Today (Wednesday 27 April) is a significant one for FTSE 100 followers as it’s the anniversary of the index’s record closing level – 7,103 – a dizzyingly high number compared with today’s, which lurks around 10% lower.
That’s not to say that the UK as a whole is doing 10% worse though. The FTSE 100 represents the biggest companies traded on the London Stock Exchange and is dominated by financial, energy and mining companies, all of which have had a volatile time recently. In fact, one third of FTSE 100 companies have seen a share price rise since last April and the average UK Smaller Companies fund has returned 5.3% within the same timespan.
You can read more about life outside of the FTSE 100 in our story ‘A lesson from history: how sensible investing could have made you a million’.
Investors and would-be investors should also keep in mind that uncertainty over Britain’s future with the EU has unsettled markets and will continue to do so for the foreseeable future.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “It’s easy to get carried away with the twists and turns of the FTSE 100, but it’s important to bear in mind the headline index is heavily influenced by the performance of the largest stocks, so doesn’t give the full picture of how UK plc is doing.
“Active fund managers, particularly those investing in smaller companies, have largely sidestepped the worst of the problems encountered by banking and commodity companies since last April. As a result many fund investors have probably done better than they might expect over the last year.”
This boosts the argument for investing in active funds over passive (also known as trackers), but it’s worth bearing in mind that active funds do cost a lot more to hold in terms of their annual ongoing charges. Making what should be decisions for the long term – at least five years is the common advice – based on a single year of stock market performance wouldn’t be the wisest of ideas.
Rebecca O'Keeffe, head of investment at Interactive Investor says: "In theory, in a low interest, low return environment, where returns to active management may be less than the additional management costs, low-cost options such as tracker funds or ETFs make good sense. However, when markets are volatile – as they are now, there are good reasons for preferring active management where there is scope for a manager to add value by choosing which sectors and stocks to hold.
"Over the past year, when markets have been very choppy, investors who have chosen established actively managed funds, such as Fundsmith Equity, have been well rewarded for their decision. Although higher-cost, the ability for a fund manager to choose large or small cap stocks, to be over or under invested and to make aggressive asset management decisions can significantly pay off."
Choose an active fund whose manager has a consistent track record of outperforming the index in different market conditions, such as the CF Woodford Equity Income Fund, managed by Neil Woodford.
You can read more about the difference between the two types of funds in our article ‘Should you invest in tracker funds?’
If you want to get started with investing then read our article ‘How to invest in 2016: the basics’.