent and the FTSE 100 fell by 7.1 per cent, the sector plummeted 12.51 per cent.

The unit trusts pictured in the same tables are not there because they they are the worst offenders. Quite the reverse.

They were added to the illustration because over the past 10 years they have been among the most reliable and better performers among funds in their sector. Save & Prosper's fund has delivered returns of 192.4 per cent in its sector. Henderson's gained 200.2 per cent while Perpetual's rose by 217.1 per cent. Over that period the sector average was 169 per cent. Yet they barely stayed ahead of the FTSE and All-Share indexes in 1987-88 - and not during the plunge itself.

In practice, if markets nosedive you will be no better off with most actively-managed funds than one of the trackers. Moreover, most tracker funds impose significantly smaller annual management fees and smaller investment charges.

Funds which track the FTSE 100 include General Accident, HSBC, Fidelity, Midland, Sovereign and Virgin Direct, while Equitable Life, Direct Line, Kleinwort Benson, Gartmore, Old Mutual, Morgan Grenfell, Legal & General, HSBC and Norwich Union track the All-Share index.

So, should you invest in trackers to the exclusion of actively managed funds? And is now the time to invest in a tracker fund, anyway?

For most investors, particularly those new to UK stock markets, tracker funds are "no-brainers". It is well worth having at least an initial holding in one. Thereafter it makes sense to diversify. This does mean, however, that expert independent advice is needed.

But the most important question is whether now is the right time to invest in equities at all. Here, all experts agree, five or even 10 years is required for a serious investment strategy to come to fruition. Over these periods, anything other than a catastrophic collapse should correct itself. If so, you won't be unduly affected by what happens in the shorter term.

If you are a relative novice but believe that a stock market fall is inevitable in the next year or so, it may be a good idea to hedge your bets. Legal & General and, ironically Perpetual, now offer the possibility of staged investment into UK markets, allowing the money to dribble into equities rather than exposing investors to the danger of a cold shower.

L&G does this through its General Election PEP, Perpetual via its Bond Fund.

Alternatively, it may pay to diversify into other markets, most notably Europe. PEP rules allow a certain proportion of investments to do this and we will look at the prospects on the Continent in coming weeks.

Whatever you do, the starting point is not to be scared off particular investments - particularly trackers - because of unwarranted claims by some fund managers. Being panicked into a fund choice is a near-certain guarantee of serious investment pains in years to come.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Attenborough with the primates
tvWhy BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
The dress can be seen in different colours
weird news
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Expect a new wave of fishing expeditions by fraudsters now we can invest our life savings

Cold callers and your pension: watch out for dangerous boiler room scams

Sean O'Grady received a cold call last week that was much more sinister than normal. Yes, someone wants to get their hands on his pension...

Fuel poverty could claim 100,000 lives over next 15 years, warns energy charity

The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter

MPs call for Equitable Life policyholders to be paid £2.8bn owed by government

Hundreds of thousands of people's policies were hit when the mutual insurer almost collapsed at the turn of the century

The elderly woman's family discovered the mistake

DWP criticised after it left a pensioner £26,000 worse off

The Department for Work and Pensions has been slammed after a series of cock-ups left an elderly pensioner £26,000 worse off.

The FCA has today issued a consultation paper on its plans to tighten up consumer credit rules to give consumers greater protection on guarantor loans and in other areas

Payday loan companies must publish their rates, says CMA

A 20-month investigation concluded that a lack of price competition between lenders has led to higher costs for borrowers

Vulnerable consumers are defined as those with poor literacy skills, those who have caring responsibilities, people with disabilities, dementia or the old

Financial companies are not meeting the needs of vulnerable consumers, says City Watchdog

The Financial Conduct Authority said the industry needs to start thinking about solutions to these challenges

The FTSE 100 is inching closer to its record high but can it maintain these levels?

In 1999 stock markets quickly tumbled, losing many a fortune in the process

Tax-free savings: Freedom dawns for the junior savers caught in low-income accounts

The parents of six million children stuck with low-interest saving accounts worth more than £5bn will be able to move the cash from this April. But what are their options? Samantha Downes reports

How much lower will mortgage rates go?

Another day, another cut. As lenders compete to offer the cheapest deals, Simon Read asks if borrowers should jump in now or wait for further falls

Are bills ruining your family life? Try the lover's guide to coping with debt...

If you're in the red and can't find a way out, it's time to get some help. Neasa MacErlean hears that relationships will suffer unless you are open with your partner, but there are organisations that will put you on the right track and get you talking

How to complain: From retailers to energy suppliers, it's easier than you think

When companies let us down, millions of us just take it on the chin. Simon Read shows how to make your voice heard

The dark side of debt: Descending into financial desperation is not due to self-indulgence

Three stories reveal financial desperation that was born of other, serious concerns, from being a victim of sexual assault, to losing a family member
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Day In a Page

    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
    Yvette Cooper: We can't lose the election. There's too much on the line

    Yvette Cooper: We can't lose the election. There's too much on the line

    The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
    A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

    It's not easy being Green

    After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
    Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

    Gorillas nearly missed

    BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
    Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

    The Downton Abbey effect

    Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
    China's wild panda numbers have increased by 17% since 2003, new census reveals

    China's wild panda numbers on the up

    New census reveals 17% since 2003
    Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

    Our woman in Beijing builds a new relationship

    Britain's first female ambassador to China intends to forge strong links with growing economic power
    Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

    Courage is rare. True humility is even rarer

    Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
    Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

    Alexander McQueen's astonishing vision

    Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
    New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

    Dinner through the decades

    A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
    Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

    Philippa Perry interview

    The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
    Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

    Bill Granger's Indonesian stir-fry recipes

    Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
    Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

    Harry Kane interview

    The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
    The Last Word: For the good of the game: why on earth don’t we leave Fifa?

    Michael Calvin's Last Word

    For the good of the game: why on earth don’t we leave Fifa?
    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?