Personal Finance: Up the ante by slinging out the FTSE failures

THE HOLY Grail for investors is a system which will automatically outperform the average and will do so without too much effort or risk. For at least the last 70 years, since Foreign & Colonial set up the first investment trust to pool investors funds and use professional managers to outperform the market, the search for such a system has become increasingly complex and urgent.

Some investors swear by relatively simple methods, such as studying charts of the rise and fall of shares and indices. They aim to identify "trend lines" and turning points, to identify shares which are over or under valued. Others use banks of computers to crunch numbers and turn masses of data into conclusive evidence.

Professional stock-pickers have their own pet systems, such as George Soros and our own Jim Slater, whose Zulu Principle is based on identifying "value" in shares.

Some investment managers invest only in high-technology stocks or new issues, or look for shares which have reached rock bottom, while tip- sheets often swear by penny shares, on the grounds that the upside is bigger than the downside.

But there is ample evidence that after paying the fund managers' charges, the average managed fund, more often than not, under-performed the markets it was supposed to beat.

This led to the expansion of "tracker funds", which are designed to follow the average performance of the market they invested in, allowing them to dispense with expensive managers and cut charges to as low as 0.5 per cent.

Tracker funds run by the likes of Virgin Direct, Legal & General and HSBC have been helped by big companies having outperformed small company shares.

Active fund managers argue that, in falling markets, the freedom to sell shares and keep the money in cash would allow them to outperform trackers. That theory has not really been properly tested.

But there are obvious disadvantages in having to hold every share in the FTSE 100, even though some will perform a lot better than others. The system comes from Hargreaves Lansdown, the Bristol-based broker and investment manager, which is offering an Active Tracker PEP intended to add common sense to the virtues of a tracker fund.

The theory is simple. A tracker fund will outperform the average managed fund, butsome of the top 100 shares will perform better than others, because not all are equally well managed or in growth sectors. Anyone who can ditch the obvious duds will have a portfolio to outperform the index.

During 1998 the system kept Kingfisher but excluded Marks & Spencer, kept Scottish Power but excluded National Power, kept Tesco but excluded Safeway from the portfolio. The company doesn't claim to have got everything right, but says its "active tracker" outperformed the index by 5 per cent in 1998.

Exactly how it operates is a professional secret, but Hargreaves Lansdown has now decided to market it to investors, and see if it can be done again in 1999. The minimum investment is pounds 2,500, the initial charge is 3 per cent and the annual management fee is 1 per cent. Good luck!

Hargreaves Lansdown:

0800 850661