New option for ‘top 100’ investors

MANY investors seeking the safe haven of blue chip stocks have experienced a rocky ride over recent months.

Market heavyweights such as Qantas, Coles Myer, Lend Lease, Fairfax and News have taken a tumble as the market reacted to profit warnings or poor results.

Perth-based ERG is another high profile stock that has fallen out of favour.

This experience demonstrates how difficult it can be for individual investors to build a truly diversified portfolio, able to ride the ups and downs of market volatility.

Indeed the ASX’s own research, while trumpeting the fact that 40 per cent of Australians own shares directly, also reveals that about half of all shareowners hold only one or two stocks – typically stocks like Telstra2, NRMA or AMP.

One alternative is to invest in managed funds. Why try to pick winning stocks when you can place your money with the experts who manage large and diversified share portfolios?

The top performers among Australia’s investment managers seem to make a compelling case.

Colonial First State’s Imputation Fund has returned 19.6 per cent per annum for the past five years while Perpetual’s Industrial Share Fund has returned 16.4 per cent per annum for the past 10 years.

In both cases, investors acquire an indirect stake in about 80 listed comp-anies, hand-picked by managers who obviously know what they are doing.

Unfortunately, there are many other investment managers whose returns are less impressive, and in some cases very ordinary indeed.

So there is clearly risk involved in selecting an investment manager.

In addition, many investors prefer the transparency and familiarity of putting their money in listed investments.

For these investors, there is a new option.

A new product that started trading on the Australian Stock Exchange last week promises to track the performance of the country’s 100 largest listed companies.

IndexShares 100 can be bought and sold like any other share and are guaranteed to match the performance of the S&P/ASX 100 Index.

This guarantee is provided by sponsoring broker Salomon Smith Barney which hopes the new product will match the popularity of similar products in overseas markets.

Salomon’s Michael McCarthy said this type of product was launched overseas eight years ago and has since attracted A$100 billion of funds in North America and Europe.

As well as matching the performance of the top 100 stocks, IndexShares 100 offers holders access to dividends and franking credits of companies covered by the Index.

The new product is comparable in its objectives to an ‘index fund’ such as Vanguard Investment’s Australian Shares Fund, which tracks the S&P/ASX 300 Index.

A key difference is that IndexShares 100 are listed, so they offer the simplicity, pricing transparency and liquidity of other ASX-listed shares.

The annual management fee for the new product is 0.95 per cent, a little higher than Vanguard’s 0.75 per cent but about half the fee charged by most “actively managed” funds.

IndexShares 100 trade at approximately one thousandth the level of the S&P/ASX 100 Index. If the Index is at 2700 points, for example, each IndexShare would be valued at $2.70.

Salomon’s has calculated that the S&P/ASX 100 Index has returned more than 15 per cent per annum between October 1992 and February 2001, with all dividends reinvested and grossed up for franking credits.

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