Personal Finance: How do trackers work?
Sunday 13 September 1998
Virgin buys all the shares in the index, in the correct proportions. This is called "full replication". The managers trade every 10 days or so. The make-up of the portfolio is rebalanced to match the index every time buying takes place.
This full replication costs more: Virgin's fund charges are 1 per cent a year. L&G's is just 0.5 per cent a year.
L&G uses a technique called "stratified sampling". This is the most widely- used method of reproducing the All Share index, and the theory is that the top 400-odd shares are bought in full, which gives full replication of around 90 per cent of the value of the All Share.
The rest of the shares are chosen according to sector; the overall fund represents the exact proportions of each sector (financials, pharmaceuticals, etc) as they appear within the All Share index.
The manager may decide, for example, to buy extra "weight" in engineering sector, and will simply buy shares in the biggest engineering firm which falls outside the top 400 companies, and perhaps one or two others - working from the top downward.
Critics say this isn't real index tracking as there is room for human judgement. The advantage of a big fund like L&G is that it finds it viable to buy many more shares than most other funds which use sampling: L&G now holds 783 of the 848 companies on the All-Share.
Contacts: L&G, 0500 116622; Virgin, 0345 900900
- 2 Scottish independence live: Scotland gives a clear 'No' in historic referendum - as it happened
- 3 iOS 8 is full of shiny new features - but it's terrible news for app developers
- 4 Friends 20th anniversary: Six things we wouldn't have without influential comedy series
- 5 Scottish independence: Tory revolt against 'devo max' grows as Rail Minister Claire Perry joins
Scottish independence referendum results: David Cameron pledges plans for 'English votes for English laws' by January
Scottish independence live: Scotland gives a clear 'No' in historic referendum - as it happened
Scottish referendum results: David Cameron set to unveil major devolution of powers to England
Iranian blogger found guilty of insulting Prophet Mohammad on Facebook sentenced to death
Scottish independence: Tory revolt against 'devo max' grows as Rail Minister Claire Perry joins
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Scottish independence referendum: A nation divided against itself
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Scottish independence: The Queen breaks silence on referendum debate – as think tank warns of £14bn black hole if Scotland votes Yes
Archbishop of Canterbury admits doubts about existence of God
iJobs Money & Business
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...