PEPS: What if the returns are rubbish?

You can find out if your PEP is doing badly and shift to a new one, says Faith Glasgow

Investment is not simply a matter of ploughing a few thousand quid into a table-topping PEP and forgetting about it. As we're all reminded repeatedly, past performance is no guarantee of future returns. And the sad truth is that today's chart-toppers are all too often found languishing near the bottom of the performance league a few years down the line.

The difference in returns is not just a matter of 20 or 30 percentage points, either: the best- performing UK fund over the last three years, Exeter Capital Growth, put on 102 per cent, while the worst, Royal & SunAlliance UK Smaller Companies, managed just 0.61 per cent (source: Reuters Hindsight as at 26/2/99).

They don't do it on purpose, of course. But a fund may be hit hard by internal factors such as the loss of a star manager (a regular occurrence in an industry where rising stars are wooed with impressive salaries) or the takeover of the whole company, which may mean office moves, fund mergers, job losses or even changes in the fund philosophy. A successful fund may also find its winning investment strategy hampered by the amount of money it has attracted. Or market conditions may change dramatically and leave the fund manager in unfamiliar territory.

BEST Investment runs an illuminating Spot the Dog column in its quarterly investment newsletter (see below for details of how to get hold of a copy). Annual fund performance is measured against the relevant benchmark index. For UK funds that's the FT-SE All-Share, or the Hoare Govett for smaller companies. European funds are compared with the FT/S&P Europe.

If a fund has underperformed in each of the past three years, the level of under-performance over the whole period is calculated; if it is more than 10 per cent behind its index, it's classified as a potential dog.

But as Jason Hollands at BEST explains, such funds are not dismissed out of hand. "A bad set of figures throws up things that need to be investigated so that we can put them into context," he says. "For example, a fund may have a specialist bias towards, say, exporters, so a strong pound could cause it great problems for a while. But that is nothing to do with the quality of management."

UK funds well entrenched in the doghouse include M&G's former flagship funds, British Opportunities and UK Equity, which up to the end of 1998 had gained just 17 and 27 per cent respectively over the previous three years. Equitable Special Situations (12 per cent up) is another inmate.

The range of respected fund managers listed in the dog tables underlines the point that an investment house with several top performers won't necessarily shine across the board.

If you want to be sure your fund won't underperform the benchmark, buy a tracker.

Otherwise you should keep track of an investment. The fund manager will provide updates on performance, often indicating how it ranks against the rest of its sector. Top performers are also listed in personal finance magazines such as Moneywise.

If performance lags, changing your PEP manager is not difficult, and does not jeopardise the tax-free status of your investment. You will still be able to switch your existing PEPs around after 6 April.

One option is to switch funds to another in the same stable - if there is one that has a better track record and fits well with your investment aims and the other holdings in your PEP portfolio. This has the advantage of being cheap, or free with some managers, and also very quick: it's simply a matter of writing a letter of instruction to your manager or independent financial adviser (IFA).

If you don' t feel comfortable with the in-house alternatives, switch to another manager. This involves filling in a transfer form and sending it to your IFA or direct to the fund manager, who will do the rest.

However, it can take several weeks for the outgoing manager to sell your holdings and send a cheque to the new one who will re-invest your money.

You will have to pay for this. There may be an exit fee, and there will certainly be an initial charge because you are opening a new investment. Managers are keen to get transfer business, however, and many offer substantial discounts. Or go through a broker; BEST Investment says that its own transfer service usually costs around 1 per cent.

Don't change plans without good reason, or the charges will whittle away the tax advantages. But if your fund's performance is consistently below par, it makes sense to move away.

n For a free copy of the latest `Spot the Dog' list plus the BEST PEP & ISA magazine, call 0990 112255.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Steve Bruce and Gus Poyet clash
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths
ebooksA special investigation by Andy McSmith
Life and Style
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
Amazon misled consumers about subscription fees, the ASA has ruled
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
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

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn