Unit trusts avoid the extremes of market price changes by spreading risk across different shares and even different market sectors. They are divided into units so that each investor can track the value of their investment.
You buy units at the offer price and sell them back to the unit trust manager at the bid price, which is usually 5-7 per cent lower. The fund managers also take an annual charge out of the fund but the pricing allows for this so the price you see is the current price allowing for all costs.
No two investors' needs are alike so we created five fictional investors (see box), each wanting to invest part of a notional pounds 50,000 portfolio, gave them different investment needs and asked our IFAs to come up with one recommendation for each.
In real life each adviser would need a much more detailed picture of the investor's needs and would spend time getting to know them, their approach to investment risk, tax position and the timescale they were working to. Any investment or unit trust chosen would have to fit in with their other investments too. Even so, the exercise shows how an IFA looks to match investors to the right investments.
Of course, there is no guarantee that the end result will be any better than using a pin to choose your investments, but over time, a good IFA should help an investor construct a portfolio that they are happy with and which performs well. To find out their recommendations, follow the illustrations below.
Sally - Both our West Country advisers like Jupiter's UK Special Situations unit trust. David Burren says: "To really `go for growth' Sally could look at special situation or emerging market trusts from the UK or overseas - or funds with specific themes such as technology. My preference is to keep close to home."
Mark Dampier adds: "The trust has a wide mandate being able to invest in any part of the market, although at present it has over 70 per cent in UK smaller and mid caps where Alan Miller, the manager, feels the best value can be found."
Mike Owen prefers Fidelity Special Situations: "It is one of the classic unit trusts, taking advantage of Anthony Bolton's management since 1979 and his proven stock-picking skills."
Fiona Price opts for Gartmore European Select Opportunities. "If you believe in the prospect of a prosperous Europe through the significant economic changes planned then Gartmore has an excellent pedigree of investing in this area," she says.
Tom - Fiona Price chooses Perpetual's High Income unit trust: "This is an old favourite. It probably receives more attention than any other fund because of its sheer size," over pounds 2bn. This fund achieves a lower than average risk profile by holding 15-20 per cent in fixed interest and preference shares."
Mark Dampier goes for HSBC's PEPable High Income Unit Trust, currently yielding 5.7 per cent: "Its fund asset mix of UK blue chips and fixed interest has been almost ideal in the present environment." Mike Owen selected Newton's Higher Income unit trust managed by Tony Thompson: "This fund concentrates largely on quality blue chips, with the potential to produce capital and a rising income stream from its current 4.8 per cent gross yield."
David Burren's choice is Fleming Save & Prosper's Extra Income Fund: "Its aim to provide a relatively high income while guarding against capital erosion in the long term by keeping some potential for capital growth meets the objectives of many `first time' unit trust buyers and the initial charge is low too."
Beryl - Mark Dampier, Fiona Price and David Burren all agree on the fund for Beryl - although both Dampier and Burren also suggested close alternatives to CGU's Monthly Income Plus unit trust.
David Burren says: "Given the recent falls in equity markets, most people would steer towards a UK Fixed Interest fund. But if rising income is required, equity-based investments must be considered too."
Mark Dampier likes its "wide range of fixed interest giving it a high degree of flexibility, although 60 per cent is invested in corporate bonds." Fiona Price adds: "The fund has been run well by Commercial Union up until now and its merger with General Accident increases its overall financial strength."
Mike Owen was tempted by CGU but opted for M&G's Corporate Bond, adding that much would depend on Beryl's need for income: "This yields 5.6 per cent, which could still look to be a reasonable income if interest rates fall, particularly if it can be placed within the tax-free umbrella of a PEP. This fund is at the lower risk end of the corporate bond scale, reflected in its lower yield."
Gavin and Helen - Mike Owen chooses Save & Prosper's Premier Equity Growth: "Andrew Spencer has an eye for impressive returns and he and his team adopt a very disciplined approach to stock selection."
David Burren chooses Jupiter Income unit trust: "I am impressed by its fund manager, William Littlewood, and he is not afraid to reposition his fund when and if he sees fit. Earlier this year people thought it curious that he should have lots of boring old War Loan in the portfolio but their very impressive return in recent months silenced the doubters."
Jupiter Income, currently yielding around 4 per cent, is Fiona Price's choice and the income can be reinvested to provide further capital growth or converted back into extra income in the future.
Mark Dampier opts for for GT's International Growth unit trust. Describing it as an "unusual" trust, he adds: "It has potential if, as we expect, sterling weakens. World bond markets still look good value and this also gives the fund some excellent defensive characteristics."
William - ABN Amro's UK Growth Unit Trust has been managed by Nigel Thomas for over 10 years and is Mark Dampier's recommendation: "Performance has been excellent, ranking it amongst the top unit trusts. This is very much a stockpicking fund with a bias toward mid and smaller caps."
A fund of funds is Fiona Price's choice, with Royal & SunAlliance's Portfolio. She says: "RSA has achieved excellent returns across its range of funds."
David Burren looks to the continent as he selects Gartmore's European Selected Opportunities unit trust, a European Fund that combines strong blue chip core holdings with aggressive active management. Mike Owen says his choice, River & Mercantile's First Growth, is "Nicely spread across the FTSE 100 and medium to small sized companies. Its manager, Jeremy Long, tries to identify those shares with earnings likely to surprise analysts."
David Burren of Warwick Butchart Associates, 01242 584144; Mark Dampier of Churchill Investments, 01934 844444; Nick Conyers of Pearson Jones & Co, 0113 2304804; Mike Owen of Plan Invest Group, 01625 429217; Fiona Price of Fiona Price and Partners, 0171 2404775
Sally is a 25-year-old advertising executive and her investment approach matches her character - aggressive. She has no need for immediate income.
Tom, a 55-year-old hospital porter, is a cautious investor looking for a combination of both capital growth and an income to support his overseas holidays.
Gavin and Helen are a recently married thirtysomething couple. Gavin, an engineer, and Helen, a civil servant, expect that one of them may give up work within the next five years to raise their family, but they are otherwise happy to take quite an aggressive investment stance.
William is a 52-year-old solicitor with grown up children and a high income. His priority is capital growth and he describes himself as "not too cautious".
Beryl, a widowed lady who is in her sixties, is cautious by nature and is looking for investment income to supplement her pension.