You have two basic choices: a traditional actively managed fund, run by managers who pick shares they believe will perform well; or a tracker fund, which is cheap, computerised and simply follows a given index (usually the FT-SE 100 or FT-SE All Share).
There is now a third choice: a hybrid called an active tracker fund (see box for more details). The idea behind this is to leave out about a third of the shares in the FT-SE 100 index and go overweight in companies with better prospects. Long used by pension fund managers, Hargreaves Lansdown is the first fund manager to bring the concept to the investing public.
"The idea is to take the best of both worlds - trackers and active fund management," says the company's Mark Dampier.
Trackers have been phenomenally successful in the UK over the last three years, with money pouring in from investors and returns shooting up in line with the markets.
The long-standing argument of many active fund managers is that index trackers will be outshone by active funds in volatile and falling markets.
Tracker funds are popular because they offer low charges and an impressive performance record on the back of a bull market. But since July, when fears of global recession led to a roller-coaster ride in share prices, tracker funds have, on average, under-performed active funds. However, virtually every fund with a high equity content, actively or passively managed, has seen a fall in value over the last few months.
Some managers argue that 1999 will bring another period of volatility, so it may make sense to use a fund with the flexibility to switch from equities into more stable assets.
One solution for private investors is to copy a professional strategy which has become popular with pension funds. Known as the "core-satellite" approach, it involves investing part of a portfolio in tracker funds or cautiously managed active funds (the core), and part in more aggressive active funds (the satellite).
Matthew Craig is deputy editor of `Pensions Management' magazine.
a new approach to stock picking
A new fund launched this week offers the chance to invest in a FT-SE 100 fund, with the twist that the manager will have the discretion to leave out a third of the shares because they are expensive or poor performers. Hargreaves Lansdown believes that weeding out poor choices, rather than the traditional active manager's role of trying to guess which shares will do well, makes for better returns than a straight FT-SE 100 tracker.
"I think the racehorse analogy works here," says Mark Dampier, head of research at HL. "If you ask jockeys which horses don't have a chance of winning, they can tell you. Some are dead losses. So when you pick shares you can spot those shares, downweight them or not pick them at all." None of the very large companies in the FT-SE 100 will be removed altogether. If they aren't good value, the manager will just go underweight.
HL has been running the fund as a notional portfolio since December 1997 and the performance has been good. Overall, the pilot outperformed the FT-SE 100 by 5 per cent.
The downside to this fund is that it costs a lot more than a conventional tracker, so it will have to outperform by that margin to make the extra costs worth while. However, if you invest before 25 January, the 3 per cent initial charge is waived. There's a 1 per cent annual charge and the minimum investment is pounds 2,500. The fund is PEPable.
For an Active Tracker brochure call 0800 850661.Reuse content