Throughout the period netPEP’s unit price has tracked the Index very closely and the chart below shows the weekly tracking differences. The significant ones are tagged on the chart.

Asian crisis

This excellent performance by the Index is attributable to a number of factors, not least the relative stability of the major western economies that have benefitted from the flight by investors out of Asian markets which are in crisis. Imagine the panic when a market like Indonesia can crash by 90% relative to Wall Street. This flight of capital to the comparative safe haven of the US , UK and European markets has been good for bonds and yields have been falling rapidly which has pushed equity markets higher.

The Asian crisis has, of course, given UK and US equity investors some cause for alarm. The shares of companies that export manufactured goods to Asia have been hard hit. Concern has also been expressed about the prospects for a torrent of cheap imports from Asia on the back of very cheap currencies resulting from the economic crisis.

Within the top 100 British companies, the performance has been diverse over the past 6 months. Orange heads the leaders list with shares up 87% over the period which compares with manufacturer GKN whose shares are down 37% in anticipation no doubt about the adverse effects of problems in Asia. But these performances are exceptional and the combined effect on the Index overall is very small since together they account for only 1% of the whole Index.

Sector differences

Looking at sectors, the impact of individual shares is more noticeable. The biggest sector, Financials (27%) shows an average increase of 4.42% whereas Consumers Goods (Pharmaceuticals and Food Manufacturers), which account for a total of 18% of the whole, recorded an average rise of 19%. These figures bear no resemblance to the size-weighted performances of the sectors which are much more relevant since they reflect a true picture of the contribution to performance that each sector makes to the Index. Hence Cadbury Schweppes up 43% which represents 0.88% of the Index contributed less to the Index than SmithKline Beecham which was up only 12% representing 3.9% of the Index.

Arrivals and departures

There have been a number of exits and new entrants to the FTSE 100 Index over the past 6 months reflecting merger and acquisition activity . Commercial Union and General Accident combined to make CGU, Grand Met and Guinness created Diageo and Nycomed acquired Amersham. Sparkling share price performance allowed Mysis and Compass to join the elite group and relative decline in unfashionable sectors caused Imperial Tobacco, Smith & Nephew, Tate & Lyle and Imperial Tobacco to drop out. Activity like this makes it difficult to keep the tracking differences of any Index Tracker to within the estimated limits because the costs of dealing and rebalancing the portfolio are not reflected in the Index. The results achieved by Barclays Global Investors are very reassuring and illustrate the importance of being the largest tracking fund managers in the world and being able as a consequence to negotiate levels of costs and charges which impact very little on the funds overall performance. The tracking differences since netPEP was launched are shown below.

Big versus small

The performance of large cap shares versus the small caps has been a subject of raging debate over recent years with the large caps which make up the FTSE 100 Index outperforming the rest of the market by a very wide margin. Supporters of small companies have been pointing to the recent reversal of this trend as illustrated in the table below where the Mid 250 and the Small Cap indices have shown a rise of + 5.5% over the last 3 months against a modest fall by the FTSE 100 Index over the same period of –1.5%. Between 16^th and 19^th June both the SmallCap and the Mid 250 Indices have lost all of this ground falling 3.3% and 3.1% respectively against the FTSE 100 Index which rose by 2.7%.

This continuation of the large cap theme is explained by the nervousness of large foreign institutions. Now the securities industry is truly global their portfolios contain increasing proportions of overseas investments. Their over-riding concern is to invest in well researched companies which offer a level of liquidity which small companies cannot provide. Coupled with the actions of local UK institutions whose portfolios have been under-performing on account of under-weight positions in the FTSE stocks, the share prices quickly rebound after short term periods of weakness as UK institutions top up their holdings to match the Index performance more closely in the future.

Therefore the place to be is the large cap shares just as it has been in America for the past few years.