There are several factors that matter when it comes to index funds: the investment characteristics of the index being tracked, costs and the fund manager’s ability to track the benchmark (which is closely related to costs). This fund is superior in all of these respects.
This offering tracks the FTSE All Share index, which offers broad UK equity-market exposure. The benchmark accounts for virtually all of the UK’s market capitalisation, and is an aggregate of all firms in the FTSE 100, FTSE 250, and FTSE Smallcap indices. As a result, the All-Share index is reas
onably well diversified down the market-cap line, though it’s worth noting that the FTSE 100 takes up the lion’s share (80%) of the benchmark – a reflection of the structure of the UK equity market. Investors who desire more mid-cap exposure will need to take this into account in planning their portfolios.
Costs are a paramount issue when selecting index funds. Given that tracker performance in a given year should equal the benchmark return less the fund’s total expense ratio plus transaction costs, investors should aim to own the cheapest fund they can find. This offering excels in this regard. After lowering its annual management charge (AMC) from 0.5% to 0.1% back in September 2005, the fund’s TER is now down to 0.3%, making it the cheapest index fund available directly to retail investors. At least one other index fund can be had for less - the HSBC Instl FTSE All-Share fund has a TER of 0.56%, but Hargreaves Lansdowne rebates that down to 0.25% for investors in its Vantage fund account. Still, the Fidelity fund is very good value for money, and has the advantage of being broadly available to investors without having to depend on third-party rebates.
Further, we think investors are in good hands with manager Riccardo Curcio. Though he’s only managed this fund (and two other Fidelity index funds) since April 2004, he shadowed this fund’s previous manager for six years prior to that, and has been a part of Fidelity’s quantitative team for just as long. In addition to using some derivatives and options techniques, he holds all of the firms in the FTSE 100 and FTSE 250, but with only a representative sampling of the Smallcap index. This makes sense, given that the tail end of the Smallcap index is an insignificant proportion of the All-Share as a whole and could present liquidity problems for the £457m (as of January 31, 2007) fund. The results are good – from April 2004 (roughly when Curcio began running the fund) to January 31, 2007, the fund generated an annualised return of 17.06%, versus the index return of 17.88%. In comparison, the average FTSE All-Share index fund over the same time period delivered an annualised return of only 16.69% (the average calculated with the fund’s oldest shareclass excluding this Fidelity offering).
With low costs and able management, we think this fund is a great option for investors seeking broad exposure to the UK equity market.
