UK tracker funds follow the FT-SE 100 or All-Share index and aim to match its performance as closely as possible. Your investment will underperform the market slightly because of the fund charges, but you will never be left with a "dog" fund, subject to the whims of a failed fund manager who has chosen shares that don't perform.
The argument in favour of trackers is compelling: figures from investment bank HSBC show just one in three active funds outperforms the FTSE index. Pension funds have used trackers for a long time and they are popular in the US but they have only taken off among UK private investors over the last three years.
"They are a cheap way into the market as long as investors remember that what goes up can go down," says Kim North, an IFA at PTP Technical. If you are interested in buying a tracker fund, look first at the two biggest, as bigger is often better in the long term. A huge fund should be able to track the index more accurately.
The Virgin UK Index Tracking with almost pounds 1.4bn and the Legal & General UK Index with pounds 1.2bn are the biggest. The rest are mostly less than pounds 500m. Both the big UK funds buy the correct proportions of the shares in the All-Share index, a technique known as full replication.
Smaller funds cannot afford to do that and buy selected shares to generate the correct returns.
Research from HSBC shows the UK and the US are the hardest markets for active managers to outperform the index. In 1998 Rob Fisher at HSBC said: "It is ascribed to the fact that the US and the UK are more efficient, developed markets and it is hard to identify stocks that are undervalued because there is so much research. In Japan, for example, there is more scope for buying undervalued shares."
Tracker funds are also cheap. They don't need expensive managers and research staff. So they have little or no initial charge and the annual charge is usually 0.5 per cent or less, although there are a couple, including Virgin, that charge 1 per cent. Overseas trackers charge slightly more, with annual charges averaging 0.75 per cent.
So should you look to put money into a tracker fund now? "Yes you should," says IFA Roddy Kohn, "especially if the FT-SE 100 falls towards 5,000. They are most attractive when the index is low. But of course, it is when prices are low that the public is most nervous about investing."
You should approach the manager directly about buying an index-tracking PEP. Then check with a discount broker (see page 17) to see whether they can deal more cheaply. You won't get a discount on a Virgin PEP.
Contacts: CF netPEP www.netpep.co.uk (deals on the internet only); Legal & General, 0500 116622; Norwich Union, 0345 738393; Scottish Widows, 0345 678910; Virgin, 0345 900900.
best and worst
UK tracker fund performance - bid-to-bid price, % growth over one year
CF netPEP Tracker 17.02
CGU UK Index Tracking 16.95
Lloyds TSB FT-SE 100 16.80
Scot Widows UK Index 16.78
Equitable UK Index Track 16.65
Old Mutual UK All Share 12.28
HSBC UK Index 12.16
Gartmore UK Index 11.63
Morgan Grenfell UK Index 11.53
HSBC FT-SE 250 Index 3.74
(including overseas) 14.06
FT-SE 100 17.47
FT-SE All Share 13.76
Source: Reuters HindsightReuse content