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THE INVESTOR
IN YOUR INTEREST
ACTIVE BETS
Although the simplicity of index tracking funds is helping their
popularity, for better long-term results it’s sensible to get active
By Heather Connon
T
here was much fanfare in
February when the FTSE
100, the index of the UK’s
leading shares, nally closed
above the peak achieved in
December 1999, before going on to break the
7,000-point mark in March for the rst time.
But despite the celebrations of the record
high, there was actually little for investors
to celebrate – a zero return over 15 years is
pretty poor.
However, only those investors who chose
funds that tracked the FTSE 100 – and who
were unlucky enough to have bought right
at the top of the market – will have had to
wait that long for their investment to recover.
Many active fund managers have made good,
positive returns over the past 15 years.
Yet passive, or index tracking funds,
are enjoying a surge in popularity:
according to statistics from the Investment
Association, trackers accounted for 11.3%
of funds under management at the end of
January, up from 9.7% a year previously.
The FTSE 100’s performance over the past
15 years is a clear demonstration of the pitfalls
of passive investment. Back in December 1999
internet fever was at its height and technology,
media and telecoms (TMT) companies
accounted for more than a quarter of the
index. In hindsight, that was a classic bubble
and the share prices of most TMT companies
fell sharply. Passive funds tracked the boom
and subsequent bust.
The technology boom was an extreme
example, but stock markets are often
characterised by dramatic shifts in sentiment
towards particular sectors. In the run-up to
the nancial crisis in 2007, banks were in
great demand; both for their dividends and
their growth prospects. Now, many of their
share prices are a fraction of their peak and
many of their dividends have been cut or
suspended.The benign economic climate
in the early part of this century, and the
emergence of China as a leading economy,
sent the shares of mining companies soaring
amid predictions of the start of a commodity
super-cycle.The global economy is now much
more subdued, as are mining share prices.
Skilled active fund managers, who decide
where to invest regardless of the composition
of their benchmark, can identify these periods
of over-optimism and avoid buying stocks
at in ated prices. Indeed, one of the UK’s
most admired managers, NeilWoodford,
was criticised for shunning tech shares when
the hype was at its peak, although their
subsequent performance meant his decision
was vindicated.
Index tracking funds, however, have to
ride the booms and busts.As they have to
own the entire index, or at least use
quantitative techniques to replicate it, they
can only mirror its performance. Indeed,
while the charges on tracker funds are
typically lower, once they are taken into
account an investor must, by de nition, do
worse than the index.When markets are
