Volume 1, Issue 4 22nd November 1997

FTSE 100 Index – still some steam left?
By Richard Carswell
Investors can be forgiven for feeling battered and bemused by the volatile ups and downs in the past three weeks which were sparked off by economic problems in Asia. One wonders why a collapse in share prices in Bangkok should upset the UK to the extent that it has. Not long ago it was accepted wisdom that investors should diversify geographically in order to spread risk. This worked well until the securities industry became globalised with the arrival of mega-mergers and acquisitions. Recent examples include Swiss Banks buying British Investment Banks (Credit Swiss First Boston/BZW) and a US Investment Banks buying British Investment Managers (Merrill Lynch buying Mercury Asset Management).

Instead of diversification it seems that liquidity matters most in the minds of the professional fund managers. These mega-mergers create massive combined fund management operations with the consequence that transaction sizes are becoming huge.

This affects equity markets in two important ways:

* Increased volatility with money managers trying to avoid market falls

* Greater concentration in the top stocks because only these offer the appropriate level of liquidity for managers to get into and out of stocks at short notice.

The implications of this for investors in netPEP Tracker Fund are good since the FTSE 100 Index comprises around 75% of the total value of Britain’s companies. Bear in mind that the FTSE 100 Index is the one which most fund managers use as their performance benchmark and it is this Index which they find is the most difficult to beat. This is because of its concentration in the Financials and Services (ie the big banks and food stores. So how well have the fund managers performed against this Index? Not very well. In fact very badly.

NOT ONE UK BASED UNIT TRUST SUCCEEDED IN BEATING THE INDEX

(according to Reuters Hindsight offer to bid price statistics over 12 months to 15th November 1997).

And the lesson from this? If you can't beat the Index, you should join it because the risk of underperformance is too great
This document is issued by MBO Advisory Partners who are regulated by the FSA. Any opinions expressed herein reflect best judgment and information at the time of writing and are subject to change without notice. Reference(s) to any investment(s) in this document is/are not an offer or solicitation to buy or sell by MBO Advisory Partners or any named contributors to this document. Remember the price of units and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. PEP and ISA tax reliefs may change in the future and their value will depend on your individual circumstances.
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