Best and worst: Funds of Funds

UNIT TRUSTS that invest in other unit trusts can provide a huge diversification of investment, both geographically and in types of company, writes Caroline Merrell.

The exact allocation of assets is taken out of investors' hands, as fund managers will switch between the underlying unit trusts according to the performance of various markets around the world.

Barry Smith, TSB savings and investment manager, said that comparing its Selector Income unit trust to other funds in the same sector was unfair, as it was only 60 per cent invested in equities, with 40 per cent invested in gilts and fixed-interest securities.

'People will be buying into the fund for the income,' he said.

The fund currently yields about 4.71 per cent and is linked to a personal equity plan. The high yield can only be generated at the expense of total return.

Mr Smith said that the bank was planning to change the allocation to take advantage of the increase in UK interest rates.

The other funds at the bottom of the sector tend to be broker funds managed by independent financial advisers. The small amounts invested in these make them difficult to manage actively to enhance performance.

Fidelity plans to scrap the 5.95 per cent front-end charge on its MoneyBuilder PEP from 26 September. It is not going to introduce any exit charges. However, the annual management charge varies between 1.25 and 2 per cent, depending on which unit trusts the fund invests in. The minimum investment is pounds 3,000. At the moment the majority of the fund is invested in smaller UK companies.

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