The company published a list of 24 personal equity plans available from its main competitors, which it called "Superdogs" on the grounds that they have consistently underperformed over the past nine years compared with the average of their peers. Virgin is offering to pay any transfers or exit penalties incurred if people switch from these so-called Superdog PEPs into either its tracker or its income PEP plan.
But behind Virgin's claims are important questions all savers should ask about PEPs that have not delivered hoped-for returns.
Put simply, Virgin's unanswerable argument - backed by all the experts - is that if a person makes an investment, waits for a discrete number of years but the fund delivers consistently poor returns, it is time to sell up.
Tony Wood, marketing director at Virgin Direct, says: "It has always amazed me that people are prepared to put such disproportionate efforts into buying a new PEP when so often it is their existing PEPs which should be getting the most attention. Hundreds of thousands could be better off by transferring their PEP."
How does one measure performance? Increasingly, experts prefer to look at discrete investment periods, perhaps three, five or even two-year cycles. This allows statisticians to check how often a fund appears within the top half or even the top 25 per cent of funds in its sector.
Virgin has chosen to focus on its rivals' performance by parcelling up the past nine years into three separate periods - April 1988 to April 1991; April 1991 to April 1994; and April 1994 to April 1997.
Peter Edwards, a founder of Premier Unit Trust Brokers, a firm of investment experts in Bristol, says: "One could argue that they have chosen fairly long cycles, but at least it allows us to see how a fund has performed in the short, medium and long term."
Virgin then looks at the performance of PEP funds within four sectors: UK growth and income, UK growth, UK equity income and UK smaller companies, checking how the companies performed within each sector during each of the three-year periods.
Figures from HSW, the specialist investment statistics provider, reveal that 24 PEP funds failed to match the average performance achieved by rivals within their sectors in any of the three-year cycles.
Among the under-achievers are PEPs run by many big industry names, including Fidelity, Framlington, GT, Hill Samuel, Invesco, Edinburgh, Henderson, Save & Prosper, Hambros and Mercury, plus a number of life companies, including Allied Dunbar. Virgin contrasts their allegedly poor performance with its own two funds, both of which have delivered good returns to investors since their launch in the past two years.
The question therefore is: should you switch out of the Superdogs? If so, which funds should you look at? Here, the consensus disintegrates.
Mr Edwards says there are a number of issues to be considered: "For example, during a recession the UK smaller companies sector is not likely to do particularly well. If the economy recovers, as it appears to be at present, the sector has the potential to outperform."
To which Tony Wood at Virgin replies: "Even if we accept that the sector may not be doing well, the question remains one of how well the specific fund is doing within it."
Mr Edwards' second point is about how fund performance is assessed: "If you have money in an income fund, then you might be prepared to accept a lower capital return. High income may require accepting a higher degree of risk, which may be acceptable." Mr Wood accepts this may be an issue for some, but argues most fund managers aim for a good overall fund performance in addition to delivering a decent income stream.
Another issue is whether some (or any) of the so-called Superdogs deserve to be ranked in this manner and whether, after years in the doldrums, they are now improving.
Michael Ashbridge, investment director at Save & Prosper, whose UK Equity Income fund figures on the list, says: "Since 1992 we have changed the team and put in place a new investment process.
"As we have gained confidence we have taken bigger positions on the basis of our strategy, which means that our performance is accelerating."
He adds that between January last year and the end of May this year, the S&P fund ranked eighth in its sector. If so, S&P's Equity Income PEP may be on the mend.
A similar picture is presented by Paul Kafka, executive director at Fidelity, whose Growth & Income and Income Plus funds also figure among the alleged Superdogs. Mr Kafka says: "Our two funds named did suffer from poor performance. But over the last year or two, it has improved very significantly."
Moreover, he seems to suggest, Virgin is comparing apples and pears: "Between February 1996 and May this year our tracker fund has grown by 23.1 per cent compared with 20.6 per cent at Virgin."
Mr Kafka dismisses Virgin's promise to pay investors' surrender penalties, by pointing out that Fidelity does not levy them: "Virgin's comments come at a time when Fidelity has succeeded in attracting 25,000 new free-share windfall investors into its PEPs because of our highly competitive charges. We are disappointed that they are behaving in this way."
Irrespective of Virgin's specific claims, its argument that investors should be prepared to switch is endorsed by Peter Edwards.
Premier keeps a list of "Black" and "White" funds for both income and growth unit trusts, based on assessments of dividend and capital growth over the past five years. Investors who ditched "Black" companies and opted for those on Premier's "White" list would have enjoyed significant outperformance.
The lesson, according to Mr Edwards, is that it does make sense to clear out your poor performing funds. But Virgin, though it has rightly sparked a debate on this issue, does not hold a monopoly on good fund management expertise.
When you do switch funds, it pays to take good independent advice as to which funds might suit you equally well - or better.
Premier Unit Trust Brokers: 0117-927 9806. For a local IFA: 117 -972 3333.Reuse content