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Are trackers the best bet in a rising market?

With some predicting the FTSE 100 will hit between 7,300 and 8,000 next year, Jon Yarker asks if trackers are the best way to ride any increase.

Over the past few weeks, there has been a series of predictions about the height to which the FTSE 100 may climb, with some wilder than others.

Analysts at Goldman Sachs kicked things off with an estimate that the benchmark index could reach 7,500 over the next year, thanks to the strengthened US economy, continued loose monetary policy and a more
stable eurozone.

Not to be outdone, Citigroup predicted that the blue chip index could hit 8,000 by the end of 2014 while Old Mutual Global Investors’ Richard Buxton tipped it to reach 7,300 over the same period.

Regardless of the exact numbers, it is clear that analysts believe a number of factors are set to drive stockmarket performance, from improving bank balance sheets and a better economic backdrop to more appetite among board members for mergers and acquisitions.

Should investors be adopting a passive investment strategy and capitalise on the potential upside while driving down costs to clients?

EA Financial Solutions managing director Minesh Patel says trackers work best for the long-term investor.

He says: “We are in a long-term equity bull run. Forget sentiment and opinions. If you look at economic theory, it shows that within a cyclical recovery phase equities perform well; if you look at all the fundamentals, there
is still value.”

Patel notes that in developed markets, passive is favoured more than active, although he believes active managers can add value in the small-cap space. But he adds: “With all the costs of active, there
is a substantial difference when using a tracker over a longer period.”

Henderson Global Investors multi-asset fund manager James de Bunsen, who works on the £412m Henderson Multi-Manager Income & Growth fund, believes trackers are a good alternative when an active fund manager is not able to justify their costs.

He says this is particularly true in highly developed markets.

De Bunsen says: “In terms of US managers that we have access to in the UK market, we have not had many out-performers – which has led us to the conclusion that it is best to go with a tracker in this case.

“The other added benefit is that you can trade on an intraday basis.”

However, de Bunsen says the disadvantage of trackers is that the risk level of certain sectors at any given time can sway the entire index.

Hargreaves Lansdown senior investment manager Adrian Lowcock is mindful that when buying a replica of the FTSE 100, an investor is also buying the stocks they may not have wanted to include, such as mining giants which have caused a drag on FTSE performance.

He says: “In the UK, you need to look at what is in the FTSE. If you are buying a tracker, you absolutely need to understand what you are investing in, and understand that, for example, commodities might lag the rise in markets. You have to be very careful.

“In the past few years, we have had a fat and flat market; it has not really risen but it has been volatile.

“We are heading towards a thin and skinny market where there is a rising market but it will not be as volatile. It will still be a stockpickers market.”

Old Mutual fund manager Richard Watts, who manages the £1.2bn Old Mutual UK Mid Cap fund, argues that active management can deliver value in hunting out the buy opportunities.

Watts says: “We are positive on the outlook for the UK equity market. However, we fundamentally believe that active management works in the small and mid-cap space because this is a relatively under-researched part of the market.

“Fund managers give a good opportunity to find and add value over time. We are trying to find that stock before it becomes well known.”

While Bestinvest managing director of business development and communications Jason Hollands sees passive strategies as viable for rising markets, he does not believe the current FTSE hype.

Hollands says: “Passive investment is a bull market product. If things are going up then capturing beta is a sensible strategy. But I am not so bullish.

“The sensible approach is to be agnostic and use the right investment at the right time. However, passives work particularly well in liquid pockets of the market.

“With multi-managers buying passives, it may work in parts of the market where they may doubt active managers.”

Premier Asset Management multi-asset fund manager Simon Evan-Cook, who co-manages the £100m Premier Multi Asset Income and Growth fund, says: “Passive investing is like playing poker with your cards face up. In the stockmarket, other investors know exactly what tracker holders are going to buy and when they are going to buy it.

“The concept behind tracking – cutting charges by harnessing the “wisdom of crowds” – was sound. But at its conception, the crowd consisted of individuals making decisions based on their own intuition.

“But what happens when most of that crowd stop doing that and follow what the rest of the crowd are doing instead? Have they become a crowd of lemmings?”



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