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Blood on the trackers

Schroders executive director Andy Brough&#39s assertion that the FTSE 100 will struggle to break through 6,000 for the next 10 years has thrown the spotlight on index trackers.

With the FTSE hitting its lowest point – 4,920 – since September 11 just two weeks ago, Brough&#39s comments have highlighted the growing feeling among some in the investment industry that UK index trackers may have had their day in the sun.

Hargreaves Lansdown head of research Mark Dampier says: “My personal view is that trackers have not been the best thing to buy since the very end of 1999 when the market topped out. They would only be worth having if there was a sharp rally in the FTSE but if Brough is right – and I hope he is not – then what is the point in hugging a static index?”

But it seems that many investors are undeterred by the performance of the FTSE over the past two years. Forty per cent of Isas bought direct in April were invested in trackers, according to IMA figures, which also show index tracking accounts for 30 per cent of the UK market.

Taking Brough&#39s 10-year assertion out of the equation, what can these investors expect from their tracker? Not a great deal, according to Dampier, who says even in better times the increasing dominance on the FTSE of four negatively correlated sectors – banks, pharmaceuticals, oils and telecoms – often means the market simply moves sideways. As he says, as one sector goes up, another tends to go down.

The other problem is that trackers are no longer the low-risk investment they once were, with the top 15 stocks in the UK now accounting for more than 60 per cent of the market despite the fact that they are generally seen as being overvalued.

Bates Investment head of research James Dalby says: “From a safety perspective, trackers just do not hold water. There is a high level of concentration in the index on a few blue-chips, which, in a manner of speaking, just are not blue-chips any more. The theory behind them being a safe bet has been blown out of the water.”

As with most IFAs, Dalby says it is now a stockpickers&#39 market, with Dampier going so far as to describe the present climate as being a “golden age” for active management. But Dalby believes it is more than simply a case of passive management versus active management, pointing out there is often a world of difference between a stockpicking fund with benchmarks and a fund with none.

He says: “JP Morgan Fleming has two actively managed funds run by the same team using the same stock-selection process. The premier equity growth fund fell by around 15 per cent in the eight months to May 31 while the UK dynamic fund gained 4.9 per cent over the same period. The difference is that the equity growth fund is benchmarked to the FTSE All-Share index, which fell by over 13 per cent from October to May, while the dynamic fund is not.”

But can trackers – or funds with tracking elements – do well in other markets? Not at the moment, according to Simpsons of Brighton IFA partner Mark Waters, who says European indices do not represent a better bet than their UK counterparts.

He says: “It is difficult to see what makes up European indices and they are not as well developed as those in the UK. The Eurostoxx 50, for instance, is a very narrow index. As a whole though, they tend to not be as reliable and are suffering as much as anyone from the global downturn.”

He believes there is more of a case for the US, where he says the major indices – the S&P500, in particular – are more reflective of the market.

But, as he points out, Enron and the issues surrounding Tyco have left investors wondering whether they can trust valuations and companies&#39 accountancy practices. Trackers simply cannot sift through this mess, says Waters, and can lead investors into areas they would otherwise seek to avoid.

Dalby holds much the same view, stating there is “no index that I would say is a particularly good bet for trackers” because the issues that currently make them unsuitable for the UK apply globally. As far as he is concerned, only true stockpickers can excel – in markets that are going nowhere fast.

For stockpickers, Dampier selects Brough, Bill Mott, Anthony Bolton and Tim Steer as being the real heavyweights. His choice of fund managers will not surprise many but their already significant influence may be felt even more keenly in an index that Brough believes will not climb much higher than it is now for another decade.

He may yet be proved wrong, but it should be remembered that between 1966 and 1982 the Dow Jones only moved between 800 and 1,000 points. It is perhaps too soon to start proclaiming the death of trackers but if Brough is only halfway right they could be left clinging on by their fingernails.


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