Our content this month are as follows:-

• News
• New Funds
• Charges
• Books We Have Read
• Quote of the Month

In the Sunday Times of 13th May 2007 Warren Buffett, often described as the world's most successful investor, again repeated his advice that investors should hold index funds. This is the third time he has given that advice to our certain knowledge and he has probably repeated it privately many more times. The William Kay column in the same newspaper contained a ringing endorsement of our approach.

An interesting new survey has come into our possession, this one carried out by Dimensional Fund Advisors London office. Many of you will be familiar with the survey carried out each year by Standard and Poors which analyses where the top 50 funds from five years ago are now. A copy of the results is attached and as you will see very few perform well over the subsequent five years. The survey we have recently obtained is called "Do Winners Repeat" and is an analysis of the top 30 funds for five-year periods from January 1982 to December 2001. The results are what you would expect but we have extracted some additional information which we think you might find to be of interest.

On only one occasion (out of eight periods) did the all funds average return beat the market and then by only 0.2%! This was when there were only 133 funds to choose from -- there are now over 2000. In all the other periods the market beat the average return of the managers on one occasion by almost 6%! It is worth remembering that active fund managers have as their objective to beat their peers, not the market.

Some of the biggest fallers are some of the biggest names; over the latest period Fidelity American fell from number 1 to number 1284, Axa Framlington Health from number 12 to number 1572 And Merrill Lynch Global Small Cap from number 4 to number 1041.

The conclusion is the same as all other similar studies, winners do not repeat, unfortunately losers do and past performance really is no indication of how funds will do in the future. Most investment advisors, be they Stockbrokers, Private Banks or IFAs use past performance to choose the funds they will recommend and are therefore doomed to fail their clients.

Over the course of the next few months we expect to be able to introduce three new funds to client portfolios, each of which will assist us in our aim to improve returns and reduce risk. The first of these is the long-awaited International Core Equity Fund which will repeat for the International Index what the UK Core Equity Fund did for the UK Index. Briefly, this will result in large company skew being smoothed and a slight small/value tilt to the fund, so improving returns and reducing risk within your portfolios. We also expect to be able to introduce an Emerging Markets Value Fund. The reasoning behind this is that the value story repeats all round the world and this fund will enable us to capture the value premium in emerging markets. The third fund will be a Real Estate Investment Trust and crucially this will be globally diversified. We have not previously had access to a globally diversified property fund and this trust will enable us to include a diversified property aspect to client portfolios.

Naturally, we will write to all clients individually nearer the time and would be happy to discuss any queries you might have at this time.

Our aim, as you know, is to keep portfolio charges as low as possible so that you can benefit from increased portfolio returns as a result. We thought it would be useful to briefly revisit an area we discuss with all clients and that is the difference in costs between "retail" funds, generally available to the public and the Institutional Grade Index Funds that we are able to make available to our clients.

While most fund managers quote an annual management charge and would like investors to believe that is all they are paying there are several other costs that investors have to bear in an actively managed fund. These include dealing expenses, commissions, bid offer spread and market impact costs; there is no way of avoiding these charges and every time a deal is done the client pays. In his excellent book, "The Intelligent Asset Allocator", William Bernstein analysed the difference in costs between active funds and index funds. He characterised the difference in charges as the "Indexing advantage" and carried out the analysis in three main areas. The results were as follows:-

Large Companies Funds: Indexing Advantage 1.97% Per Annum

Small Companies Funds: Indexing Advantage 3.5% Per Annum

Emerging Markets Funds: Indexing Advantage 7.53% Per Annum

Mr Bernstein's analysis was carried out in the US where Index fund expenses are slightly lower than the UK (we expect the UK to catch up over time), but where actively managed funds cannot get away with charging as much as UK fund managers. As we have previously noted actively managed fund charges in the UK are rising to as much as 1.75% per annum. The result of this is that the indexing advantage in the UK is likely to be far higher than in the US.

Equally significant is the fact that the higher the expenses the riskier the fund becomes and risk adjusted returns for low-cost funds such as index funds can be 47% greater than for the highest cost funds (The Little Book of Common Sense Investing: John Bogle).

The best book we have ever read on asset allocation is "The Intelligent Asset Allocator" by William Bernstein. It covers all of the main areas of money management, including market efficiency, the behaviour of real-world portfolios, risk and return and has the best explanation of value investing we have ever seen. The author's style is very readable and he makes the subject interesting and understandable. Also worth looking at is his website www.efficientfrontier.com; a number of very interesting articles about investing in general are available free of charge.

You will not generally find the book at bookstores but it is available from Amazon; if you have any difficulty finding it please contact jayne@indexfundadvisors.co.uk.

"You don't get paid for the hour. You get paid for the value you bring to the hour."

- Jim Rohn