Get out your crystal balls, PEP pickers

Question: How do you pick a good PEP? Answer: Gaze into your crystal ball. You think I'm being flippant? Listen to what analysts at the WM Company had to say after studying returns from unit trusts (the stock market funds held inside your PEP) over the last 20 years. Don't be put off by the jargon; this is dynamite.

"Over the entire period of the study, the probability of selecting a top-quartile performer based on historic top-quartile performance was no better than would be expected by chance ..." (my italics).

A "top-quartile" unit trust is one which performs among a sector's top 25 per cent of funds. The WM Company analysed the UK Growth & Income sector, where the funds can be compared directly with growth in the FT-SE All Share index of UK stock market-quoted companies.

The question is whether you have a better chance of making lots of money by buying an actively managed PEP, where a manager selects shares using skill and judgement, rather than just buying a tracker fund, which follows the All Share index.

Over the 20-year period, the position of the FT-SE All Share index at the end of each year varied hugely. In 10 of the 20 years recorded, the All Share finished in the second quartile of returns (so in the top half of the performance table). In 1987, it was in the bottom quartile.

This goes to show how much active management can do for your cash if you hitch a ride with a good PEP fund. Another survey last week showed the ABN Amro UK Growth Fund was the best-performing PEP over the last 10 years, returning pounds 35,092 on the original pounds 6,000 invested - pounds 4,600 ahead of its nearest rival.

So you could opt for the ABN Amro fund and hope it keeps growing. But, disturbingly, the WM report suggested: "Investing in a bottom-quartile fund would give a better than random chance of achieving top-quartile performance in the next (five-year) period."

Overall, the longer you leave your money in an actively managed fund, the more likely it is to underperform the index. Over five years, your PEP has a one-in-four chance of doing better than the stock market. Over 20 years, that reduces to four funds out of the 46 which have a full performance history.

Virgin Direct, which runs a huge tracker fund, commissioned this research. It must be pleased. But the big active-fund managers point out that they have a wide range of active funds; if one stops performing, you can switch to something better. And if you are thinking of investing abroad, you may do better with an active fund: HSBC research shows the majority of European funds have outperformed their benchmark indices over the past five years.

So how do you spot a good PEP? The WM Company came to the following conclusion: "The key to benefiting from active management is the identification of superior managers before their superiority shows." In other words, get out those crystal balls.

n i.berwick@independent. co.uk

News
news
Voices
voicesThe Ukip leader on why he's done nothing illegal
Arts & Entertainment
artYouth club owner says mural is 'gift from the sky' so he can prevent closure of venue
News
science
VIDEO
News
Plans to decriminalise non-payment of television licence fees would cost the BBC £500m according to estimates drawn up within the Corporation
people
News
people
Life & Style
The new low cost smartphone of Motorola, 'Motorola Moto G', is displayed in Sao Paulo, Brazil on November 13, 2013. The smartphone, with dimensions 65.9mm W x 129.9mm H x 6.0 - 11.6mm D is equipped with a Qualcomm Snapdragon 400 with quad-core 1,2 GHz CPU, a 4.5-inch display and Android Operating System 4.3 and a suggested price of $ 179 USD.
techData assessing smartphones has revealed tens of millions of phones are at risk of being harvested
Arts & Entertainment
Jessica Pare as Megan Draper and Jon Hamm as the troubled, melancholy Don Draper
tvAnd six other questions we hope Mad Men series seven will answer
Arts & Entertainment
Cody and Paul Walker pictured in 2003.
film
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Analyst - Financial services, Client data, LEI

£40000 - £50000 per annum + BONUS + BENEFITS: Harrington Starr: A leading, Cit...

Management Consultancy - Operational Research Analysts

£35000 - £50000 per annum + Bonus + Benefits: Pro-Recruitment Group: You must ...

Corporate Actions Consultant - Market data, ISO15022, presales

£45000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: Corporate Acti...

Prudential Risk/Operational Risk Associate - London

£350 - £400 per day: Harrington Starr: An opportunity has arisen at a FCA regu...

Day In a Page

Homelessness: Why is the supported lodgings lifeline under threat?

Why is the supported lodgings lifeline under threat?

Zubairi Sentongo swapped poverty in Uganda for homelessness in Britain. But a YMCA scheme connected him with a couple offering warmth and shelter
A History of the First World War in 100 Moments: When the world’s biggest shed took over Regent’s Park

A History of the First World War in 100 Moments

When the world’s biggest shed took over Regent’s Park
The pain of IVF

The pain of IVF

As an Italian woman vows to keep the babies from someone else’s eggs, Julian Baggini ponders how the reality of childbirth is often messier than the natural ideal
Supersize art

Is big better? Britain's latest super-sized art

The Kelpies are the latest addition to a growing army of giant sculptures. But naysayers are asking what a pair of gigantic horse heads tells us about Falkirk?
James Dean: Back on the big screen

James Dean: Back on the big screen

As 'Rebel without a Cause' is re-released, Geoffrey Macnab reveals how its star perfected his moody act
Catch-22: How the cult classic was adapted for the stage

How a cult classic was adapted for the stage

More than half a century after it was published 'Catch-22' will make its British stage debut next week
10 best activity books for children

10 best activity books for children

Keep little ones busy this bank holiday with one of these creative, educational and fun books
Arsenal 3 West Ham United 1: Five things we learnt from the battle between the London sides

Five things we learnt from Arsenal's win over West Ham

Arsenal still in driving seat for Champions League spot and Carroll can make late charge into England’s World Cup squad
Copa del Rey final: Barcelona are paying for their complacency and not even victory over Real Madrid will put things right

Pete Jenson on the Copa del Rey final

Barcelona are paying for their complacency and not even victory over Real Madrid will put things right
Rafa to reign? Ten issues clay courts will serve up this season

Rafa to reign? Ten issues clay courts will serve up this season

With the tennis circus now rolling on to the slowest surface, Paul Newman highlights who'll be making the headlines – and why
Exclusive: NHS faces financial disaster in 2015 as politicians urged to find radical solution

NHS faces financial disaster in 2015

Politicians urged to find radical solution
Ukraine crisis: How spontaneous are the pro-Russian protests breaking out in Ukraine’s east?

Ukraine crisis

How spontaneous are the pro-Russian protests breaking out in Ukraine’s east?
A History of the First World War in 100 moments: The first execution at the Tower of London for 167 years

The first execution at the Tower of London for 167 years

A history of the First World War in 100 moments
Fires could turn Amazon rainforest into a desert as human activity and climate change threaten ‘lungs of the world’, says study

New threat to the Amazon rainforest:

Fires that scorch the ‘lungs of the Earth’
Liverpool, Chelsea and Manchester City: And the winner of this season’s Premier League title will be...

Who’s in box seat now? The winner of the title will be ...

Who is in best shape to take the Premier League prize?