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Investment View

I shall be sorry to leave Lombard Street. We will be moving to the north bank of the River Thames as our new parent, Old Mutual, gathers together the ever growing threads of its UK businesses. I will be trading a view of the Barclays Bank headquarters for an as yet undefined aspect. I rather think that, even now, battles are being fought over who will have the Thames-side vista.

One good thing about being in Lombard Street is the proximity to other major financial institutions. I was fortunate enough to have lunch recently in the dining rooms at Barclays Bank. It was not, as I rather hoped, to celebrate my near 40 years as a customer. Rather, it was to give my opinion on some of the issues surrounding the retail investment industry in these highly competitive days. It also provided an opportunity to learn more about Barclays Global Investors&#39 approach to investment management.

I confess I had forgotten that the first index funds were launched in the US around a quarter of a century ago by a company which Barclays later acquired. Wells Fargo Nikko Investment Advisers unleashed the world&#39s first index fund in 1973 and index funds have helped propel BGI to the forefront of global investment management.

Doubtless, the debate over their contribution to the investment process will rage on. Accepting there is a limit to the extent to which a passive investment management system like indexation can be refined, much effort has recently been put into the “advanced active” approach, borne out of the considerable interest that US academics have shown towards stockmarket investment. In essence, what it does is to take the indexation model and endeavour to add value by using a highly sophisticated and rigidly applied system of individual stock selection. The aim is to add those few extra percentage points in performance. Results so far have been encouraging.

If you start from the basis that the index is the benchmark you wish to beat, you need to look at the constituent companies and determine which to omit and which to overweight. By applying rigid risk criteria, you will never be far out of line with the index but, hopefully, the little added emphasis you put on companies expected to outperform should add to a modest incremental improvement over basic trackers. It is, of course, more expensive to operate as there is a degree of subjective judgement which computers cannot provide. That gives cause for encouragement as it means people play a part in stock selection. Moreover, the wider range of stocks that would usually be held suggests you are likely to be less volatile relative to the market than a bottom-up fund with a limited range of shares.

If a fund such as BGI&#39s UK growth fund provides the broad market coverage suitable for core holdings, there are an increasing number of funds available for the more esoterically minded investor. Looking through my post recently, I spotted an invitation to the launch of Merrill Lynch&#39s New Energy Technology trust, fund updates from Scottish Value Management which reminded me that it offers a Life Offices Opportunities trust as well as the Warrants and Value investment trust (which must be enormous fun to manage), along with European property and emerging markets debt funds from Morgan Stanley.

The array of choice is becoming positively bewildering. Good opportunities exist for portfolio managers, I feel, although the multi-manager approach is still not as widely accepted in this country as in the US. Perhaps we need to build more comprehensive databases that will help in the selection of suitable portfolios to satisfy a variety of strategies.


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