Time for a spring clean

Justin Modray, of Bestinvest, the independent financial adviser, says that the first thing to check is how your investments are divided among broad areas such as shares, bonds and natural resources, along with the geographical breakdown of your portfolio.

“The split will determine the portfolio’s risk profile and whether it is geared towards income or growth,” he says. If it is skewed towards one sector, it can increase the risk or restrict your overall return.

He adds: “If someone is very overweight in larger companies, by shifting into emerging and smaller companies it may only increase the risk a little, but it may increase the scope for returns to a much greater extent.”

Once you have completed this “asset allocation” exercise, you will need to audit the performance of your individual holdings. The advent of internet sites such as Morningstar, TrustNet, ADVFN and Hemscott, which allow you to compare the performance of your investments online, make this process much easier.

This may prompt you to make some changes. If you have a multiplicity of funds, reshuffling your investments will be made easier if done under a single umbrella such as a fund supermarket. These relatively recent arrivals allow you to buy a range of funds from a range of providers on one website. Fidelity’s FundsNetwork has more than 900 funds to choose from.

Fund supermarkets can also be a cheaper way to manage your portfolio. Although rebates on initial purchases may be similar to those elsewhere, Jason Hollands, of F&C, the fund management group, points out that using the supermarket costs nothing extra, but switching between one fund and another is significantly cheaper at about 0.25 per cent.

If dealing with the make-up of your portfolio is not your bag, another option is to effectively hand over management to a “fund of funds”. These are investment funds which employ a manager to make the choices for you.

The extra cost of the multi-manager’s services may be one percentage point, but Mr Hollands argues that it may still end up cheaper than running the equivalent portfolio yourself.

If you balk at the extra cost and want to own shares directly, a self-select Isa will allow you to tailor your investment collection to your own needs. Two offerings worth considering are from Hoodless Brennan and Comdirect. The former charges £50 a year and £7 a trade. At the latter, the costs are £25 and £12.50 respectively. Comdirect also claims that keen pricing saved an average of more than £8 per deal for its customers last month.

MAGNUS GRIMOND

AS THE FTSE 100 index of leading shares burst through the 5,000 mark this month, the picture is starting to look brighter for tracker Isa funds.

Many Isa investors put money into trackers in the late 1990s, but were hit hard when these funds, which replicate the performance of a stock market index, fell sharply from April 2000 onwards.

Since the upturn in March 2003, tracker funds have benefited on the back of a 50 per cent share price rise, fuelling more talk about the relative merits of active and passive funds, or trackers.

Where trackers score is that they represent a low-cost way of gaining exposure to the stock market. Most actively managed funds charge an annual fee of 1.5 per cent, but funds such as M&G’s Index Tracker and F&C’s FTSE All-Share Tracker charge just 0.3 per cent. This is an advantage in the present climate of low inflation and low returns, where steep charges can be a heavy drag on performance.

Trackers are also easy to understand. A spokesman for Legal & General, whose £3 billion UK Index fund, managed by Ian Clarke, is the biggest tracker of all, says: “We do what it says on the tin. When the market goes up, our fund goes up, and when the market falls, our fund falls. Markets tend to go up more than they go down, so trackers should rise in value in the long term.”

Yet critics of tracker funds say the two most common indices that they track, the FTSE all-share and the FTSE 100, are dominated by the largest companies. As a result, they are heavily skewed towards sectors such as banks and oils and do not give broad exposure to the market or diversify investors’ risk.

The top ten FTSE 100 companies account for about 50 per cent of its value. If those ten shares don’t perform, neither will the tracker.

Another handicap is that trackers have to buy new shares that enter their index and sell those dropping out, so they tend to buy high and sell low. Some trackers follow their chosen index more exactly than others.

But how have trackers done over five years, during which markets have both risen and fallen? The answer is that returns have varied, depending on the particular index.

The runaway winner is the fund that replicated a mid-cap index: HSBC’s Tracker FTSE 250 Index fund. Figures from TrustNet, the financial research group, show that it has returned 23.5 per cent over the past five years.

FTSE 100 and all-share trackers performed more poorly because the blue chips that dominate both indices were outshone by small and mid-cap stocks. All-share trackers did better than FTSE 100 trackers because they have some mid-cap exposure.

Justin Modray, of Bestinvest, the independent financial adviser, says: “There is a place for both trackers and actively managed funds in a balanced portfolio. You can have trackers to gain exposure to blue chip stocks in the UK and US, and then pick some specialist funds.

“Our preferred tracker is L&G’s UK Index fund because it has low charges, follows the all-share, rather than the FTSE 100, and is available through the Cofunds fund supermarket.”

MARK ATHERTON

LINKS

Cofunds: 0845 6033001, www.cofunds.co.uk; FundsNetwork: 0800 414161, www.fidelity.co.uk/ fundsnetwork; Comdirect: 0870 6006044, www.comdirect.co.uk; Hoodless Brennan: 020-7538 1166, www.hoodlessbrennan.com; F&C: 0845 6006166, www.fandc.com.