They cannot offer the steady growth of interest-paying deposit accounts, with the value of your savings forever rising and never falling. As financial advertisements always warn, share prices (and therefore unit prices) go down as well as up.
Like any stock market investment, the progress of unit trusts can be erratic, continually swayed by economic news, political turmoil and the varying fortunes of a multitude of businesses. The risks are as numerous as uncertainties about the future.
However, while the short-term performance of unit trusts can be volatile, the long-term returns from investing in shares have far outstripped the growth from building society savings. A unit trust allows small investors to take advantage of these potentially higher returns while eliminating the worst risks of the stock market.
If you invested your money in the shares of a single company, you could lose your entire investment if it went bust. If you spread your stakes across 40 or 50 companies, these dangers are greatly reduced. While one company may fail, and others perform badly, the overall returns should hold up because of good results from the majority.
A unit trust does just this, pooling the savings of many individuals and investing the total across a broad portfolio of shares or other investments, particularly interest-bearing securities called bonds. This fund is then looked after by a manager whose job it is to buy and sell the investments to make the best use of the trust's resources.
There are more than 1,500 unit trusts, run by banks and life insurers as well as specialist fund management firms. Investors can choose funds that specialise in providing an income, or those that aim to provide capital growth; funds that invest entirely in the UK, or in the US, mainland Europe, Japan, the Far East, or right across the world.
The tables show the best and worst-performing unit trusts over the past one, three and five years. The results show both the high returns possible, and the potential dangers.
For example, if you had invested in the Beckman Bio-Tech fund at the start of last year, you would have virtually doubled your money. A pounds 1,000 investment made five years ago in Prolific Technology would now be worth more than pounds 4,800.
Notice also the performance of the average unit trust over each of the periods: 16 per cent over one year, 48 per cent over three years and 109 per cent over five years. This is far more than investors will have earned on their building society savings.
Equally, however, it is quite possible to lose money over the shorter term. An investment in Edinburgh Latin American last year, or in Govett Gilt Bear three years ago, would by now have lost you more than a quarter of your money. Only over five years is the worst-performing fund showing a profit. So the rule is: if you are going to need your money in the foreseeable future, do not invest it in unit trusts.
The one-year figures also illustrate another stock market lesson: the importance of fashion (or sentiment), and the need to be wary of it. A couple of years ago, City pundits were full of enthusiasm for Latin America, tipping it as the next big emerging market. The miserable results of this can be seen in the table, with Latin American funds claiming four of the bottom five places.
Unfortunately, investment companies typically find it easiest to sell unit trusts to the public when stock markets are strong and shares have already risen. Professional investors recommend the opposite approach, putting in money when shares fall and reducing investment when markets look too good.
After strong stock market performances last year from the UK and US, many investment experts are looking elsewhere this year. The consensus is that Japan and the small markets of South-east Asia offer better prospects in 1996.
Roger Cornick, deputy chairman of Perpetual, believes Japanese investors may rediscover enthusiasm for their stock market as the country's banking crisis eases and confidence returns. Chrissie Keen, investment communications director at Fidelity, also expects Japan's economic recovery to take root, and is hopeful of positive news on company profits. Investment managers at Morgan Grenfell believe the smaller Asian markets will be pushed ahead by US investors seeking better returns than they can get at home.
Fidelity and Morgan Grenfell are also quite positive about the UK because of low interest rates, continuing takeover activity, and the support the market will receive from the proceeds of maturing tax-exempt special savings accounts. That said, after the UK market's strong start to the year, it has already reached the year-end forecasts of many analysts.
Graham Hooper, investment director at Chase de Vere Investments, tips Morgan Grenfell European, a top-performing fund investing in continental companies, to do well on the back of falling interest rates. He also likes the Mercury Portfolio Fund, which invests about 60 per cent of its money in UK shares, with the balance split between international stocks and fixed-interest securities.
Alan Emery, investment director at Berry Birch & Noble, backs the Credit Suisse High Income and the Morgan Grenfell Equity High Income funds, based on the thinking that the UK market may be unsettled later this year by the prospect of an election. "Should the market get a bit wobbly, [higher- yielding] income stocks will hold up better than growth stocks. People obviously sell their income stocks after their growth stocks."
Performance figures to 1 January 1996
% change over 1 year % change over 3 years % change over 5 years
Source: Micropal. Figures show % change in a lump sum investment ignoring buy-sell costs.
Top five unit trusts
1 Beckman Bio-Tech 99% Mercury Gold & General 348% Prolific Technology 483%
2 Framlington Health 92% Morgan Grenfell Euro Gth 177% Schroder US Smaller Cos 441%
3 Prolific Technology 77% Morgan Grenfell Europa 167% Hill Samuel US Smaller Cos 372%
4 PM N Am Growth 73% Waverley Australasian Gold 163% Old Mutual Thailand 365%
5 Friends Prov Am Sm Cos 73% Waverley Penny Share 139% Gartmore Hong Kong 352%
Averages 16% 48% 109%
Bottom five unit trusts
Abtrust Latin American -20% S&P Korea -16% Barclays Unicorn Jap & Gen 24%
Mercury WT US Equity Bear -21% Govett UK Bear -16% Govett Japan Growth 23%
Old Mutual Latin Am Cos -23% Govett US Bear -21% MGM Special Situations Gth 21%
Perpetual Latin Am Gth -25% Govett Japan Bear -22% Equitable Special Situations 18%
Edinburgh Latin Am -27% Govett Gilt Bear -27% Friends Prov Jap Smaller Cos 17%Reuse content