Spring fever affects unit trusts

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The Independent Online
Do you remember Peter Young? He, you may recall, was the investment manager whose wife says she began to realise he was behaving rather oddly when he started coming home last year with jar upon jar of pickled gherkins. He was also, so we learned last summer, buying a lot of rather unusual stocks for the unit trust fund he managed for his employers, Morgan Grenfell.

Its European Growth fund had been the top performing fund in its sector for several years when Mr Young took over, but the pressure of sustaining that performance simply proved too much. Mr Young started buying all sorts of obscure and risky unquoted shares - some of them not even in Europe - in a doomed, and unauthorised, attempt to keep his fund at the top of the industry's performance tables.

When news of his unorthodox activities leaked out, Mr Young was sacked and Deutsche Bank, Morgan Grenfell's German parent, had to dig deep into its pocket.

Why do I mention all this again now? Surely, the Morgan Grenfell business is old hat? Well, that is true - up to a point. What is also true is that memories seem to be short in the unit trust world. At the time the Morgan Grenfell scandal broke, there were fears that it could have a damaging knock-on effect on the unit trust business.

It now seems such concerns were misplaced. How else to interpret the latest figures for unit trust sales, which show sales of units are once again booming like no tomorrow? According to Autif, the industry trade association, total net investment in unit trusts by the general public reached an all-time peak of pounds l.6bn in April this year. This was 44 per cent more than ever achieved in a single month before.

Nor, as my chart shows, was this an isolated trend: sales of unit trusts have been steadily rising for some time. Although retail sales did dip briefly in the third quarter of last year, when Morgan Grenfell was in all the headlines, it interrupted rather than derailed the underlying trend. In fact, 1996 was the best year ever for unit trust sales, with pounds 10bn of net new investment.

As well as the booming retail market, there was also a significant inflow of institutional money. The number of unitholders has jumped from under 4 million in 1992 to nearly 8 million last year. If this is what the industry can do in the wake of scandal, one is tempted to ask what might it not have done but for Peter Young?

The figures are undoubtedly telling us something interesting about what is happening to personal savings habits in this country. But what exactly is the message? When you look a bit closer, nothing is quite as clear- cut as it looks. For a start, one of the biggest factors driving change has been the big increase in the number of unit trust PEPs, which now account for over half the net new investments.

The PEP market has been boosted by the successful introduction of a new product, corporate bond PEPs, and there has also been a fierce price war going on, with all but the most successful providers having to give away most, if not all, of their up-front commission in order to win business.

That is well and good for the saver, but the concern for the industry is that most of these sales are only being achieved at a loss. With low interest rates on most traditional bank and building society accounts, savers are showing an increased willingness to shop around for higher returns. We may be becoming less promiscuous in our private lives, but in terms of where we leave our money, the trend is the other way round.

The implication is the money that has flowed into unit trusts in the last five years may just as easily flow out if and when rising stock markets and falling interest rates go into reverse. While Autif claims we are witnessing a sea change in investment habits, it is far from clear this trend is that well-entrenched.

There is a fair bit of evidence, however, that when it comes to picking unit trusts, price is not the only factor. Performance and the reputation of the fund management firm are also very important.

The other really big story in the unit trust world this year has been the remarkable performance of one fund management company, Jupiter. It has spent a huge amount of money on advertising its products - more than anyone other than M&G has ever spent before, according to some accounts. The advertisements have emphasised the firm's exceptionally good performance record with many of its leading funds in the past five years.

And the results, so I am told, have more than justified this strategy. Jupiter has won something like a fifth of all new unit trust and PEP business since it started its ad campaign. Even Perpetual, the firm that historically led the way in using its brand name to sell funds, has been left panting in Jupiter's wake. More galling still to its competitors is that Jupiter has been able to continue charging a premium.

The problem for Jupiter, of course, is that it now has to justify the huge inflow of money it has received by sustaining its remarkably consistent performance record.

History suggests it faces an uphill task. There is no more consistent finding in all the research into the fund management business then that which says that the top performers in any one year are unlikely to be there again in subsequent years. It will be interesting to see how Jupiter copes with all of its new money - a great chunk of which, ironically, has flowed into its European fund, courtesy of Morgan Grenfell's fall from grace.

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