Advisers and providers believe investors should not necessarily be discouraged from investing in UK tracker funds despite heavy exposure to natural resources.
Two of the leading managers in the UK equity income sector, PSigma’s Bill Mott and Jupiter’s Tony Nutt, have both warned that the level of exposure to natural resources in UK trackers has leapt to over 30 per cent and that there are now big risks associated with investing in them.
The FTSE 100 currently has 17.5 per cent exposure to oil and gas and 12.8 per cent in mining.
PSigma income manager Bill Mott says there are concerns that while the man in the street may think he is getting exposure to the UK economy, he is actually getting exposure to a specific sector which, in some cases, may be exposed to high risks. He made an analogy with technology, media and telecom stocks in the 1990s.
He says: “The risks of a dislocation in China or mining are too high to warrant the potential rewards. Oil is slightly different as it has a greater geopolitical influence and may return a higher price than the fundamental economic landscape would warrant.”
Jupiter income manager Tony Nutt says: “Mining has become a much larger proportion of the 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 a specialist fund in a particular area.”
A number of leading managers have previously highlighted their concerns over China and the mining sector. Invesco Perpetual income manager Neil Woodford has said those investing in China on the commodity play are due “a dose of realism”.
Legal & General Investments managing director Simon Ellis says investors will always want exposure to the index through trackers.
He says: “They will look at the news and see the market is up X or down Y. This move is nothing new as it is always a case that the popular stocks will begin to become a large constituent of the index, people want exposure to the market and trackers do what they say on the tin. Active managers, by comparison, will always make bets away from that in order to outperform.”
HSBC Global Asset Management head of UK external distribution Phil Reid says: “The advisers we speak to are savvy enough to know what the market consists of and what the drivers are. If you have got an extreme view on drivers and sectors, of course, you are going to have a different perception of this.”
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 they are chasing an active index and need to be comfortable with that.”
Whitechurch Securities managing director Gavin Haynes says it is a traditional argument against passive investing that if a particular sector of the market grows in popularity it will become a bigger constituent of a tracker.
He says: “It has been seen before with TMT. Vodafone is a perfect example, given that it was at one point the biggest stock in the index at £4, only to lose around 75 per cent of its value. Track-ers would have felt that.”
Haynes says he would much rather take a contrarian stance than invest in a tracker at this point in the market.
He says: “The best time to invest in trackers is at times when we are seeing a broad recovery. Looking at the current weighting of natural resources in the index, oil is not a concern as it is not that cyclical, however, mining shares are cyclical and rising on the back of the China growth story so that is the worry if there is one to be found.”
Skerritt Consultants head of investments Andy Merricks says investors should not be too worried over the level of natural resources in the FTSE 100, pointing to the fact the pharmaceuticals are unloved at the moment yet some of those stocks remain in the index.
He says: “This is an argument that will continue to occur, whether it be banks in the past or another sector in the future. You do have to be careful as they are not all things to all men but the low cost nature and market exposure mean there will always be a demand for them in the market.”