Rogue trackers exposed


A NEW guide reveals vast differences in performance between some of Britain's biggest index tracking funds. The tracking error was so bad on one fund that including all charges, it would have under-performed the index it followed by an appalling 12%.

Tracker funds, which should exactly replicate a particular index (such as the FTSE All-Share), are often praised for their low charges and ability to beat the average actively managed fund over the long term. But Bath-based financial adviser Chartwell Investment Management, which compiled the guide, says not all are so cheap and that many are falling way behind the index they aim to mirror.

Chartwell has named its favourite trackers for various indices based on a combination of the lowest charges and the most accurate historical tracking. The firm is particularly impressed by HSBC's tracking skills. Tracking error over the past year and annual charges are in brackets.

The last two trackers are the only to carry initial charges because they follow more specialised indices.

Patrick Connolly of Chartwell said: 'People often only look at what the charges are on an index-tracking fund. These findings show tracker error is equally important.'

Chartwell's research shows that over five years, Legal & General's UK Index Trust followed the FTSE All-Share closest, slipping behind just 3.5% in total. But the Deutsche UK Equity Index ended up a massive 19.5% below where it should have been.

Scottish Amicable's £63m FTSE 100 Tracker fund comes off badly on both tracking performance and charges. It takes 4.75% of all new money going into the fund and then another 1.45% each year. It slipped behind the Footsie by nearly 6% in the year to 3 August. An investor parting with £1000 would have expected it to fall to around £870, in line with the 13% fall in the Footise. But tracker error and charges would mean the fund would only be worth £750.

Connolly said: 'There's absolutely no excuse for a tracker fund applying those sorts of charges any more. The maximum people should pay is 1%. They should also look for a fund with a historically low tracker error. It's the only indicator of how closely a fund will track an index in the future.'

A wide range of technical factors influence a tracker's faithful following of an index, such as whether it exactly replicates an index or whether it sample buys and sells shares so that it is roughly the same. Replicating the FTSE 100 is easier with just a handful of blue chips to mirror, but tracking, say, the FTSE All-Share's 800 members would be trickier. That's when sampling comes to the fore.

Advisers say it is impossible to say which index will perform best so most investors should stick with the one they are most familiar, such as the FTSE All-Share for UK investors. The lowest charging FTSE All-Share trackers are offered by Hargreaves Lansdown (0.25% a year) - but clients must part with a minimum £500 lump sum with no option to invest monthly or Isas from M&G (0.3%) and Abbey National (0.35%). None of these funds carry initial charges or exit penalties.

For a copy of the guide call Chartwell on (01225) 446556.

Rogue trackers exposed

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