Your Money: The right track

The perfect 'no-brain' investment may save on expensive fund managers, but keep an eye on the charges. Andrew Verity investigates the tracker

Investors who are used to hearing the message that the more an investment grows, the better, may have been surprised by the latest spate of deals offered by some major financial services companies.

In this case, the companies insist, you may have picked the wrong company if you invest in a fund that grows too much. NatWest, Legal & General, Virgin, Marks & Spencer and Gartmore - all have funds which must not do too well.

The reason for this surprising logic is that the funds in question are "trackers" - funds which aim to mirror the performance of a financial index such as the FT-SE 100 or the American S&P 500. If the index goes down but the fund does not, then the fund manager is failing to do the job.

Tracker funds, most commonly available in PEPs, are known to financial services professionals as a "no-brainer". There is very little need for financial advice.

There is no need to worry about whether your investment manager is picking the right stocks. Theoretically, the investment manager cannot make mistakes as it is a computerised system.

The fund will invest proportionately to reflect fluctuations in, say, the shares of the top 100 companies in the FT-SE index. As the FT-SE 100 rises and falls, so in theory will the fund's performance. The GA Blue Chip Tracking Trust, launched last month by General Accident, one of the UK's top life companies, is among those tracking the FT-SE 100.

But won't you miss your fund manager? After all, the best managers must be paid up to pounds 1m a year for something - presumably the ability to get better returns than average. Some large investment houses such as M&G insist that they consistently out-perform indices over the long-term. Active fund managers, they say, are necessary - especially in a climate where the stock market is widely predicted to be set for a fall.

Those selling tracker funds have an iconoclastic retort. They cite statistics showing that up to 75 per cent of all actively managed funds perform worse - not better - than the FT-SE over five years. Despite predicted falls in the market, there has not been a five-year period when the FT-SE has fallen overall in the last 30 years.

Gartmore, BZW and Legal & General are by far the largest managers of tracker funds, managing more than pounds 40bn. They point out that while astute trustees of pension schemes have long invested up to a fifth of their money in trackers, individual investors have not followed their example. Index-linked funds hold just pounds 3bn out of pounds 120bn in unit trusts.

Meanwhile, returns so far have not been disappointing. On the back of a good year for the stock market in 1996, Virgin's fund (managed by Pearl Assurance) returned 17.9 per cent. Legal & General's earned 18.5 per cent.

It's a simple, no-brain investment. Or is it? While the principle of tracking an index is easy to understand, it cannot all be done by computer. Gartmore's index-linked funds expert, Rick Lacaille, says: "You can't just turn a computer on and walk off. Experience counts in tracking the index."

If a takeover removes a company from the FT-SE 100 index, the money invested in those shares must be redistributed throughout the rest of the FT-SE 100 companies in proportion to their size. This can require human input to decide how to redistribute.

Humans must also decide whether to track every company in the index, which can mean paying stockbrokers a mint in dealing fees - or simply try to mimic the performance of each sector in the index.

Lacaille points to evidence that some tracker funds may be underperforming the index to a surprising extent, sometimes falling short of the FT-SE by up to 5 per cent. For example, while HSBC's Footsie Fund returned 16.81 per cent in the year to January 31, Midland's FT-SE 100 Index Account returned 12.07 per cent.

Part of this is due to charges. Most fund managers levy a management charge of 0.5 to 1 per cent. But some companies ask for an initial charge of up to 5 per cent and their returns drop dramatically. While the HSBC fund has charges of just 0.5 per cent per year, the Midland fund has a bid/offer spread of 4.5 per cent. Govett's fund, based on the FT-SE mid- 250, returned just 6.75 per cent, largely because of a 6.5 per cent charge.

The GA PEP, by contrast, levies no initial or exit charges, ensuring that, in common with other funds levying similarly low fees, its performance should mirror the market more closely.

If the FT-SE 100 suffers a long-expected correction this year, trackers should follow it down. Over more than five years, it is likely to return to growth. But if investors watch charges and invest for at least five years, few may miss their expensive active fund manager.

'The Independent' has published a free 32-page guide to PEPs, sponsored by General Accident Life. The guide explains the difference between tracker funds and actively managed PEPs. For your copy, call 0500 125888 or fill in the coupon on this page.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Finacial products from our partners
Property search
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

    Recruitment Genius: Digital Optimisation Executive - Marketing

    £30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

    Recruitment Genius: Financial Reporting Manager

    £70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Day In a Page

    Syria civil war: Meet the military commander who says his soldiers will not rest until every inch of their war torn country is free of Islamist 'terrorists'

    ‘We won’t stop until Syria is back to normal’

    Near the front lines with Islamist-controlled towns where Assad’s troops were besieged just last month, Robert Fisk meets a commander confidently preparing his soldiers for battle
    Fifa corruption: Strip Qatar of the World Cup? Not likely

    Strip Qatar of the World Cup? Not likely

    But if a real smoking gun is found, that might change things, says Tom Peck
    Twenty two years later Jurassic Park series faces questions over accuracy of the fictional dinosaurs in it

    Tyrannosaurus wrecked?

    Twenty two years on, Jurassic Park faces questions over accuracy
    The inside story of how Bill Clinton built a $2bn global foundation may undermine Hillary's chances

    The inside story of how Bill Clinton built a $2bn global foundation...

    ... and how it may undermine Hillary's chances in 2016
    Genes greatly influence when and how many babies a woman will have, study finds

    Mother’s genes play key role in decision to start a family

    Study's findings suggest that human fertility is still evolving
    12 best olive oils

    Extra-virgin, cold-press, early-harvest, ultra-premium: 12 best olive oils

    Choosing an olive oil is a surprising minefield. Save yourself the hassle with our handy guide
    Rafa Benitez Real Madrid unveiling: New manager full of emotion at Bernabeu homecoming

    Benitez full of emotion at Bernabeu homecoming

    There were tears in the former Liverpool manager’s eyes as he was unveiled as Real Madrid coach. But the Spaniard knows he must make tough decisions if he is to succeed
    England can win the Ashes – and Elvis Presley will present the urn

    England can win the Ashes – and Elvis will present the urn

    In their last five Test, they have lost two and drawn two and defeated an India side last summer who thought that turning up was competing, says Stephen Brenkley
    Sepp Blatter resignation: The beginning of Fifa's long road to reform?

    Does Blatter's departure mean Fifa will automatically clean up its act?

    Don't bet on it, says Tom Peck
    Charles Kennedy: The baby of the House who grew into a Lib Dem giant

    The baby of the House who grew into a Lib Dem giant

    Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
    Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

    The harrowing testament of a five-year-old victim of Syria's endless civil war

    Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
    The future of songwriting: How streaming is changing everything we know about making music

    The future of songwriting

    How streaming is changing everything we know about making music
    William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

    Recognition at long last

    Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
    Beating obesity: The new pacemaker which helps over-eaters

    Beating obesity

    The new pacemaker which helps over-eaters
    9 best women's festival waterproofs

    Ready for rain: 9 best women's festival waterproofs

    These are the macs to keep your denim dry and your hair frizz-free(ish)