MANY people want to invest directly in the stock market, but are worried about the volatility of share values. They may also be uncertain about which stocks to choose and which to avoid. Stock market tracker funds - as opposed to trackers bonds - may be the answer for the cautious investor.
Tracker bonds have been widely promoted for about five years, and a number of banks, life assurance companies and stock brokers have offered such bonds. The companies guarantee a return of your capital after a designated period; some even guarantee a certain amount of growth.
Some invest in a single stock market, others in two or three, some in global markets. Charges are relatively low and transparent. If there is a weak point in these bonds - and innately conservative investors would disagree - it is that the growth potential of the underlying investment is constrained by the need to put a great chunk of the funds into deposits in order to support the capital guarantee. As a result, returns from these trackers are never going to be particularly high, though they should beat the guaranteed returns available from An Post savings certificates or SSAs.
Not that long ago, the most popular alternative to direct stock market investment was the unit linked managed fund - the life assurance vehicle which gave small investors with regular sums a chance to buy units in a fund that was made tip of a conservative mixture of shares, cash, government stocks and property. Though they carried no guarantees, there was opportunity for growth, but also a measure of stability from the other investments.
The problem with managed funds was not only were they expensive to set up, with high initial charges and commissions which were repeated every year when a policy was indexed, but they have also been shown to be quite unsuitable when as part of a pension fund, they were universally applied. Whether you were 55 and approaching retirement soon, or 35 and facing another 30 years of work, the catch all and cautious managed fund was the product for you.
An increasing number of pension fund investors are now seeking independent advice and active fund management which acknowledges that equity investment is the essential ingredient in building up pension fund growth.
A very real alternative to the unit linked managed fund for savers/investors have been UCITS and unit trusts - collective equity investment schemes operated directly by the fund manager, often huge international companies with tens of billions of pounds under investment. Available here in Ireland since exchange controls were lifted at the beginning of the 1990s, but not widely marketed, UCITS and unit trusts operate under a more transparent charging structure in which the price of the value of the units in the trusts is based on the real value of the securities in which the trust is invested. They are the main investment vehicle in Britain and are particularly popular in the form of tax efficient PEPs - Personal Equity Plans.
Share volatility is a common worry for all small investors, and British unit trust fund managers believe they have come up with a credible investment option - the stock market tracker or index fund. What makes this different from a tracker bond, is that your investment buys a stake in each and every company of a particular stock market and tracks the daily performance of the market as it moves tip and down the index.
Index trackers do not carry capital guarantees, but the attraction for cautious or inexperienced investors is that the shares represented by a major index, such as the FTSE 100 in Britain or the S & P 500 in the United States, are the top performing companies in those markets. A stock market crash will of course result in a fall in value, but recovery is nearly always just as likely. This was certainly the case after the 1987 crash.
The popularity of low risk index tracker funds in Britain over the past year or so has resulted in the creation of global index trackers, offering exposure to the other countries stock markets through a single investment. According to recent reports, the Kleinwort Benson Global Equity Trust - the global index tracker fund - has grown by 23.65 per cent in 1995, exceeding the FTSE 100 AllShare Index which grew by a very respectable 18.5 per cent. The appeal of the global trackers will be the wide exposure to successful international equities and the balance they offer an investment portfolio.
The technicalities of these funds is quite simple, by Graham O'Neill, fund manager for Taylor Asset Managers who is master agent in Ireland for big UCIT fund managers such as Fidelity and HKSB (Hong Kong Shanghai Bank), the latter the Footsie Fund, which tracks the FTSE100 index.
"The weighting of the fund investment in the index is done on a strictly mathematical basis," explains Mr O'Neill. "If the value of one company goes way up, you weigh it more heavily against the others. But the value of your fund of stocks must keep proportionately in line with the movement of the index. The deviation of the HKSB fund from the movement of the index, for example, is a fraction of one per cent."
Index trackers, which can be purchased with a monthly premium or by lump sum, are not available here - yet - but Irish investors can arrange to buy into UK based funds through Irish broker intermediaries. The cost of such an investment varies between fund managers and can include initial charges plus annual management charges and broker commissions and because you are going through Britain you will incur foreign exchange charges and risk the cost of currency fluctuation. The nearest thing to a tracker index here was a product Irish Life brought out last year which tracked the performance of some top performing Irish stocks.
