The success of Index Tracking Funds over the past couple of years has been

remarkable.

Millions of people with cash to invest are not choosing to buy their own shares, are avoiding the traditional "managed" funds and are plumping for funds which simply "track" the FTSE index.

These funds work, in effect, by simply buying every share in sight and keeping them roughly in proportion to their share of the stock market as a whole. Very little management and no skill is involved.

Why are they so popular? Partly, of course, because the stock market itself has been having a very healthy run. But mainly because the majority of the managed funds, those which pick the best shares in which to invest, have actually been doing worse than the stock market as a whole.

On the face of things this is remarkable. Throughout the seventies and eighties the managed funds consistently beat the market. Of course they did.

They were assisted by expert reports and detailed analyses which were not avaliable to ordinary investors.

So the funds beat the index and the individual investors, those who bought their own shares, lost out.

Now if it is true that the managed funds have been doing badly then it can only mean that the individual investors have been doing rather well. The market, after all, reflects a balance of supply and demand. It is no more possible for everyone to underperform the market as it is for everyone to beat it.

What is more, the current popularity of Index Tracking Funds has probably increased the opportunities for individuals to do well. These funds rarely invest in shares outside the top 250 so they miss the growth prospects of smaller companies. Also, if all these Funds are simply buying every share pro rata to its size, then who is deciding which goes up and which goes down?

So when we read that people in the City are earning megabucks salaries because of their much vaunted fund management skills, what exactly are they being paid for? For running funds which do worse than the market? Or for following a simple buying plan that would not challenge the intellect of a fourth former?

The message is clear. If their salaries have to be supported by fees charged on your investments then don't pay them. Do it yourself, buy a book (Jim Slater's is the best) and beat them at their own game.

Converted for the new archive on 30 June 2000. Some images and formatting may have been lost in the conversion.