The greatest loss in the split-capital scandal is trust

This week, the Association of Investment Trust Companies finally launched its rescue plan for the thousands of people ruined by the split-capital investment trust scandal.

Despite the fund backing the rescue probably containing less than half the £10m originally hoped for, the scandal has rocked the investment trust industry because of the way in which it has damaged public confidence.

Investment trusts began in 1868, when Foreign & Colonial was launched, as a way for "people of modest means" to share in the stock market opportunities which until then had been the preserve of the rich. But, as the word "trust" implies, the arrangement meant investors had to trust those City firms who ran the investment trusts.

They are not going to do that if, as happened to shareholders in split-capital investment trusts, they lose all their money. Even more shocking was the claim by Charles Irby, chairman of one of the worst offenders, Aberdeen Asset Management, that it had "acted with complete integrity and in accordance with all relevant regulations and laws". Many other investors are nursing losses after one of the worst bear markets for a generation, leading a large proportion of them to shun the stock market and others to ask where they can turn for reliable investment management.

This week a report by KPMG, the accountancy giant, and the think-tank Create said: "Never have so many lost so much in such a short time. The breadth and depth of the resulting disillusionment among investors has no precedents in the post-war period. It was the crushing end of a dream for a generation that had been enticed to believe that stock markets had magical powers." And an anonymous contributor to the report admitted: "We sold dreams and delivered nightmares."

Not surprisingly, the Investment Management Association says net investment in unit trusts last year, after allowing for cashing in, was less than £8bn compared with more than £18bn in 2000 at the height of the dot.com boom.

In those circumstances, the authors of the KPMG/Create report advise the industry to keep its promises and run its businesses as if they were businesses instead of a cottage industry. Rob Page, the marketing director of New Star Asset Management, which was formed two years ago, said: "If you are going to pay fees for active management, it's important to trust a firm that has an active-management philosophy. Our raison d'être is to provide good return to UK investors, and we have a structure where none of our fund managers is paid bonuses and they have no reward other than basic salary."

He advised investors to do their homework, adding that they key is not to be suckered by the performance figures of the latest hotshot fund manager because you never know if they are going to repeat that performance.

But Charles Ansdell, technical manager of the nationwide IFA Inter-Alliance, warned: "One of the risks fund managers have faced has been the fear of litigation. Rather than stick their necks out, they have an incentive to stick to their benchmark, which is not necessarily in the interests of their [clients].

"At the same time, there has been a sneaking suspicion that the best deals have been available to the high net-worth user, such as hedge funds which have not been accessible to the man in the street."

CHECKLIST

Visit websites such as citywire.co.uk, trustnet.com and moneyfacts.co.uk to compare investment funds and fund managers.

* Consider forming an investment club: starter pack from ProShare.

* Useful contacts:

Investment Management Association;

www.investmentuk.org 020 8931 0898.

The London Stock Exchange lists registered brokers with website links. www.lse.co.uk 020 7797 1000.

ProShare www.proshare.org.uk or 020 7220 1750.

* If you are interested in a particular fund, find out as much as possible about it. Ask the fund manager for brochures

and the performance record. If you use an independent financial adviser, ask if he or she knows anything about the fund.