The yardstick arrives

Private investors who use stockbrokers to advise them on their equity investments have always had problems in the performance of their portfolio. From this week, their efforts will be made easier by the joint launch between the FT-SE and the Association of Private Client Investment Managers and Stockbrokers (APCIMS) of three new indices, providing a yardstick against which to compare their portfolios' performance.

The indices aim to provide private investors with a tool that will give a visible comparison of returns from income, growth and balanced funds.

They will also provide a comparison basis from which investors can review their asset allocation and structure of their portfolios together with their stockbroker or fund manager.

Finally, the indices aim to provide an industry-wide benchmark for assessing the performance of discretionary fund managers.

Michael Read, head of fund management at Greig Middleton, and an APCIMS board member, says: "Private investors and trustees have long been waiting for readily accessible, highly visible and easily understandable benchmarks.

"There is a real need for such measurement tools and I think investors will be pleased that information which has previously been available to institutional investors is now available to them cheaply and conveniently."

The three indices are based to the key needs of investors: for income, capital growth and a balanced portfolio. A survey of the model portfolios will be carried out quarterly and used to determine the weightings of the asset classes within each of the three indices.

Although the survey will be conducted quarterly, the index weightings will be based on the annualised portfolio weightings, in order to maintain continuity.

In determining asset allocation, the performance of UK equities will be measured by reference to the FT-SE All-Share index.

Foreign equity performance will be measured by reference to the FT/Standard & Poors All World Index, without UK stocks. Bonds and cash will be assessed by reference to FT-SE Gilts All-Stocks index.

A sample of leading discretionary private client fund managers showed the average allocations for model portfolios changed according to whether they were income or growth producing, or balanced.

Indices will be calculated by FT-SE International and both capital and total returns for private investors will be published. The underlying return calculations will assume the private investor purchases and holds the underlying stocks.

Weightings will be adjusted at the end of each month to maintain the chosen weightings for the asset classes within each private investor index.

Back histories will also be created, starting from 1986, in order to give a rough-and-ready reckoner of indication of historical performance.

Experts at APCIMS who collaborated in drawing up the indices agree that they may not provide a perfect model for all clients.

Michael Read at Greig Middleton points out: "For all sorts of reasons the construction of a client's portfolio of investments and its performance is unlikely to exactly mirror the indices.

"Our benchmarks are not perfect. For example, they do not allow for a client's requirements not to invest in certain sectors of the market, nor do they take into account the capital gains tax constraints. None the less, they will be a very useful guide and will provide a good discipline for the industry.

"In the main, we find our clients at Greg Middleton want to participate in growth as the market rises as well as obtaining a reasonable and growing income.

"They recognise that we are not superhuman and do not expect us to achieve `top dollar' appreciation all the time. They want safety and responsible investment management.

"As a by-product, [these indices] will show over time how badly bank and building society deposits have served savers"