Money: Study the formbook

Investing in the market is much like betting on the horses, and the same rules for success apply, says Andrew Couchman
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The Independent Culture
Lovers of the turf will tell you that the biggest single aid to knowing which horse will win the 2.30 at Chepstow is to study the form book. If you know the horse's trainer, jockey and form, then factor in the going, you have a better than evens chance of winning at least some of the time. The same holds true for determining which investment to pick.

The fund management company is the equivalent of the trainer ,and its record in both good times and bad can be a good starting-point. The going is how the markets are performing currently, and with markets in turmoil, a good track record in such times is more important than doing well in a stable rising market.

Volatility relative to other funds can also indicate whether the fund is likely to mirror or to buck trends. This is measured using complex formulae based on the fund's performance relative to sector averages. Past form is useful to study, but, as with the equine equivalent, has to be considered carefully. Some years ago, a small insurer suddenly showed up as having the top performing property fund, albeit at a time when property was doing particularly badly, and everyone wanted to know why. The rather embarrassed insurer had to admit that its fund was too small to hold any property, so it had remained in cash. That explained why it was the only fund not to fall in value. It was the equivalent of the 100/1 outsider Foinavon winning the Grand National in 1967 when most of the more fancied horses fell - and just about as unlikely to recur.

To the skilled investment pundit, however, it is the jockey that can be the decisive factor. Just as having Frankie Dettori in the saddle is no guarantee of success, so a top fund manager need not necessarily mean a winning fund, but the ability to think out the right strategy, pick the appropriate stocks and adjust over time can lead to winning long- term performance. In today's markets, good investment managers have the opportunity to make or break their reputations.

The final factor to consider is the fund's handicap. The extra weight that it may carry is not measured in pounds, but in the fund's charges. Whereas tracker funds that require little day-to-day management may have very low charges, actively managed funds charge more. Unless the fund can consistently beat a tracker, though, such a "handicap" is not worth paying.

So how can the average investor weigh up all these factors and place the right money on the right horses? According to David Burren, of a Cheltenham-based firm of independent financial advisers, Warwick Butchart Associates, there are two routes to take. The simplest is to let an investment specialist do it for you. He warns, though, that a fund manager will sometimes change his or her investment strategy, which can call into question how well their fund will do in the future. And when a manager moves to another company, sometimes that can revitalise a flagging fund, but not always. Mr Burren says: "The danger comes when the manager's new role is different from their old one. Just because someone is good at managing one type of fund does not mean that they will be as successful at managing another."

Most fund management companies now actively court leading IFAs, explaining through seminars, newsletters and one-to-one meetings their current investment thinking and justifying their investment decisions. At times of great market turbulence, such an inside track can be invaluable.

The alternative is to study the form yourself. Leading companies advertise in The Independent, especially if their fund performance is good, and prices of individual funds can be tracked daily. Details of funds are set out in managers' key features documents, while many produce regular investment updates, although these are usually targeted at advisers and may not be available to individual investors.

The Internet is also fast becoming a source of information. Earlier this year, Autif (the Association of Unit Trusts and Investment Funds) launched a website; others to look at include Interactive Investor, Micropal, Reuters and Trustnet, and many fund management groups have their own sites.

Betting on the horses may have the advantage of immediacy and the thrill of the race to keep punters happy. Its techniques, though, can be just as successful in choosing which unit or investment trust, OEIC, Pep, life or pension fund to invest in for the long term, provided that, like the hardened gambler, you do your homework first.

Warwick Butchart Associates: 01242 584144; for a comprehensive list of independent financial advisers near you, call IFA Promotion on 0117- 971 1177.

Investment web sites: Autif at: www.investmentfunds.org.uk

Interactive Investor at iii.co.uk

Micropal at www.micropal.com

Reuters HSW at www.hsw.co.uk

Trustnet (investment trusts) at www.trustnet.co.uk

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