Curtain comes down on a dismal year

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Investors can be a fickle lot. Last year net sales of unit trust personal equity plans peaked at £1.6bn in the quarter to 5 April. While figures for the same period this year will not be known for some weeks, the signs are that fund managers will be lucky to reach half that figure.

The slump in sales, confirmed this week by the Association of Unit Trusts and Investment Funds, has renewed predictions that the golden age for such investments is over.

Certainly a sharp fall in sales during what is the peak selling period is very worrying.The low-interest environment of the past 18 months - which saw many savers opting for equity investments in place of traditional building society deposits - has changed. Now that deposit rates are up again, unit trust sales have fallen back.

But the industry is swift to dismiss suggestions that the market for its products is in inexorable decline.

"People with low levels of equity holdings are continuing to buy PEPs,'' insists Philip Warland, Autif director-general. "Where substantial portfolios are being managed, the last few months have seen a waiting game, with cash being a rewarding short-term home for funds. If the market bounces, money will flow back quite quickly."

Unit trust providers are desperate for this revival in the fortunes of the underlying stock markets. Rachel Medill, head of corporate communications at M&G, said: "What happens in the market affects our sales. The problem is that if the market does pick up it takes a long time for sales to follow. That is a shame, because you could argue people should start buying when the market is low, rather than wait for it to pick up."

Not that all providers have been suffering. Virgin, which last month launched its low-cost PEP tracking the stock market, took in more than £42m in new investments in just over a month. At an average of £4,500 per PEP, this suggests a sophisticated level of investor. Scottish Amicable too raised £100m in three weeks for its guaranteed-income PEP.

According to Roger Cornick, marketing director at Perpetual, one of Britain's largest providers of unit trusts and PEPs, investors have long mirrored movements in the stock market. He points to the way sales of unit trusts slumped by 50 per cent throughout 1988 compared with the previous year, much of it a reflection of the October 1987 market crash.

By the end of 1989, sales had gone back up by half on the previous year - still only 75 per cent of the 1987 total - as investors saw the market recover. But sales again fell 20 per cent in 1990, reflecting the share index's dip in the wake of the Iraqi invasion of Kuwait.

In 1991 sales recovered 15 per cent, falling back the following year before the runaway boom in sales and stock market gains in 1993.

The increasing popularity of tax-free PEP envelopes also drove unit sales. Mr Cornick said: "People tended to go for unit trusts for tax reasons rather than for investment reasons. But in some cases, investors have seen the market fall 15 per cent in the past year."

He pointed out, however, that for investors who bought unit trusts two years ago, the outlook is still one of net gains. "There is an understanding on their part that investments are made for the longer term rather than simply to reflect immediate returns."

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