Judy Delaforce, product development manager at Fidelity, said the Euro-PEP was for more sophisticated investors. The low income from many European stocks means the income tax savings are negligible. The tax advantages lie in capital gains tax exemptions, which are relevant only to investors with large enough portfolios to exceed their CGT threshold.
The Euro-PEP has become almost entirely a collective vehicle offering only unit or investment trusts. Early experiments to allow investors to select their own continental stocks or for the PEP manager to invest directly in Eurostocks have been abandoned. Although a few stockbrokers may still allow favoured clients direct investment in European shares, the cost and complexities and difficulties of getting an adequate spread of risk are too much for most PEP managers.
Scottish Widows and Barings were two of the very few managers which included European shares in their PEPs and both are now offering only collective vehicles.
David Graham, group unit trust manager at Scottish Widows, said it was better to give clients a bigger spread and lower charges through a collective vehicle. Scottish Widows used to choose four continental equities for PEP clients, but the annual management fee of 1.5 per cent charged VAT on top. The European unit trust PEP charges just the management fee of 1.5 per cent.
The high price of continental shares - they can cost pounds 200 a share - meant it was difficult to allocate the right number of shares to clients whereas unit trusts can be split proportionately between clients. If a client wanted to sell, an order might have to go to a stockbroker to sell just two Deutsche Bank shares leading to colossal charges, Mr Graham said.
Other problems with investing directly in continental shares include higher dealing charges on some exchanges, the difficulty of defining an equity for Inland Revenue purposes and need to have secure double tax agreements.
The definition of a quoted share in some parts of Europe includes bond or preference forms which do not meet the 'qualifying status' of a PEP. If the PEP holding fell outside double tax agreements, the PEP-holder could lose all the tax advantages of having a PEP.
There are, however, plenty of collective Euro-PEPs on offer from fund managers. Charges tend to be higher than for UK collective PEPs, typically at 1.5 per cent annual management fee against 1 per cent or 1.25 per cent for UK unit trusts.
Performance of European trusts has been affected by the gathering recession on the continent, offset by currency translation gains following the UK's withdrawal from the Exchange Rate Mechanism.
Fidelity's European Values investment trust has grown 9.2 per cent since its launch in November 1991. It also has two European unit trusts PEPs which are in the first quartile of investment performance of European vehicles.
The Prudential's European unit trust PEP price has risen 42 per cent since the start of January last year. The Pru is negative on European investment in the short term. It is underweight in Germany and countries linked to the German economy and overweight in countries such as Switzerland and the Netherlands with high levels of exports to the US and UK, which are beginning to pull out of recession.
Fleming Continental European Investment Trust with assets of pounds 160m is the largest investment trust investing on the continent. Steven Bates, European fund manager of Flemings, said stock markets in Europe would be influenced this year by falling corporate profits and declines in interest rates. 'Those markets such as France which are particularly sensitive to interest rates should perform well.'
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