When in doubt, sit on the fence

The fall in the stock market raises questions about pooled investments

To track or not to track? This is the question uppermost in the minds of hundreds of thousands of small investors as they ponder the next likely movement in the UK stock market.

The issue has acquired major significance in the past few weeks as the seemingly inexorable rise of shares in the FTSE 100 index appears to have ground to an uncertain halt. Hence the detailed attention paid to the subject by several writers in this week's section.

So, how long will this "hiccup" last? Does it mean that index tracker funds, which have delivered outstanding performance in the past 18 months or so, thereby attracting a gigantic wall of investors' money, are now no longer the place to put one's money into? Should one now be concentrating on the next rung of so-called "mid-cap" stocks in the FT 250 index, for instance?

Tony Wood, marketing manager at Virgin Direct, whose All Share tracker PEP has gobbled up the biggest single chunk of savers' money, is forthright about his company's investment strategy: "We do not ever try to predict the way the market is going to go. We simply argue that trackers offer good long-term value."

For all Mr Wood's frankness, the past two days' falls in the Footsie confirm the increasing need to reach a judgement on what is happening. For many experts, the experience confirms a view they have held for many months about the Footsie and the All Share indexes (which reflect the dominant influence of blue-chip stocks).

Premier Unit Trust Brokers is a Bristol-based firm specialising in so- called "pooled" investments such as unit trusts. Its latest bulletin suggests the reason Footsie shares have done well depends at least in part on the growing trend among giant US pension funds to seek overseas investments in large companies, whose stocks can be quickly liquidated if need be.

"The preference for large liquid stocks by US fund managers, including those running tracker funds, has put a firm imprint on all markets, including our own," writes Peter Edwards, a partner at Premier.

Generally, a handful of sectors - banks, oils, utilities and pharmaceuticals - have been responsible for most of the Footsie uplift. In particular, cash has poured into a handful of shares: HSBC, Lloyds/TSB, Glaxo, SmithKline and Shell. "Conversely, the FT 250 and Small Cap [stocks] are overweight in the `wrong' sectors," Mr Edwards adds.

This, along with the appreciation of sterling compared to other currencies, has meant that smaller companies without major international exposure have found foreign markets difficult to export into.

Political factors, in which foreign investors began betting on the inevitability of a Tory election defeat and a consequent rise in interest rates under Labour, meant the pound remained at high levels, exacerbating the trend.

Mr Edwards is rueful about these factors: "In the past, we have tended to consider that trackers were funds to invest in during an economic downturn. This does not appear to be happening now."

But he points out that the Bank of England's recent statement that further upward pressure on sterling may finally have been checked by recent interest rate rises underlines the Bank's commitment to keep inflation under control.

The Bank's view, coupled with the most recent base rate rise on 6 August, led to a drop of about 3 per cent in the Footsie, while the FT 250 rose by more than 4 per cent.

It is this adjustment which recently led some observers, including Bill Mott, head of UK investment at Credit Suisse, to suggest that a fall in the value of the pound would eventually allow small company exports to power ahead, along with their share prices.

Not everyone agrees. Andy Jackson, small companies fund manager at Hill Samuel, another respected investment house, says: "We would be reluctant to say that small-cap companies will outperform. Our view is that large [company shares] are still likely to do better."

"Ah, yes, but," say the fund managers, "should the rise falter, the ability to pick the right stocks in a generalised market downturn means we will begin to recover lost ground."

This argument is not entirely true. Earlier this year, The Independent looked at how trackers performed in the aftermath of three share price downturns.

The result was that in each of the three periods - 1987, 1990 and 1994 - trackers bounced back at the same speed as many of the best funds in their own sectors.

Of course, a question mark still hangs over the ability of trackers to outperform managed funds at a time when the market begins a slow downward spiral running over a year or two, as in the mid-1970s. Then, genuine stock-picking might come into its own.

So what should investors do? Mr Edwards' view is simple: "I believe we should sit on the fence for the moment."

By that he means accepting that - given the money from the US pouring into them - safety of sorts will come, for the time being, from larger and more liquid stocks.

But that does not negate the potential for stockpicking at the same time or from the mid-cap markets, where the gap with the Footsie has closed. The time may have come for investors in tracker funds to look at funds which can combine both aims, delivering the best of both worlds.

Is fence-sitting the best of both worlds or just a painful exercise? Only time will tell. But in the meantime, those of nervous disposition might want to give it a try.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

The cost of a buildings policy has dropped by 10.1 per cent over the year, with the cost of a contents policy falling by 8.2 per cent

Simon Read: Mild winter cuts the cost of home insurance

The average quote for a buildings and contents policy has fallen by 3.6 per cent

Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Labour will raise the national minimum wage to more than £8 an hour by October 2019 (EPA)

Barclays new Blue Rewards hands cash to customers. What’s the catch?

Joining Barclays Blue Rewards costs £3 a month but then lets customers in for handouts of up to £15 a month

New research reveals that despite the recovering economy, four out of five low-income households have seen no sign of their financial situation improving

Hard-up families could be eligible for financial help

A charity is urging anyone struggling financially to see if they could get help from the state

When is the best time to buy foreign currency?

Video: With an election looming, a hung parliament could hit sterling

General Election 2015: Vote for the party that will boost your finances

Experts warn that the general election is unlikely to lead to stable markets. Simon Read talks to two investment managers who are advising caution

Make the most of your money in 2015-16: The end of the tax year is the beginning of the next...

The new tax year brings with it a raft of new rules and regulations

General Election 2015: Will pension reform be a major factor?

Video: Tom McPhail, head of pensions at Hargreaves Lansdown, says May's outcome could alter your pension

General election 2015: David Cameron's promise brings uncertainty to investors

Video: Simon Read talks to Fidelity's Tom Stevenson

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Financial Adviser

    £20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

    SThree: Graduate Recruitment Resourcer

    £20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

    Guru Careers: Application Support Analyst / 1st Line Support

    £25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

    Guru Careers: .NET Developer / Web Developer

    £45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

    Day In a Page

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    How a costume drama became a Sunday night staple
    Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

    Miliband promises no stamp duty for first-time buyers

    Labour leader pushes Tories on housing
    Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

    Aviation history is littered with grand failures

    But what went wrong with the SuperJumbo?
    Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

    Fortress Europe?

    Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
    Never mind what you're wearing, it's what you're reclining on

    Never mind what you're wearing

    It's what you're reclining on that matters
    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence