Special Report on Personal Equity Plans: Options to tempt the safety-first investor: Giving the choice of investments to someone else may pay off, if you expect to make large annual contributions, says Christine Stopp

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The Independent Online
NOW the year-end PEP boom is on, what ingredients do the professional advisers recommend for the ideal plan? The stockbrokers Gerrard Vivian Gray, Henderson Crosthwaite, and Whitechurch Securities, the Bristol fund specialists, have come up with some answers.

Each was asked what advice would be given to someone 'coming in off the street' with pounds 9,000 to put into a PEP. All three were unanimous in saying that, if this was the total investment, they would be unhappy about putting pounds 3,000 of it into a single company PEP, which was seen as too risky in a portfolio of this size.

If the client insisted, said Richard Twydell of Henderson Crosth waite, he would suggest a water company as a safe option. Kean Seager of Whitechurch would avoid a single company PEP and invest part of the pounds 9,000 before and part after the year-end, using up some of the 1993-94 general PEP allowance as well.

Mr Seager offered a single investment suggestion for three risk categories. His first idea was the income shares of split capital investment trusts for the safety-conscious. Even though these shares look expensive now, they offer a yield of 8-9 per cent - twice what is available from the building society. Kean Seager likes River & Mercantile income shares, emphasising their defensive qualities. In the October 1987 crash they fell from 100p to 85p, but the share price made up the lost ground by the following February.

The less risk-averse investor might look at an equity income fund. Mr Seager likes the GT and Aetna smaller companies' dividend funds, yielding 6.36 and 6.81 per cent respectively at 22 February, both of which have PEPs with no charges apart from those of the unit trust.

For a higher-risk choice Mr Seager recommends the capital shares of split capital investment trusts such as River Plate, whose wind-up date is September 1996. The fund will have to grow by only 2 per cent each year for the remaining 3.75 years of the trust's life to maintain the capital shares' current price of 36p. If it grows by 10 per cent a year, the price could rise 450 per cent to 160p.

Gerrard Vivian Gray (GVG) runs its own managed PEP portfolios, with three choices of investment objective: income; UK growth; and international growth. Mark Searle, who runs the international portfolio, thinks his plan's value lies in enhancing capital performance - with the possibility of investing in fast-growing emerging economies - and reducing risk by spreading investment across world markets.

Mr Searle's portfolio holds 20 per cent in the Smith & Williamson Smaller Securities unit trust, 30 per cent in the Scottish Investment Trust, 30 per cent in Baring European Growth unit trust and 18 per cent in Schroder Far Eastern unit trust, with 2 per cent cash. Though well within the PEP qualifying rules, this portfolio gives around 30 per cent UK exposure, 34 per cent in the rest of Europe, 6 per cent in the US and 25 per cent in the Far East.

Like GVG, Henderson Crosth waite (HC) has a special arrangement for smaller investors, with 'managed in common' portfolios for either a growth or an income objective.

Richard Twydell makes the point that 'people should get away from thinking of PEPs as pounds 20-a-month savings plans'. A married couple putting the maximum allowance into PEPs since they were first established could have invested almost pounds 57,000 between them to the start of this tax year. This represents a substantial part of most people's portfolios.

To show how PEPs could be used in a large client portfolio, Mr Twydell gave the example of a married couple in their late fifties, with investments of pounds 100,000, who are looking for growth. As HC clients they might have 5 per cent cash, 10 per cent gilts, 15 per cent zero dividend preference shares, and 70 per cent in shares, of which 50 per cent would be UK and 20 per cent overseas. The UK shares would include Northern Electricity, Severn Trent Water, Misys, Betterware, BTR, Cable & Wire less, GEC, Rothmans, United Newspapers and Rolls Royce.

The whole of the 70 per cent share element could be held in PEPs, assuming a certain level of growth. If the couple's contributions had grown in line with the Friars House Capital Fund, a unit trust managed by the HC fund manager, John Napier, their pounds 57,000 would now be worth pounds 77,000.

A PEP bought through an adviser may have higher charges than a unit trust or investment trust PEP bought direct from the fund manager, but handing the investments choice to someone else may be worth it, especially if the investor makes annual contributions of several thousand pounds.

(Photograph omitted)

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