Since then an increasing number of fund management groups have promoted the idea of funds which track the various stock market indices.
Over 10 per cent of the near pounds 30bn invested in all PEPs has gone into tracker funds and new ones are being launched all the time, the latest coming from National Westminster.
An investment cliche is the "75 per cent rule", which states that in any given year, 75 per cent of all fund managers underperform the FTSE 100 index - the 100 largest UK companies in terms of market capitalisation.
Therefore, why not simply invest in all the companies that make up the FTSE 100? The most common trackers follow either the FTSE 100 or the more widely based FTSE All-share index.
The GA Blue Chip Tracking Trust, launched last month by General Accident, one of the UK's top life companies, is among those tracking the FTSE 100.
Some of the 30 funds available, however, aim to match non-UK indices. One such example comes from Norwich Union, which aims to track the performance of a global index. Others can track a European index, Wall Street's Dow Jones or Japan's Nikkei.
Over the year to the beginning of February 1997, the FTSE 100 rose 18.9 per cent gross, while the All-share rose 17.2 per cent. Surprisingly, only four of the 23 tracker funds in existence for the whole of this period came within 1 percentage point of this. This is partially explained by the charges levied by the managers.
In a fiercely competitive market, the cost of investing in an index-tracking fund is very low. Most charge nothing for initial investment and between 0.5 and 1 per cent for the annual management charge. The GA PEP, for example, levies no initial or exit charges and a 1 per cent annual fee.
Over the year, the best performing tracker fund was the largest: Virgin's UK Index Tracking - which looks after some pounds 400m in PEP funds - rose 16.85 per cent. This was closely followed by Fidelity's MoneyBuilder Index, which went up 16.8 per cent.
Another reason funds fail to match the stock markets is that they invest in either a partial selection of the companies in the index or in the more volatile futures market of those shares.
Why then invest in actively managed PEP funds? Typically, they charge around 3 to 5 per cent for the initial purchase of units and around 1 per cent for the annual charge.
If longer-term performance is looked at, good actively managed funds easily outperform the index. Over the last five years, the FTSE 100 has doubled in value. More than 50 UK growth and income, or just growth funds, have beaten this and Fidelity's Recovery fund, the top performer, has almost trebled in value.
Active fund management comes into its own when markets are volatile or falling.
A good tracker fund is a reasonable first PEP investment for the novice investor. Long term, it will show reasonable performance when measured against the average fund. But to outperform the stock market a good actively managed fund can give a better result.
The Independent has published a 32-page guide to PEPs, sponsored by General Accident Life. Written by Steve Lodge, it explains the difference between tracker funds and actively managed PEPs. For your free copy, call 0500 125888 or fill in the coupon on page 30.Reuse content