Investing for growth: Keep it simple: the attractions of trackers

INDEX-TRACKING funds provide a good first step into shares and are good core holdings of any stock market portfolio. These funds are a type of unit trust, normally, so your money will be pooled together with that of many other investors and used to "buy the market".

By buying every, or virtually every share in a stock market index, such funds aim to mirror the performance of the market. So if the market does well so will the fund, and vice versa.

More than 20 tracker funds are now on offer and most follow either the UK's FT-SE 100 index or the All Share index. The companies making up the FT-SE 100 are the largest quoted in the UK and account for 75 per cent of the stock market by value. Funds tracking this index are offered by Direct Line, River & Mercantile, Fidelity, Legal & General, Equitable Life, Lloyds Bank, Sovereign, Barclays and Govett.

The All Share consists of the FT-SE 100 companies plus hundreds of other medium-sized and smaller companies. Funds tracking it are offered by Legal & General, HSBC, Dresdner RCM, Gartmore, Virgin, Old Mutual, Norwich Union and Morgan Grenfell.

With so many companies in the All Share index, a number of fund managers employ a "stratified sampling" technique. Typically, they will invest in the largest 300 companies and then choose a representative sample from the remaining companies. Legal & General claims that most All Share trackers usually end up with very similar portfolios; its fund invests in 700 of the 900 shares.

Trackers offer a number of attractions. First: simplicity. The investment managers do not employ any special approach to picking shares, simply buying the whole market. Second: risk reduction. Instead of "taking punts" that might turn out bad on parts of the stock market, such as engineering companies, they buy everything and do not stick their head above the parapet. A third attraction is that the risk of getting a particularly bad return is lower.

Steve Abbott, marketing director at Legal & General unit trust managers, says: "Trackers give you the market as a whole, so you don't have to decide which fund manager to put your faith in or which part of the market to put your money in."

"Eliminating the risk of choosing a poor fund manager makes sense," says Jonathan Harbottle, a director at River & Mercantile. "It's a statistical fact that most active [non-tracking] fund managers underperform their benchmark index most of the time, because the market is very efficient and because no one gets it right all the time." This claim is borne out in the performance tables regularly: trackers usually do well.

Tracker funds are also cheap, in part because a fund manager does not have to do any research into individual companies, just buy and sell. Many make no initial charge and the annual fee often is less than 1 per cent, compared with the not untypical 5 per cent initial and 1 per annual management fee on a traditional unit trust.

The cheapest FT-SE 100 trackers are offered by the likes of River & Mercantile and Fidelity, while low-cost All Share trackers are offered by Legal & General, HSBC, Dresdner RCM and Gartmore. There also a few funds on offer that track overseas markets. But these are only likely to appeal to investors who already have their core UK investments in place.

Where trackers can fall down is if the stock market does poorly. "If it heads down then the tracker will mirror this decline whereas with an actively managed fund, the manager can take steps to try to curtail any losses," says Roger Cornick, deputy chairman of Perpetual, a well- known active management company. "When markets fall an active fund manager can go liquid [that is, into cash], avoiding companies he doesn't like. An index tracker has to remain exposed to the market. Actively managed funds are more flexible and suited to all sorts of market conditions. Trackers only shine when the markets rise."

Mr Cornick says investors should choose a fund manager with a good track record to outperform both the stock market generally and tracker funds.

One way to try to outperform the market is to take a core approach, where you use a tracker fund as your main investment to provide wide exposure to the market.

On top of this, you then select actively managed funds to spice things up. This way you get a highly diversified portfolio but with the opportunity to outperform the market, too.

PROMOTED VIDEO
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Life and Style
techCould new invention save millions in healthcare bills?
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Voices
Mosul dam was retaken with the help of the US
voicesRobert Fisk: Barack Obama is following the jihadists’ script
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
News
Jermain Defoe got loads of custard
i100
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.

iJobs Job Widget
iJobs Money & Business

Business Analyst - Banking - London - £550 - £650

£550 - £650 per day: Orgtel: Business Analyst - Traded Credit Risk - Investmen...

Data Centre Engineer - Linux, Redhat, Solaris, SAN, Puppet

£55000 per annum: Harrington Starr: A financial software vendor at the forefro...

.NET Developer

£600 per day: Harrington Starr: .NET Developer C#, WPF,BLL, MSMQ, SQL, GIT, SQ...

Data Centre Engineer - Linux / Redhat / Solaris / Puppet / SAN

£65000 per annum: Harrington Starr: A financial software vendor at the forefro...

Day In a Page

All this talk of an ‘apocalyptic’ threat is simply childish

Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
Mafia Dons: is the Camorra in control of the Granite City?

Mafia Dons: is the Camorra in control of the Granite City?

So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Once the poor relation, the awards show now has the top stars and boasts the best drama
French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

Radio 1’s new top ten

The ‘vloggers’ signed up to find twentysomething audience
David Abraham: Big ideas for the small screen

David Abraham: Big ideas for the small screen

A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf