Tracking down the business

Investors have traditionally used index tracking funds to follow high-profile indices such as the FTSE 100 or All-Share. But funds are now heading off the beaten track to follow a range of indices, including European, US, Japanese and Far Eastern markets, as well as specialist sectors such as technology.

Investors have traditionally used index tracking funds to follow high-profile indices such as the FTSE 100 or All-Share. But funds are now heading off the beaten track to follow a range of indices, including European, US, Japanese and Far Eastern markets, as well as specialist sectors such as technology.

No longer a bread and butter product, trackers are becoming a little more exotic.

Index trackers work by dispensing with the active fund manager whose job it is to buy and sell stocks, and replicating the movements of a particular index instead. Although Barclays launched the first in November 1967, trackers did not grip investors' collective imaginations until Virgin launched its Index Tracking Trust in 1995, following the FTSE All-Share. The fund now manages £2.2bn for 200,000 investors.

Buoyed by the success of trackers in recent years, asset management houses have launched funds to track almost every conceivable index worldwide. Advocates of trackers have long argued that they combine top performance with low charges - but does this new breed of tracker match up?

Technology trackers have inevitably figured highly in launches over the last year. In November 1999 Close Fund Management launched the Close FTSE techMARK tracker to follow the FTSE techMARK 100 index, which was set up by the London Stock Exchange weeks before.

Close Fund Management managing director Marc Gordon believes tracking can work for specialist indices. "Technology encompasses many areas, including internet, technological infrastructure, computer hardware, WAP technology and a multitude of different sub-sectors. It is almost impossible for an actively-managed fund to have the expertise to follow all these areas," he claims.

Gordon argues that trackers reduce the risk that a fund manager will miss the next Microsoft or Cisco Systems. Because they have no fund manager, they also avoid the danger that a star performer will leave for pastures new and threaten future performance, as happened recently with the departure of the management team behind Henderson Global Technology (see page nine).

Close FTSE techMARK grew 46 per cent over the last 12 months, a period that includes the surge in technology share values at the turn of the year, and subsequent plunge in April. By comparison, popular actively-managed technology fund Aberdeen Technology grew 50 per cent over the same period.

Two new technology trackers have been launched this autumn tracking the new FTSE European technology index - the Euro e-TEX fund, also from Close Fund Management, and the FTSE eTX Innovation Index Fund from asset management house Themis.

Another technology tracker, Investec Asset Management's Guinness Flight Wired Index, launched in August last year, tracks an index set up in June 1998 by journalists on US techie magazine Wired. This fund invests in tech giants such as America Online, Nokia, Vodafone and Yahoo, but also companies that are not dedicated technology companies, including Wal-Mart and Walt Disney.

Fund director Philip Saunders says non-tech companies are included in the Wired index because they use technology to drive efficiency, or will benefit generally from the technological revolution. Performance so far is hard to gauge as technology funds have struggled over the last six months, and Wired grew just 1.79 per cent in that period.

Justin Modray, investment expert with Chase de Vere, says: "Companies held by the fund are spread quite widely through different sectors, different types and size of business. The fund lacks a consistent focus." He believes active managers can outperform trackers in specialist and volatile areas. "This sector allows a good manager to produce excellent performance through careful stock picking. Although admittedly, if the manager gets it wrong the losses could be even greater."

He says the drawback with the Close FTSE techMARK fund is that it only tracks UK technology companies, when most technology growth is powered by American companies.

If technology tracker performance is hard to gauge as yet, charges are not. Trackers are generally cheap to buy, because investors do not have to fund the cost of fund managers and company research, but this is not the case here, where charges are similar to those on actively-managed funds. Close FTSE techMARK has an initial charge of 4.75 per cent and an annual charge of 1.15 per cent, while the Wired fund charges 5 per cent initial and 1.25 per cent annual. By comparison, M & G has no initial charge on its tracker and an annual fee of just 0.3 per cent.

Investors who want to act ethically when buying their investment fund have a choice of trackers. The NPI Social Index Tracker was launched in November 1998, and aims to track the performance of companies with a strong social and environmental record. Legal & General launched its Ethical Fund in August 1999. The fund tracks the FTSE 350, but filters out companies that fall foul of its ethical criteria, for example those involved in animal testing, water pollution, deforestation or involved in regimes with human rights abuses.

Trackers fans can also invest in the US, Europe, Japan and Far East through a range of funds from Legal & General, HSBC, Norwich Union, AIB Govett and others. Legal & General runs a multi-tracker covering these four markets and also the UK. Investors can buy all five as an ISA and switch between funds at no extra cost. There are no initial charges on the funds, while the UK fund charges 0.5 per cent annually, and the international funds charge 0.75 per cent.

HSBC runs trackers following the FTSE 250, and US, European, Japanese and Pacific markets. But head of savings and investments Alan Gadd say: "Trackers work best in the UK and US, where company information is easier to get, and they should make a good core holding in your portfolio. In Japan, the Pacific and to a lesser extent Europe, accurate tracking is difficult, and active managers are more likely to beat the index," he says.

Investors wanting a global spread of companies should consider Norwich Union's International Index tracker, which grew 100 per cent over the last five years, and Premier Global 100, which grew 109 per cent over the same period.

But for a really offbeat tracker, watch out for the Govett US Bear fund. This is designed to track the US index, but in the wrong direction. If the index rises 10 per cent, the fund should fall by a similar amount. "It is a short-term holding for those people who are feeling bearish on the market, which many people have been for a hell of a long time," says marketing manager James Rainbow. The fund has rewarded the bears recently, growing 11 per cent over the last six months. Over the past five years, when markets have risen strongly, it dropped by 38.55 per cent. Govett also offers funds tracking Japan and the US, both with high initial charges of 5 per cent and 3.5 per cent respectively.