Personal finance: Sector watch - Calm at the end of last year's storms

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The Independent Online
MANY people choose their investments by looking at what has done well in the past year. If you are planning to take this approach in 1999, then it's worth looking at the pattern of fund performance in 1998.

It was a bumpy ride with a happy ending. Global turmoil hit the markets over the summer and, with hindsight, the critical decision was that of the US authorities to cut their interest rates twice in the autumn. This ensured that Wall Street did not fall to its knees.

By the end of the year calm had returned. Anyone with an investment in a UK growth-and-income unit trust, one of the most popular sectors, would have seen an average return of around 6 per cent after charges, less than a third of what they received in 1997, but still well ahead of inflation.

However, they still lagged behind the performance of the FT-SE 100, the main stock market index, which despite the summer shake out, finished some 12 per cent up.

Investment trust investors generally fared less well. Apart from some specialist split capital funds, it was largely the international trusts that best weathered the summer storms. Although their underlying assets performed in line with the markets, demand for their shares fell as investors became increasingly nervous about the future. This led to their discounts widening. By the year end the average discount was around 13 per cent. The effect of low demand and lower share prices meant that the average UK capital growth fund saw a near 6 per cent loss last year.

The table of top and bottom fund performers in 1998 has thrown up some strange bedfellows. Over one year it is highly specialised funds that take the top and bottom positions. Unit trusts concentrating on Korea have done best. At the beginning of the year the South Korean market had lost more than 70 per cent of its value from its peak in 1997. But after the events of the summer, US investors in particular saw that there was real value in a number of its companies and started to buy shares in the Seoul market. It did not take much inward investment to send share prices motoring. By the same token, global events have taken their toll on other emerging markets, especially the South American specialists that had done so well in 1997.

Over five and 10 years, a more mixed picture emerges. US and European specialist unit trusts at the top of the tables are joined by a number of funds that concentrate on technology stocks, largely in the US, as well as a couple that invest in smaller companies there.

Among the investment trusts Foreign & Colonial Enterprise and Candover stand out. Both specialise in venture capital, backing management buy- outs and management buy-ins, largely outside the stock market. They have both shown that they can perform well year in and year out.

Emerging market and Japanese specialists have produced the poorest long- term returns. The latter have suffered from investing in an economy that has shown hardly any growth over the past decade and has yet to prove that it knows how to rectify the situation.

Overall, the performance tables highlight the risks involved in equity investment. The more specialised the fund, the higher the potential returns but also the greater the risk.

the top and bottom trusts in 1998

Best and worst performance over one year (to 31/12/98)

Unit Trusts Investment trusts

Top five Top five

Save & Prosper Korea 156.7 Jove Cap 154.6

Baring Korea 122.1 Johnson Fry Utilities 134.9

Schroder Seoul 119.8 Second St David's Capital 89.7

Fidelity American 84.2 Jupiter Split Capital 78.3

Baring German Growth 70.6 Aberdeen Preferred Income 63.3

Average unit trust 10.0 Average investment trust 4.5

Bottom five Bottom five

Edinburgh Latin America A -42.3 Murray EmergingEconomies -47.4

Perpetual Latin America Growth -43.1 Aberdeen Latin American -51.6

AIB Govett Latin America -46.0 InternationalBiotechnology -52.2

Five Arrows GI Latin America A -46.0 F&C EmergingMarkets -62.5

Scot Widows Latin America -49.5 First Russian Frontiers -83.1

Best and worst performance over five years (to 31/12/98)

Unit trusts Investment trusts

Top five Top five

GA North American Growth 236.4 Jove Cap 297.7

Fidelity American 231.5 F&C Enterprise 293.7

Aberdeen Prolific Technology 223.6 Johnson Fry Utilities 221.1

Invesco European Growth 213.3 TR European Growth 190.2

Gartmore Euro Sel Opps 211.7 Rights &Issues Inc 185.5

Average unit trust 51.9 Average investment trust 39.8

Bottom five Bottom five

Aberdeen Prolific Emerging Mkts -61.9 Gartmore Emerging Pacific -74.6

Save & Prosper Korea -62.8 Govett Asian Smaller Cos -78.3

Save & Prosper SE Asia -63.5 Siam Selective Growth -79.3

Save & Prosper Gold & Exp'tion -66.5 Edinburgh Java -85.0

Old Mutual Thailand Acc -72.1 F&C East German -88.4

Best and worst performance over 10 years (to 31/12/98)

Unit trusts Investment trusts

Top five Top five

Aberdeen Prolific Technology 884.0 F&C Enterprise 923.0

GA North American Growth 838.7 Candover 597.4

F&C US Smaller Cos 759.1 Fleming Ince & Growth Cap 583.5

Fidelity American 696.9 Rights & Issues Inc 580.2

Edinburgh North American 671.7 Edinburgh US Tracker 453.1

Average unit trust 217.2 Average investment trust 225.3

Bottom five Bottom five

Henderson Japan -41.0 Fleming Japanese -8.3

Invesco Japan Growth -43.8 Baillie Gifford Japan -13.4

Henderson Japan Smaller Cos -47.6 F&C Emerging Markets -31.0

M&G Japan Acc -50.6 Baillie Gifford Shin Nippon -34.7

Barclays Japan -58.4 Invesco Enterprise -62.1

Source: Reuters Hindsight. All tables are bid to bid to remove the effect of different charges. Exempt funds not open to ordinary investors have been excluded.