Credit Suisse retail UK equities head Graham Ashby has warned investors to limit excessive exposure to FTSE 100 or FTSE All-Share trackers, as the indices have become too exposed to the oil and mining sectors.
Ashby says with the addition of two new resources companies to the blue-chip index, UK equity tracker funds are now too heavily weighted to historically very cyclical industries.
At the end of March, UK tracker funds had £24.5bn of funds under management and accounted for almost a third of net retail inflows over Q1.
Ashby says while index trackers offer a cost-effective entrance to the UK equity market, advisers may not realise how concentrated the indices have become.
“The top ten stocks in the FTSE 100 Index now includes just one pharmaceutical stock, one telecoms company and one bank – the rest are all in the mining or oil and gas sectors,” he says.
“Index trackers will also be major participants in the raising of additional equity by the banking sector, even though many of these stocks are going to pay a much lower level of dividend than in the past.
“Unless dividend growth in other parts of the market accelerates, this could mean the yield on offer from index trackers falls.”
Credit Suisse urges advisers to minimise tracker exposure and avoid actively managed funds designed as ‘index huggers’.
“We also believe that every stock in the portfolio should make an impact upon performance, and set target minimum and maximum holdings regardless of the index weighting,” Ashby says.
“We believe this approach will provide investors with above average returns combined with a secure income stream over the longer-term.”IFAonline
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