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Foolish SpecialThe Index TrackerBack in October, 1997, at the dawn of the Fool UK, I undertook a little research for one edition of the Daily Fool. The experience proved so traumatic I haven't ventured to do anything similar since, but here, preserved for all time, are the results of my travails... We talked about index trackers in Step Seven -- Buying the Market, but what caught my attention that October day was a listing at the Hardwick Stafford Wright website (http://www.lipper.reuters.com) of the performance of all the UK unit trusts as of Oct. 1, 1997 (they actually update these numbers regularly). It was nice to see that index trackers haven't done at all badly. The problem, though, if this is your chosen Foolish path (or one of them), is which one to invest in. There is a bewildering array to choose from. I managed to identify 21 of interest to the Foolish investor. (There were another two, but these had minimum deposits of £100,000 -- interested? Email me for the details if you are!) Nineteen were classed under the"UK Growth and Income" heading and the other two were under the "UK Growth" section. I don't know why they were in different sections and neither did anyone I talked to. I phoned them all to get details of their charges and PEPability. Anyway, out of 19 in the "UK Growth and Income" class, 15 had been in existence for 1 year or more. The average performance ranking of these 15 was 22nd out of 140 funds in total in the UK Growth and Income sector in existence for the last year. In other words, they beat 84% of the other funds over the last year, returning an average of 28.26%, as opposed to the 20.4% average for the sector:
Index Trackers
Index trackers in UK Growth and Income Class
Source for rankings: Hardwick, Stafford, Wright.
1 year Rank 3 year Rank 5 year Rank
Barclays Uni
FTSE 100 26.17 20 - - - -
Direct Line
FTSE 100 Track 35.43 4 - - - -
Equitable UK
Index Tracking 29.21 10 - - - -
Fidelity Moneybuilder
Index 36.00 2 - - - -
Gartmore UK
Index 28.04 15 75.44 8 131.50 12
HSBC Footsie
Fund 35.23 5 78.92 3 - -
HSBC UK
Index 29.03 11 67.01 33 117.42 35
Kleinwort Benson UK
Index 28.60 12 - - - -
Legal & General UK
Index 29.54 9 69.51 20 - -
Lloyds Bank
FTSE 100 26.97 18 - - - -
Morgan Grenfell UK
Ind Trk 21.14 65 64.57 38 113.93 44
Norwich UK Index
Tracking 22.02 56 65.96 34 116.90 37
Royal Life UK
Index Tracking 20.85 70 63.45 48 115.21 40
Sovereign
FTSE 100 27.61 16 73.99 10 - -
Virgin UK
Index Tracking 28.08 14 - - - -
Average 28.26% 22
Averages/
Tot.Funds 20.40% 140 59.41% 121 112.57% 111
In existence for less than a year:
CF Net PEP Tracker
Guardian UK 100 Index Tracking
NatWest UK Tracker
Scot Widows UK Index
Index trackers in UK Growth Class
Source for rankings: Hardwick, Stafford, Wright.
1 yr Rank
Marks & Spencer UK 100 Cos Acc 36.91 1
Midland FTSE 100 Index Acc 29.71 7
Averages/Tot. Funds in class 16.37% 157
Index Tracking Charges
Details and charges
Barclays Uni FTSE 100 0181534 5544.
PEP. 5% initial. 1.25% annual.
Direct Line FTSE 100 Tracker 0117 925 9099.
PEP. No initial. 1.1% annual. Exit 0.5%.
Equitable UK Index Tracking 01296 393100.
PEP. No initial. 1% annual.
Fidelity Moneybuilder Index 0800 414161.
PEP. No initial. 0.5% annual.
Gartmore UK Index 0171 623 1212.
PEP. No initial. 1% annual.
HSBC Footsie Fund 0171 955 5050.
PEP. No initial. 1% annual. Exit 0.5%.
HSBC UK Index 0171 955 5050.
No PEP. No initial. 0.5% annual. Exit 0.5%.
Kleinwort Benson UK Index 0171 956 6600.
PEP. No initial. 1% annual.
Legal & General UK Index 0500 116622.
PEP. No initial. 0.5% annual.
Lloyds Bank FTSE 100 01634 834000.
PEP. 6% initial. 1% annual.
Morgan Grenfell UK Ind Trk Inc 0171 545 6000.
PEP. 3% initial. 0.75% annual.
Norwich UK Index Tracking 0345 738393.
No PEP. 5% initial. 0.9% annual.
Royal Life UK Index Tracking 01277 842601.
No PEP. 5.25% initial. 0.3% annual.
Sovereign FTSE 100
Couldn't find the phone number!
Virgin UK Index Tracking 0345 900900.
PEP. No initial. 1% annual.
CF Net PEP Tracker
www.netpep.co.uk. 1% initial. 0.3% annual.
Guardian UK 100 Index Tracking 0800 282820.
PEP. No initial. 1.17% annual.
NatWest UK Tracker 0800 200400.
PEP. No initial. 1% annual. 0.5% exit.
Scot Widows UK Index 0345 678910.
PEP. No initial. 0.5% annual.
Marks & Spencer UK 100 Cos Acc 0800 363451.
PEP. No initial. 1% annual.
Midland FTSE 100 Index Acc 01392 602000.
4% initial. 1% annual.
Goggle-eyed? Yup! There are, however, a few interesting things we can note from these tables. First, there is only one www address (URL) among them -- that of netPEP. On no other advertisement was there a URL, nor was it suggested to me by any of the 19 representatives I talked to that I visit their website. That's not to say they didn't have one, just that they didn't tell me about it. Next, we see that there is a vast spread of performance, from Royal Life returning twenty-odd percent to Fidelity raking in thirty-six percent. "Great," says you, "I'll have half an ounce of your finest Fidelity please, heavy on the onions." That makes sense you would have thought -- choose the best-performing of the bunch. But (and why did you just know we were going to say this?) you're wrong. For on this occasion, we Fools wish to be average. We wish not to beat the market, we wish to keep our heads down and run with the pack. Market-beating returns mean greater volatility, or in other words a higher degree of tracking error. Over time, we wish to mimic the market. A fund that outperforms the market (or underperforms, although we're even less likely to want to choose one of those) is simply not tracking it very well. If it doesn't track it very well, it seems unlikely that over time it will mimic it, even less likely that it will outperform it and most likely that it will crash and burn. What we want is a tracker that has a proven record in tracking. There are a number of ways these funds actually try and follow the index, but the details really don't concern us -- all we're interested in is performance. The longer a fund has been in existence, the more reliable will be its past performance as an indicator of tracking finesse. As we can see from the tables, very few have even been in existence for three years, let alone five. If we do take a look at those that have been in existence for five years, we see that one of these is the Gartmore UK Index Tracker. Over the last five years, it has underperformed the FTSE All-Share Index by a bare 0.96%, and since its inception in 1989 it has returned 187.84%, underperforming the FTSE-ASI by 1.15%. This gives an annualised return since 1989 of 14.13%. One of the arguments against investing in managed unit trusts is that it is very hard to predict future performance from past performance. Why should this not be the case with index trackers too? Quite simply because they are not dependent on the skill of an individual or on a particular subjective strategy. This is a mechanical investment strategy and a good past record shows that the managers know their business. It is unlikely that something drastic is going to change that will mean that all of a sudden they no longer know how to track an index. Even if someone leaves, the expertise will remain behind and the basic philosophy of the fund will not change. To summarise, when choosing an index tracker, you are looking for the following:
1. Longish history. Be Foolish!
David Berger
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