Income And Growth Survey: The investment two-step

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The Independent Online
WHAT ARE the main factors to consider when comparing funds? Here are two of the most important.

l Consistency. This means the performance of a fund over different time frames. Some will do better over some periods. Others will be worse at other times. What matters is being in the top 25 per cent or so (the "top quartile") on a regular basis.

But what if a fund which delivered good returns for five years suddenly starts doing badly over one year? That doesn't necessarily make it a bad fund. The thing to do is wait and see whether it improves over the next 18 months or so.

Most investors believe that if a fund delivers poor performance their role is simply to sit there quietly without complaint. At worst, they switch funds. In fact, if a fund performs badly, you should be prepared to write to the manager asking why returns are so bad and what action is being taken to improve matters.

l Offer-to-bid. When measuring performance, be sure to take charges into account. For example, you may be provided with information which shows that a fund has delivered returns of 20 per cent on a "bid-to-bid" or an "offer-to-offer" basis.

If so, the figures have ignored the performance of any initial charges. If in the first year the initial charge is 5 per cent, the actual return will be 15 per cent.

Moreover, when annual management fees (typically between 0.5 and 2 per cent) are deducted, it becomes impossible to calculate what their impact is if a bid-to-bid or offer-to-offer figure is given.

You should ask for the figures to be be given to you on an "offer-to- bid" basis, which means performance taking into account the price you bought the investment at and what you would receive should you want to sell it.