|If trackers are cheap they are
ideal for first-time investors. But only if they track something
What are they?
'Tracker' is the word given to a particular style
of pooled investment. It is not a type of investment. All
pooled investments - Investment Trusts, Unit Trusts or the newer
kids on the block (OEICs and ETFs) - have the potential to be trackers.
The word 'tracker' refers to the investment style followed
within the fund.
Trackers are so called because they aim to track
a particular market index. An index is a representation of a market.
The most familiar in the UK is the FTSE100 (Financial Times Stock
Exchange 100). This replicates the results of investing in the 100
largest shares on the London Stock Exchange (LSE), weighted by size.
So the index tracks the aggregate market value of the 100 largest
companies. And a 'FTSE100 Index Tracker Fund" aims to do the same.
There are literally hundreds of different indexes
worldwide. And thousands of different tracker funds aiming to track
That sounds pretty dull.
So why do people buy them?
Beacause, embarrassingly for the industry, actively managed funds
(the opposite of trackers), with their high running costs, have
consistently failed to beat the indexes on average. Just one example:
85% of UK funds aimed at capital growth have failed to beat the
market over a 20-year period.
Trackers gain because they are cheap to run.
What's the point of expensive star managers if the evidence is that
they do not deliver? Trackers keep costs low by saving on fundamental
analysis and ephemeral stock-picking skills. Computers take the
decisions. And those cheap running costs translate into higher returns.
Tracker funds are therefore the first port of
call for an investor who wants to minimise his risk with a broad
exposure to a market, and are ideal for first-time investors. If
you are considering trackers you should also look at other low-cost
funds provided they are diversified. Exchange Traded Funds are often
the lowest cost trackers.
But make sure the tracker is tracking something
sensible for you. Some are quite specialised. Tracking