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Investment View

You may have already noticed but I confess to being slow to pick up on the fact that a fifth South African company is about to join the FTSE 100 index. Computer giant Dimension Data joins Billiton, Anglo American, South African Breweries and our own parent Old Mutual in a London listing and an almost certain FTSE place. Personally, I consider South Africa to be God&#39s own country but I am beginning to wonder about the relevance of the FTSE 100 as a benchmark, given the changes taking place.

This concern appears to be well timed. Last week, research by Friends Ivory & Sime showed that many investors have little idea of how the index is made up. The highly regarded Guy Monson (highly regarded by me, certainly) of Sarasin has taken issue with the whole question of indexation in markets that are essentially global and subject to rapid change.

Monson makes the point that many people buying trackers are unaware of what the underlying portfolio is likely to contain. There will be those who will have breathed sighs of relief at having avoided the dotcom collapse, unaware that at its peak the FTSE 100 had 40 per cent of its value made up by technology, media and telecommunications. Even the All-Share index, the wider measure of the market which is particularly popular among tracking houses, had close to 37 per cent in these stocks. No wonder the index has delivered such poor performance since the start of the year.

My concern over trackers is twofold. First, tracking distorts market trends, accentuating the over-reaction that tends to happen in both directions. Second – and arguably most important – is that the retail investor seldom understands quite what they are buying. At the very least, they are unlikely to have a clue on the methodology used. There are, after all, several ways of tracking an index.

But who can blame those who support trackers given that, during the same week that saw the Friends I&S research published, we learned that only 20 per cent of actively managed funds have succeeded in beating the index. I wonder if those who would use that as an argument for supporting tracking realise that none of these funds would have ended up ahead of it. I accept this is an unsubstantiated statement but the truth is that an index has no costs attached to it and, while the principal advantage of trackers is that they are cheaper to run than active funds, once you add in costs you are bound to deliver underperformance.

I have every faith in this inventive and creative industry of ours to come up with the means of producing products that meet the challenge of these times. I consider that the standard indexation approach has a sell-by date stamped all over it. At some stage, we will need to pick up some form of global theme, be it sectoral, thematic or what you will. Indeed, specifically constructed industry funds might present a good opportunity for a multi-manager industry which is still not as highly developed here as I might have expected, given the US experience. Rothschild is playing with this approach with its new technology fund of funds but there is plenty more that could be done in this area.

Last week&#39s conference on Sipps and income drawdown was something of an eye-opener. I batted first, so I kept to a simple approach of why Sipps could be the fastest growing portfolio management business in the country. Then I learned about the possible introduction of an individual pension account. Described variously as a working man&#39s Sipp or an Isa with tax relief on entry. I confess to feeling excited over the opportunity. Help, please, DSS. If this is really on the cards, let us know about it. As an industry, we will be enthusiastic. I promise.


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