In particular, you need to decide whether to risk stock market exposure in return for potentially higher long-term returns, or whether you'd prefer a safer corporate bond PEP with lower long-term returns.
One option is simply to invest in the fund you think will do best in the coming years. But in case you make the wrong decision you need to be able to switch to another fund.
If your manager offers a range of decent funds, transferring PEPs will be cheaper than moving to a fund run by another manager.
Certainly, once you've iden-tified a fund you like, it's worth looking at other funds run by the same company. Look for consistent long-term performance - if your fund is the only one that has done well in recent years, its success might well have been a fluke.
One of the dangers with PEPs is that investors end up backing the companies that shout the loudest. The biggest PEP managers have more to spend on advertising but don't necessarily offer the best products.
Investment Intelligence, an investment research group, publishes figures that show how unit trust managers have performed across all their funds over different time periods. Its latest figures show that Fidelity, Threadneedle, Legal & General and Gartmore, four of the UK's 15 largest unit trust managers, have all posted good performance figures over the last 12 months. However, the perfor-mances of Schroders, M&G and Perpetual, three of the four largest unit trust managers, have slumped over the last couple of years. In response, both Schroders and M&G (just taken over by Prudential) have made high-profile changes to their investment strategies.
Part of the problem is that many large fund managers have house strategies that individual managers must apply. M&G, for example, prides itself on its value style. Managers buy into companies that the market as a whole rates poorly but which M&G believes are fundamentally sound. The idea is to benefit when the market rediscovers these out-of-favour companies.
By contrast, growth investors look for companies they think will grow strongly, irrespective of whether the shares are currently good value. Exponents of this theory include Jupiter.
PEP managers also talk about having top-down and bottom-up approaches. A top-down manager considers which markets and sectors to invest in and then finds the best companies in those areas. A bottom-up manager tries to identify good companies and considers the big picture later.
If you're still confused about picking a PEP manager, you can send for comprehensive literature from discount brokers or talk to an independent financial adviser - though you will have to pay for advice, which is built into the initial charge on a PEP.
If you are happy to buy a PEP from a manager that doesn't offer a wide range of funds, there are several houses with a good reputation. These include Exeter Fund Managers, in particular its Capital Growth fund, and Newton, especially its Income and Higher Income funds.
n For discount brokers see page 8.
David Prosser is personal finance editor of `Investors Chronicle'.Reuse content