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.