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Trackers Of their tears

Investment IFAs are warning that tracker funds should no longer be marketed as low-risk investments.

This view is echoed across the Atlantic by fund guru John Muresianu, former manager of Fidelity&#39s American fund. He goes as far as describing so-called “closet” trackers as “insidious” and even blames the rise of index trackers, not technology shares, for the US equity bubble.

IFAs such as Chase de Vere think tracker funds are too restrictive in forcing investors to put all their eggs in one basket. It says by limiting clients to the FTSE 100, for example, investors are effectively putting most of their money in the top 10 funds which dominate the market and if the index continues to drop they are stuck in freefall with it.

Chase de Vere savings and investment manager Nikki Foster says: “By the time that shares creep into the top 100, they have usually experienced their biggest period of growth and are effectively past their sell-by date. The majority of investors do not want a portfolio of just 10 giant stocks.”

Foster says the firm is not putting any of its clients into trackers and she warns other investors not to jump on the bandwagon. “We are increasingly seeing clients with entire portfolios in trackers that are underperforming and with charges built into the funds.”

Foster thinks investors will soon realise that although cheap, trackers are not a safe bet, she adds: “Investors are becoming aware that the big names will not bring in the money – just look at Marconi.”

IFA Hargreaves Lansdown Investment director Mark Dampier says: “The problem with trackers is that good returns are obviously based on steadily rising markets. This was all very well in the 90s when blue-chip companies were doing well but in current market conditions, while the index is static, trackers are only likely to move sideways.”

After three years of a bear market, IFAs say more proactive stockpicking is needed for clients to have any hope of seeing a positive return.

But trackers do have their defenders and some say IFAs do not like trackers because they pay less commission. Advisers say regardless of the commission they would still prefer to see stockpicking from an experienced fund manager making decisions based on market analysis.

In defence of trackers, Govett FTSE 250 index fund manager Conrad Preece argues that investors are not taking on board the fund manager risk. “They are buying consistency – a consistent performance,” he argues.

Preece hits out at the cult of the star fund manager, likening them to Premiership football players with regular off-days or who are transferred overnight without the fans&#39 knowledge. He warns of the danger of investment decisions being swayed by personality.

IFAs say the controversy over “clo-set trackers” which covertly mirror market indices but charge as being actively managed is that more and more are sneaking into the UK market by the “actively managed” back door.

Legal & General retail and corporate investment spokesman Steve Leach is strongly opposed to closet trackers which he describes as funds that purport to be active but are predominantly index-linked.

Gerrard investment manager Brian Tora thinks trackers increase volatility in the markets and it is not inconceivable that, if the number of index funds continued to increase in the UK, then a significant distortion of markets could happen.

When stocks enter the index which is being tracked, investors with trackers are landed with them, regardless of price.

Towry Law product research manager Simon Farrant thinks the trend towards index-linked funds will prob-ably continue and agrees that by latching on to funds at the margins of the FTSE100 trackers do have the capacity to distort the market significantly. Farrant says: “Tracker funds do not over-inflate the values of companies but trackers do exaggerate trends and increase volatility in the markets.”

State Street Global Advisers spokesman Stewart Reed says the US market is a different breed to the UK and it is misplaced idea to blame the US stockmarket crash on an influx of trackers in the late 90s.

He says he could understand the allegations if the majority of the market was made up of these products but that this is just not the case.

Reed says: “Tracker funds get quite a kicking whenever the managed side of the industry get a chance. If most funds were trackers and not managed, then we would clearly have a problem but this is not going to happen any time soon.”

Reed sees a change for the UK market ahead with more IFAs offering their own-brand tracker funds. He predicts the clash between hands-on active managers and number-crunching index trackers looks set to continue.

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