Should you join the herd?
Investors are flocking into the trusts run by big fund managers. Harvey Jones asks if they are the best places for your money
Sunday 09 August 1998
So should you be swayed? Is it better to follow the crowd and add your money to the pounds 13.5bn invested in unit trusts run by Schroders, or opt for a minnow with just a few million to play with?
Unit trust performance has been exceptional in recent years, and some of the huge funds can boast impressive increases. Jupiter Income has grown by 123 per cent over the last three years. Perpetual's UK Growth is up by 126 per cent over five years. Handsome returns.
Yet some investment experts warn that some of the more successful funds have grown too fast and have found it difficult to repeat their successes once the money floods in from investors desperate to leap on the bandwagon.
Mike O'Shea, joint managing director at Premier Asset Management, says investors looking for fast growth may be better looking at smaller funds. "Some of these very big funds don't add a tremendous amount of value because they end up getting so big that it's hard to maintain performance.
"When you are running a pounds 20m fund, it is far easier to be flexible to get in and out of stocks. If somebody is running a pounds 500m fund, they cannot afford major losses and have to be more cautious. If you go for one of the big funds you get something pretty solid, but you're never going to get something that really catches the imagination," he says.
Premier runs a fund of funds, made up of a combination of both small and large companies. "We don't just look at Jupiter, Mercury, Fidelity and Gartmore funds, which are all included in our fund, but we also look at Royal & SunAlliance, which is performing well at the moment, or Newton, which fell out of favour but now appears to be coming back," Mr O'Shea says.
"With our fund of funds you screen out some of the volatility because you are combining different managers' approaches in one fund."
Roger Cornick, marketing director with Perpetual, dismisses the argument that the larger funds can become too unwieldy to manage effectively. He says the argument that a flood of new money coming into a fund can damage its profitability is false, and that it is easier to maintain growth when buying stock than when looking to sell. He argues that since no investment comes with absolute certainty of growth, it makes sense to choose a fund with experienced managers and a proven track record.
Steve Glynn, sales and marketing director with Jupiter, says it is not the size of the fund that matters, but he admits that larger funds may face more difficulties producing spectacular growth.
"Our benchmark is to outperform the All-Share index rather than aim to be number one. If you aim to beat all your competitors you will have to take a fair amount of risky bets. The fund manager's job does get harder, but there is no reason why the Jupiter Income fund cannot continue to deliver very strong results, although it will be more difficult to deliver our earlier outperformance of the market," Mr Glynn says.
Investment decisions are highly personal. They depend on whether you are looking for solid or spectacular growth, the state of the stock market when you enter, and how you expect it to move. These variables will also dictate your choice of fund.
An independent financial adviser, Brian Dennehy, says it is a difficult time for anybody looking for the next small fund that is going to come from nowhere to beat all-comers.
"At the end of the last recession, when there was a lot of restructuring still going on, a good small fund could take advantage of that and make some big bets. However, the stock market is now very mature, the economy may be heading into recession, and now isn't necessarily the time to be looking for those smaller
funds with perhaps younger, aggressive fund managers. Now is the time to be with the mature funds and managers with a steady approach," he says.
"I would look at something like the Witan investment trust, which has pounds 1.5bn in it, a good pedigree and a number of good managers. Its track record goes all the way back to 1909 and it has therefore been through some pretty horrible periods and lived to tell the tale with above- average performance, so it has got to be doing something right."
Mr Dennehy advises new investors to wait until later in the year before they go into the market. Or to use a monthly investment plan.
"If the markets plummet you can actually take advantage of buying at lower prices," Mr Dennehy says.
Some of the most successful funds in recent years have been index-tracking funds, which have attracted huge sums from investors. Around pounds 1.5bn has been invested in Virgin PEPs since they were launched in March 1995, for example.
Mr Dennehy warns that the prospect of recession is a strong argument against sinking money into a tracker fund. "I don't think you'd want to touch a tracker at the moment as the only guarantee is that the markets will go down. Once the recession is over and the stock market has bottomed out, there may be the prospect of a long growth cycle of maybe four to six years, and then you might consider a tracker. When both the economy and the stock market are at mature stages, it is the last thing you'd want."
Even so, tracker funds have historically done well over the long term, so if you aren't going to take your money out in the short term, they should bounce back from any fall.
And unlike actively managed funds, they aren't prey to the whims of fashion and fund managers.
Fund of funds. A collective fund which only buys shares and units in other funds, usually unit trusts. Funds of funds tend to be more expensive than other unit trusts as the manager has to pay to buy and sell the holdings, so in effect you are paying for two lots of managers. The idea is that the manager only buys top-performers and that this will offset the cost.
qInvestment trust. A company which is quoted on the stock market and buys shares in other companies. Investors can buy and sell shares in investment trusts.
Tracker funds. These funds are set up to follow the performance of a particular stock market index, usually the FT-SE All Share or the FT- SE 100. The funds are run by computer and are cheap.
Unit trust. A pooled fund which usually uses investors' money to buy shares. The fund is divided into units, which can be bought and sold by investors.
Top five unit trust groups
The top-performers by fund value
December 1997 December 1994*
1. Schroder 13,610 6,049 (2)*
2. M&G 9,215 6,841 (1)
3. Mercury 7,293 3,797 (4)
4. Perpetual 6,884 3,017 (7)
5. Gartmore 6,414 4,226 (3)
Figures supplied by the Association of Unit Trusts and Investment Funds
*Figures in brackets indicate position in December 1994
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