Personal Equity Plans: Question of where to place your trust

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The Independent Online
PEPS were not always so simple or attractive. Their birth in 1987 was difficult, mainly because of a confused ruling that only 25 per cent of the money could be invested in collective funds such as unit or investment trusts.

In the Treasury's mind, the new savings vehicles were meant to reward investment in British industry with tax breaks on both capital invested and income earned. But for investors used to the rule that an equity portfolio should be as diverse as possible to reduce risk, this scheme appeared plain daft.

The sceptics were right. Officialdom bowed to the inevitable, relaxing the 25 per cent rule in stages until 1991 when it was removed. Investors were allowed to put all their money into a PEP investing exclusively in a unit or investment trust, as long as those trusts met certain criteria on investment in UK companies.

The question then was: should it be unit or investment trusts? Unit trust shares are created on demand, but in investment trusts there is a fixed number of shares in circulation.

Because demand for investment trust shares in general has waned in recent years, they are now trading at high discounts, averaging 12 per cent below the net asset values of the shares they are invested in. In effect you get 100p worth of investments for every 88p you put in, and you get income based on the 100p.

Among the top-performing investment trusts, only F&C's Enterprise trust, specialising in venture capital, and Fidelity European Values and Abtrust Scotland figure prominently in PEP performance leagues. Most top positions are taken by the capital shares of split-capital trusts, which are very complex and specialised investments.

Charges for managing investment trust PEPs also affect performance. Some managers make no initial or annual charges while others make an initial 3 per cent charge only. Some levy an initial charge of 1 per cent and a 0.5 per cent annual fee.

The top trusts*

1 F&C Enterprise pounds 520.93

2 Fidelity European pounds 302.08

3 Abtrust Scotland pounds 298.08

4 Mercury Keystone pounds 287.19

5 Gartmore European pounds 285.95

Top-performing investment trusts (excluding split-capital trusts) based on a holding of pounds 100 over five years, net income reinvested.

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