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.

peopleFrankie Boyle responds to referendum result in characteristically offensive style
Life and Style
Couples have been having sex less in 2014, according to a new survey
New Articles
i100... with this review
Holly's review of Peterborough's Pizza Express quickly went viral on social media
footballTim Sherwood: This might be th match to wake up Manchester City
Arts and Entertainment
musicHow female vocalists are now writing their own hits
New Articles
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
Blahnik says: 'I think I understand the English more than they do themselves'
Arts and Entertainment
Michelle Dockery as Lady Mary Crawley in Downton Abbey
TVInside Downton Abbey series 5
Life and Style
The term 'normcore' was given the oxygen of publicity by New York magazine during the autumn/winter shows in Paris in February
fashionWhen is a trend a non-trend? When it's Normcore, since you ask
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam