Let it not be said that investing in a tracker fund is boring. People imagine that once you buy a tracker you sit there exposed to a bundle of the same old companies. Not so. Since netPEP was launched in April 1987 no less than 25 companies have dropped out to be replaced by 25 new young Turks raring to show their heels to the rest.

Rules of Entry

The entry qualification is size. This is measured in terms of a company’s market capitalisation which is calculated by multiplying the number of shares in issue by the current share price. So companies that issue new shares, say, to help acquire another company or companies whose share price sets a blistering pace find themselves in the top 100 knocking their less fortunate colleagues into the 2^nd division.

Bright New Entrants for Promotion

Of the 25 companies that joined the serried ranks of the big 100, 7 were in the financial services sector which caused some concern that perhaps the Index was over-represented in this area and was changing the character of the overall Index. But the financial sector was not the only one to be affected by the new entrants. Service companies and Utilities also featured strongly with companies as diverse as Misys, Sema and WPP Group joining in through the Services sector and British Energy, Telewest and Scottish & Southern in the Utilities.

Old Favourites Lose Out

The companies that ‘lost it’ were very well known past favourites like Guinness, Next, Rank, Burton, Burmah Castrol and British Steel. The one time Midlands Top Dog Manufacturer, Lucas Verity was also relegated to the 2nd Division. We even saw some soft shoe shuffling from the likes of Hanson and Dixons which started in the 1^st Division were relegated last season and this year were promoted. In Dixon’s case this was all on account of the major success of the new free Internet connection service from Freeserve.

Congratulations

All these changes naturally make it hard for Trackers to track the Index accurately – so many congratulations to BGI (Barclays Global Investors who are netPEP’s and netISA’s tracker managers. Despite all the comings and goings which run up costs that the Index does not take into account, they maintained a minuscule tracking error of 0.2% over 2 whole years. Well done.

Sector Changes

Below is a summary of the sector changes in the FTSE 100 Index over the 2 years of review

The Movers and Shakers

The top performers over the 2 year period since netISA started are interesting. Telecoms companies took the first and second place with Vodafone just pipping Orange to the post with a massive rise over the period of 300%. Hard on their heals was the outstanding Bank of Scotland who notched up a rise of 180% and its Scottish competitor Royal Bank of Scotland only a few percentage points behind.

Not surprisingly British Telecom was close to the top as were Utilities National Grid +93%, Centrica +89% and BG +84% close behind.

Expert Lose the Plot

We then have a large body of Financials filling a large number of the top 30 slots but out of a total of 18 Financial companies in the FTSE 100 Index 10 actually failed to beat the Index over the 2 year period. This runs quite counter to the reasons given by the active fund managers who try to beat the Index why they failed to do so. When the financial shares were soaring in price they said it was unhealthy to have so many banks and Insurance companies represented in a balanced portfolio. The fact is that 98% of them failed to beat the Index over this time so maybe the real reason they lost out was because they chose the wrong Financials!

Other sorry performers were Tesco, British Airways, and EMI and probably for the first time ever, Marks & Spencer. What a change of fortune.

Stats for All

For those of our readers who like to study statistics, over the 2 year period the FTSE 100 Index rose by 47%. We have examined the performances of those companies which started and finished in the Index without dropping out in the middle. Of these 0nly 26 companies actually beat the Index averaging rises of 100%. The remaining 50 companies which under-performed the Index managed an average increase in share price of only 11%, that is 36% below the index.

Conclusion

Here are some of our thoughts on investing in a tracker fund

• Don’t dismiss the Index as an average performer

• Beating the Index is far from easy as 98% of highly paid active managers have found.

• Index performance is NOT average performance – it is BETTER THAN average.

• The constituents of the Index are constantly changing as better and more successful companies are promoted and the less successful are relegated. What better stock picking process can there be than that?

As Warren Buffett said, "Buy a tracker for 70% of your assets and play around the edges with the rest to add value."