How does the FTSE All-Share Tracker Fund work?
When you invest in the stock market your money buys shares in companies. When companies are profitable their share prices tend to rise. Companies also pay out regular dividends to shareholders. These two factors can both increase the value of your investment.
Unless you’re an experienced investor, used to buying and selling your own shares, most people invest through an actively or passively managed fund which contains a number of different shares. Basically, an ‘active’ fund manager will try to beat the stock market by investing in a smaller number of selected shares that he thinks will do better than average. Whereas an index tracking fund is ‘passively managed’ – it spreads your money across the whole stock market index.
Both investments can pay off. And while the active fund has the greater potential upside, it’s also riskier than a tracker. It can do better than the stock market, or worse than it, depending on how good the fund manager is. In comparison, the tracker invests in the growth potential of the whole market. So you’ll never do better than the market, but your returns should always keep track with it.
Most experts agree that over the long term the stock market should potentially outperform almost every known investment. And the surest way to take advantage of the full growth potential of the market is our tried and tested investment approach called index tracking. With our tracker fund your money gets invested in the shares of every company listed on the FTSE All-Share Index, ensuring that whenever the index is growing your investment keeps track with it every step of the way.
Look how the UK stock market has grown over the last 20 years.
If you look back over any ten year period during the last 100 years, shares have outperformed gilts (government bonds) and cash deposit accounts in 8 out of 10 decades. Which pretty much sums up the stock market – it does have blips, and it isn’t guaranteed to always give you the best return, though mostly it has, as the statistics in this table show.
Annual % returns over the last 10 decades
| Shares | Gilts | Cash | |
|---|---|---|---|
| 1905-15 | -0.2 | -2.2 | -0.5 |
| 1915-25 | 3.9 | -1.1 | 0.8 |
| 1925-35 | 8.7 | 10.8 | 4.7 |
| 1935-45 | 2.4 | 0.3 | -2.3 |
| 1945-55 | 5.3 | -5.4 | -3.0 |
| 1955-65 | 7.3 | -1.0 | 1.8 |
| 1965-75 | 0.1 | -5.4 | -1.4 |
| 1975-85 | 11.0 | 5.2 | 1.5 |
| 1985-95 | 9.9 | 6.8 | 5.2 |
| 1995-2005 | 5.0 | 5.6 | 2.9 |
Source: Barclays Capital - Equity Gilt Study 2006. Remember your money is not at risk in a deposit account but it is in stocks and shares.
In a word, yes. One of the great myths of the stock market is that you only make money if the market is rising. Whereas the main key to your growth is really dividend payments. Companies regularly pay them out to investors and they increase the value of your fund, so even in poor stock market periods, your investment can still be growing away in the background.
To put this in context, if your great grandfather had invested £100 in 1899 and spent the dividends, his £100 would now be worth just under £200. If he’d reinvested the dividends in his fund, like our tracker does, his £100 would be worth £22,426 in today’s money. Which shows the huge importance of share dividends in growing your money. It’s not just about watching the FTSE index on the evening news.*
*Source: Barclays Capital – Equity Gilt Study 2006. £100 investment, end 1899 to end 2005.
Because share prices go up and down daily, it’s not a good place to put money you might need in a hurry, as you could get back less than you invested. You should be prepared to invest for at least five years to be fairly confident of a decent return on your money.
While past performance doesn’t guarantee future performance, historically the overall trend of stock market investments has been upwards. That’s why the longer you stay invested in the market the better you tend to do, and why it remains the No1 choice for professional investors looking to grow their money.
The risks of not investing are rarely spelled out, but are just as real. For instance your savings in a cash deposit account, considered risk free, can actually fall in value. If you are only earning 3% interest after tax, and inflation is 3.5%, your savings aren’t growing in real terms, they’re shrinking. Now that is scary.
