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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.