Until now tracker and index funds have only been constructed with reference to the market capitalisation of each constituent company. The market capitalisation is calculated by multiplying the number of shares a company has by its share price. So, if the share price goes up 10% so does the market value of the company. Sometimes, as in the dot com bubble, share prices rise simply because sectors and companies become popular. That can make them expensive and vulnerable to sharp collapses when sentiment changes. In few other walks of life do we assess things purely on price. We always seek to find some measure of quantity.
Our preference is to use a fundamental measure to assess companies.
Fundamental Tracker only runs one fund, The Munro Fund. It uses gross cash dividends to create a portfolio. Follow the link in the footsteps to learn more about this unique fund.
Rob Davies' Munro Fund Blog otherwise known as the Munro Musings takes a regular look at the world of investments offering up to the minute comment and clarification.
Many investors expect, or hope, to beat "the market" by selecting a fund that chooses a limited number of shares from within a specified index. This added value from stock picking, usually called active management, is known as "alpha". In reality this is incredibly difficult because so many other people are trying to do exactly the same thing that any anomalies are quickly identified and exploited.
The alternative is to select a fund that invests in all shares the market and is known an passive investing. This reduces the risk of underperforming and losing more than the market. It does though limit the upside. However, as few funds consistently beat the market, but lots regularly underperform, this should make for a better overall return. It is not that so-called active funds cannot beat the market, it is just hard to spot them in advance. The advantage of passive investing is that it gives the return of the market at low cost and this is more reliable ride.
To understand more about the stock market and the merits of investing in equities there is a fuller account at www.betainvestor.co.uk.