One way to spot the right investment is to compare funds with broadly similar investment aims. This is easier as similar funds are grouped in the same sector. There are more than 20 unit and investment trust sectors, ranging from the very large to quite small, covering everything from tracker funds to emerging market specialists.
This new monthly column will look at long and short-term performances in these sectors. We kick off by looking at UK Growth. These funds, as the name suggests, invest in British companies expected to deliver long- term capital appreciation. Income, as share dividends, is of secondary importance.
This is the largest sector for unit trusts, although it's quite small for investment trusts. This is because the latter have in the past concentrated on the international investment scene. There are only 15 investment trusts specialising in UK Growth, and this includes a handful that trade in second- hand life assurance endowments and one, Taverners, which invests in breweries.
An obvious feature of the UK Growth sector is that the average fund has failed to outperform the FT-SE All Share index. This index is used as the benchmark for the sector as it is made up of about 600 leading companies and, unlike the FT-SE 100, is not heavily weighted to the financial and pharmaceutical giants which led the market upwards over the last couple of years. The All Share has risen by about 30 per cent in the past year and 235 per cent in five years.
ABN Amro's UK Growth Fund has been a top performer in this sector since its 1986 launch. In investment-speak, this effectively means that the fund is always among the best 25 per cent of all funds in its sector.
Nigel Thomas, the manager, has been with the fund since 1986, giving it the advantage of consistent management. Investments are split in roughly one-third proportions between FT-SE 100 shares,mid-capitalisation shares and smaller firms. Mr Thomas has no financial shares: he follows a traditional approach and only buys shares in firms he believes will perform well in the long term, so he has fewer than average holdings and currently has 38 shares in the portfolio.
Most of the top performers in the short to medium term are specialist funds. The pounds 28m Exeter Capital Growth, for example, invests almost exclusively in split capital trusts. "These have had a tremendous run over the past couple of years," says Nick Brind, its fund manager. "We have no plans to change our specialisation. We could easily increase our current size and find plenty of new investments."
The really big names appear in the longer-term performance tables. Fidelity has two very different funds here.The pounds 800m Fidelity UK Growth fund invests in around 80 stocks, looking for well financed, soundly run companies with clear strategies. Just over half the fund is invested in companies in the FT-SE 100.
Fidelity Special Situations, capitalised at pounds 1.2 bn, is very different. With around 180 holdings, it looks to invest in small to medium-sized companies. It always looks for new opportunities, concentrating on companies recovering from a financial setback, those being turned around or restructured, possible takeover candidates, or those whose asset value is greater than their market valuation. Because of this, it's a higher-risk investment and its performance will be more volatile.
"We aim to outperform the market on a long-term basis," says John Ross, of Fidelity. "We don't try to time the market movements, as many small funds do, but look to outperform the index over the long term by picking the right stocks. We have 46 research analysts used by individual fund managers."
Not all the large management groups employ this many in-house experts, but all argue that by actively investing in well-managed companies they will outperform any index.
It's just a shame that only one in four of them manage to do that.
UK growth funds - past performance
Growth since 30/5/97 (one year) top 10 (%)
Exeter Capital Growth 83.3
ABN AMRO UK Growth 47.3
Cavendish Opportunities 44.1
Dresdner RCM UK Mid-Cap Income 47.3
Henry Cooke UK Special Situations 43.4
Old Mutual Hartley Growth 41.9
Old Mutual UK Growth 41.3
St James UK & General Prog Inc 40.2
Jupiter UK Special Situations 40.0
Sanwa UK Growth 40.0
UK growth average 29.6
FT-SE All Share rise 30.0
Growth since 31/5/93 (five years) top 10 (%)
Exeter Capital Growth 249.6
Johnson Fry Slater Growth 223.0
Jupiter UK Growth 206.7
River & Mercantile 1st Growth 189.1
Old Mutual Hartley Growth 185.1
Perpetual UK Exempt 180.6
Standard Life UK Equity Growth Account 172.2
Sanwa UK Growth 165.1
Fidelity Special Situations 161.1
Barclays BGI UK Growth Account 159.5
UK growth average 123.6
FT-SE All Share rise 235.0
Growth since 31/5/88 (10 years) top 10 (%)
ABN Amro UK Growth 477.3
Jupiter UK Growth 471.5
Johnson Fry Slater Growth 465.5
Standard Life UK Equity Growth Account 419.9
Perpetual UK Growth 403.1
Capel-Cure Growth Inc 371.5
AIB Govett UK Equity General 363.9
Fidelity UK Growth 360.3
Gartmore British Growth 358.6
Fidelity Special Situations 352.3
UK growth average 239.6
FT-SE All Share rise 325.10
All fund figures are offer to bid, net income reinvested. FT-SE All Share figures are calculated on a slightly different basis and are provided as a general comparison only. Source: Reuters HindsightReuse content