Dedicated followers of fashion: Emerging markets and other new investment funds are catching the public's attention. Diane Coyle reports on why unit trusts have become the vogue again this season

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UNIT TRUSTS have gone into marketing overdrive. One group has even started leafleting door-to- door in likely suburbs. 'Losing interest in banks and building societies?' asks the mailshot put out by Abbey Life, the parent of Abbey Unit Trust Managers.

The group is one of many running a campaign that stresses the attraction of unit trusts compared with bank and building society accounts paying low rates of interest.

High net sales of unit trusts since early last year have had fund managers rubbing their hands with glee. Low interest rates on deposit accounts have helped, as did the rise in share prices through 1993.

Yet the marketing campaigns are encouraging investors into unit trusts at a time when the FT-SE share price index is looking sickly and equity analysts are nervous about where it will head next.

Richard Youard, the investment ombudsman, expressed concern in his recent annual report about products that erode the investor's capital while providing income. He criticised some of the advertising literature for not making this clear.

Nevertheless, the Securities and Investments Board has ruled that unit trust managers will be allowed to deduct annual management charges from capital rather than income. Guidance on how a fund's charging policy should be spelt out in the marketing literature will follow soon.

Disclosure of details like these is due to improve when new regulations come into force on 1 January. After that, investors will get a complicated, but fuller, picture.

A particularly murky area is the upfront fee that most unit trusts charge new investors. Some groups, including M&G and Fidelity, have axed these fees on certain funds, although in some cases a withdrawal fee replaces it.

Cutting charges can attract a lot of investment. Gartmore says its UK equity index fund has grown from pounds 6m to pounds 100m within 18 months of its dropping the initial charge and cutting the annual management fee to 1/2 per cent.

Most unit trusts have initial fees of 4 to 6 per cent. Competition means there are downward pressures, but probably benefiting the financial intermediaries who sell most unit trusts, rather than the investor.

'In practice, charges are coming down,' one financial adviser says. 'You can almost always negotiate a reduction in the front-end fee with the unit trust company, but you wouldn't necessarily pass on the whole saving to the customer.'

Intermediaries suggest that cuts of up to 2 percentage points are possible, but could be taken as part of their own commission.

Fimbra, the body regulating financial advisers, says it has received no complaints from the public about this practice. For that matter, there is no rule against it as long as the intermediary honestly reveals his commission if the investor asks. Only from 1 January will commission disclosure be compulsory.

What investors are charged for buying unit trusts is one thing. Whether they are buying the right investment product is another.

The unit trust industry is a fashion business. 'Marketing is about trying to find a new story,' says Lewis McNaught, managing director of Gartmore Fund Managers. 'Emerging markets and new funds capture the public's attention.'

According to the Association of Unit Trusts and Investment Funds (Autif), 29 new unit trust funds were launched between the beginning of January and mid-May - one to two a week. Two trends stood out in the spring collection: emerging markets and privatisations.

Emerging markets and other new funds might fire imaginations, Mr McNaught says, 'but they have no track record. Investors are probably better served in existing funds.'

The investment regulators are in the process of shifting the responsibility for determining which emerging markets are suitable for unit trust funds from themselves to the fund managers.

A list of approved markets is about to be scrapped, leaving fund managers to decide whether the latest exotic market meets minimum criteria of size and probity. Managers running emerging market funds had been steadily pushing at the limits of the list.

Autif's director-general, Philip Warland, thinks there is little unscrupulous marketing. He reckons the fads are driven by investors.

Recent industry research, for example, found that investors had a Pavlovian response to anything with privatisation in its title. 'It worries me that most people think privatisation means a quick profit,' says Mr Warland.

Alan Maidment is head of unit trusts for Martin Currie, the Edinburgh fund management group that launched an Asian unit trust in February. He says: 'No market is immune from volatility, not even the US or Japan.'

He points out that as most unit trusts are still sold through financial intermediaries, there is someone who can, in principle, stop investors from doing anything foolish. Martin Currie's marketing literature to advisers recommends an upper limit of 10 per cent of an investor's portfolio for riskier funds such as emerging markets.

One regulator also draws comfort from this: 'When I see the sales literature for a new fund that scares the pants off me, I reassure myself with the thought that it is at least being sold through an adviser who can put it in the context of a client's total portfolio.'

Gartmore's Mr McNaught thinks investors have become more cautious about equities in recent weeks. He is surprised that they have not been less cautious about them in the past few years.

Whereas US mutual funds' net sales are four times the level they reached before the 1987 crash, UK net unit trust sales are barely higher. 'It has taken seven years to rebuild confidence in the UK,' he says. 'Sales do depend on current sentiment, but these investors are probably in it for the long term.'

If unit trust investors have become long-termist, they only have to kick themselves for not having believed the marketing a few years ago. If share prices continue their slide, they will be less likely to take advice from the leaflets dropping through the letterbox.

(Photograph omitted)