Vital to this view is that sector and stock values perform in a cyclical manner, with the prospect of currently undervalued sectors recovering to give investors a gain at some future time.
Anyone tempted by this approach might look to the Far East, the worst performing unit and investment trust sector of 1997. This week, fund manager Murray Johnstone released six-month interim results for their Scottish Asian Investment Trust up to the 31 January, showing a fall in net asset value per share of 55.3 per cent.
Across the Far East, sweet has turned to sour as the so-called Tiger economies face crisis after crisis.
Investors in Old Mutuals' Thailand Unit Trust would have received just pounds 30.90 on 1 January 1998 for an initial investment of pounds 100 made 12 months earlier.
Until recently, investing into Tiger funds seemed like a good bet. Glossy fund prospectuses and annual reports carried pictures of booming Eastern city states like Singapore, with high rise sky-lines and new hi-tech industries.
But Peter Montgomery, who runs the Scottish Asian Investment Trust, warns that the worst may not yet be over. Speaking from Singapore, he agrees with contrarians "that assets in this market look very cheap in the longer term, but there are still problems to come. From an individual investor's point of view, it looks cheap but could get even cheaper".
Mr Montgomery distinguishes between Tiger economy's which are already adapting to the crisis and those still in denial. "Hong Kong, Taiwan and Singapore have faced up to their changed circumstances and will pull through fastest."
The root problem in these fast-developing economies lie in their use of borrowed money to fund the expansion of export industries.
Some of this money has come from international sources, but much from domestic banking systems which lack cash reserves. With exporters failing to maintain growth, business bankruptcies have multiplied. Local banks, which have lent and lost, do not have enough cash to stay solvent.
"These countries are coming to foreign investors looking for more cash, but getting a poor response," warns Mr Montgomery. "What we are seeing in the worst cases is systemic failure which can only be put right by major changes in the way they conduct business."
Another fund manager, who prefers to stay anonymous, points to Malaysia as one of the worst examples of this failure.
"Chinese Malaysian businesses are being asked to do `national service' and bail out the Prime Minister's ethnically Malaysian family and friends by lending their businesses money. This is just a recipe for further business collapses," he warns.
Tiger funds are available as unit or investment trusts. Both are collective investments, but there the similarity ends.
Unit trusts are open ended, with new money creating new fund units, and cash raised invested directly into the range of stocks specified by the trust prospectus. At any time, at least 95 per cent of funds held must be invested, even if the market is falling.
You cannot sell unit trusts on the open market, but must redeem them from the fund managers. The managers meet the cost of redemptions from the 5 per cent cash they are allowed to hold, or from selling stocks owned by the trust. This means that when markets fall fund managers remain locked into them.
Investment trusts differ from unit trusts in three important ways. Firstly, they can hold far more of their fund in cash. So fund managers can sell when a market starts to fall, and buy back when it has bottomed out.
Secondly, they can then borrow, or "gear" the trust on the value of stocks held in it. If markets are rising, this allows them to buy early and take profit. Finally, they issue shares traded like any other on the stock exchange. If you want to sell your holding, you must find a buyer.
Because they are traded like other shares, they can be bought at a discount to the net asset value (NAV) owned by the fund. Many funds invested into the Tiger economies are currently trading at substantial discounts of 20 to 30 per cent on their net asset values.
In theory, this should make them a good buy, with in-built gains for investors. But, like unit trusts, the price at which investment trust shares trade is a function of demand for those shares in the market, not the real value of assets owned by the fund.
Mr Montgomery still thinks investment trusts are a better buy than equivalent unit trusts "as long as you are buying them over at least a five-year period, and are sure you won't need to sell earlier. Sooner or later, the discounts to net asset values on these shares will close."
But he warns savers that one country funds are inherently riskier than those investing across the whole sector. "Plenty of people enjoy holidays in Thailand, but this is not a good reason to put all your cash into a Thai fund. Diversification reduces risk."
Those tempted by a Tiger fund can invest a lump sum or start a regular premium saving plan. Up to pounds 1,500, or 20 per cent of the annual general personal equity plan (PEP) allowance of pounds 6,000 can be used to invest into Tiger funds. But, as most growth from these will be capital not income driven, the PEP charges may outweigh tax savings for many.Reuse content