Leading UK equity income managers Bill Mott and Tony Nutt have warned investing in UK index trackers carries significant risks at present with their heavy exposure to the natural resources sector.
PSigma income manager Bill Mott says he has concerns that people investing in UK trackers think they are getting exposure to the UK economy when, in fact, they are heavily exposed to a high-risk sector at present.
Mott says this was also the case with technology, media and telecom stocks in the late 1990s, when investors were exposed to a sector that had already been overblown.
He says: “It is possible to argue that natural resources, mining and oil, make up such a big part of the London market that you are almost taking an active bet with lower fees as the index is so skewed. The risks of a dislocation in China or mining are too high to warrant the potential rewards.”
The FTSE 100 currently has a 30 per cent exposure in natural resources, courtesy of 17.5 per cent in oil and gas and 12.8 per cent in mining.
Jupiter income manager Tony Nutt says: “Mining has become a much larger proportion of the UK market than it ever was before. If you want to participate with an appropriate level of prudence, you should not use an index tracker or indeed a specialist fund in a
HSBC Global Asset Management head of UK external distribution Phil Reid says: “We think index funds do what they say on the tin by offering cheap access to
the benchmark without slicing and dicing the market.
“The advisers we speak to are savvy enough to know what the market consists of and what the drivers are.”
CandidMoney.com founder Justin Modray says: “I would not actively discourage someone from investing in a tracker at present but people need to be aware that they are chasing an active index and need to be comfortable with that.”