Building Society windfall survey: Make sure that you do your homework before selecting a unit trust

Click to follow
There are more than 1,500 unit trusts to choose from and at first glance the choice can be bewildering. But with a few minutes thought and a little research it can be a simple manner to find a fund that meets your needs.

And that is the key: your needs. What are you trying to achieve with your investment? Will this be a one-off, to be "filed and forgotten" for the next five or 10 years? Or is your windfall going to provide the opportunity to start serious, long-term investment, perhaps for retirement, or children's higher education?

If you fall into the first category, you might as well take the easy route: swap them for a holding in a unit trust PEP operated by your bank or building society and tell them to reinvest all the income. Keep all the paperwork safe and forget about it until the summer of 2002, or any time after that, when you simply take it in to the branch, tell them to sell your units, and hand over the cash.

If you fall into the second group, the starting point is to look at the different unit trusts according to the type of investment they make. Funds are classified in 24 different sectors, which are defined by the Association of Unit Trust and Investment Funds (Autif), the trade body. Within some sectors there may be just a handful of funds, while others consist of hundreds.

All the funds in a sector have similar investment activity or areas of operation, for example, investing in fixed-income stock or companies in the Far East. But as you can see from the table, a sector that does well in one year does not necessarily do well over the long-term.

You should send for information from half-a-dozen or so fund managers and see how their funds in each sector compare with their competitors and with the average performance for that sector as a whole. There are wide variations: do not make the mistake of thinking that because a fund manager does well in one sector it will automatically do well in another.

Firmly in the doghouse at present are funds that invest in Japan, while those that focus on gilts (government stock), UK equities, and, particularly, smaller companies, are doing well.

Most investment houses have their share of good performers - and those that are the opposite. For example both Gartmore and Schroders, two respected City names, each have some star performers and some which, were they football teams, would be wondering nervously what life was like in the GM Vauxhall Conference League.

To illustrate, the Gartmore UK Smaller Companies fund is the top performer in its sector over one and three years according to HSW, a specialist firm of funds analysts; on the same measures, Schroders' Smaller Companies fund is third in its sector over one year.

At the other end of the scale Gartmore's Japan fund was ranked 78 out of 90 in its sector over one year, while the Schroders Japanese Enterprise fund came in at 86.

Why the difference? In a nutshell, economic cycles and stock market performance. The UK economy has recovered well from the recession, small firms have benefited both from the recovery and the downsizing of many large companies - and the London stock market is scaling new peaks.

Japan has been going through tough economic times and the Tokyo stock market has dived. At the turn of the decade the positions were almost exactly reversed.

So does this mean that you should put all your money into a fund that invests in gilts, or smaller companies, or UK equities generally? Maybe, but before you rush in remember that investment professionals make their money by buying low and selling high. So you might want to take a look at some of those Japanese funds after all.

Looking for credit card or current account deals? Search here

Comments