The new launches that don't fly high

Unit Trusts

EVERY YEAR, the range of unit trusts available to the UK investor grows by a staggering amount. There were 105 new trusts launched last year and another 97 so far this year.

But is the number of launches really justifiable? And should investors go for the new or the tried and tested? Several arguments are put forward in favour of investing in a new trust, rather than an existing one.

Mike Webb, sales and marketing director at Prolific, said: "In theory, if a unit trust group is launching a new trust, then it is doing so because, from an investment point of view, it makes sense to be putting money into that particular market at that particular time."

Generally, this means shares are reasonably priced and offer significant growth potential. Often the rationale behind the launch of a new trust is to capitalise on the opportunities presented by the emergence of a new market such as China, Taiwan or Thailand.

It is also argued that new trusts are better than old ones because the fund manager is starting with a clean slate - rather than inheriting a portfolio of stocks, some of which may need changing - and will probably give the trust greater attention. This should, in theory, result in superior investment performance.

Finally, it is common for unit trust groups to offer a discount off the offer price of a new trust to encourage investors into the fund. Recent examples include GT's High Yield Fund, which offered a 1 per cent discount, and Henderson Touche Remnant's Ethical Fund, which offered a 2 per cent discount.

But the arguments against investing in a new trust are equally compelling. All too often, the investment rationale put forward for opting for a new trust does not pan out, no matter how plausible it may have seemed at the outset.

A prime example of this was Gartmore's Euroventures trust, launched in 1990, which aimed to capitalise on the investment opportunities in Eastern Europe, after German re-unification and political reforms across the former eastern bloc.

Initially it was to invest in companies which had exposure to these markets, but later it was to have invested directly in them.

But as its director, Jim Clark, explains, the trust was ahead of its time. "The framework in those countries did not develop quickly enough for the trust to take off." Consequently, after two years the trust had to be merged with the group's European Select Opportunities trust.

Good performance, especially in the short term, is far from guaranteed. Several of the trusts launched towards the end of last year, for example, have bombed so far this year. Latin American funds have been particularly hard hit. Perpetual's Latin American Growth fund, launched in November last year, fell by 23 per cent between the beginning of the year and last month, making it 166th of 167 funds classified as international equity growth.

In addition, groups often do not launch trusts when markets are sensibly priced, because they know investors are unlikely to part with their money at such times. But, all too often, investors wait until a market has risen before they take the plunge, by which time it is usually poised to turn down.

And although, on one hand, discounts offer a cut-price way of getting into a unit trust, on the other they can encourage investors to buy for the wrong reasons. Roddy Kohn, principal of the Bristol-based financial adviser Kohn Cougar, said: "Discounts entice people into buying trusts that they would not otherwise buy. They get distracted by the discount and marketing blurb.

"In my opinion, unit trust groups ought to be focusing on managing their existing trusts better instead of launching new ones. But obviously they see greater opportunities in marketing new trusts," he said. "While consumers continue to buy new ones,the issue of poor performance will never be addressed."

Many of the trusts launched this year have been designed as the underlying investment for a corporate bond PEP. In last year's Budget, the Chancellor extended the regulations so that a unit trust could qualify for a PEP even if it were fully invested in what are called bonds or fixed-interest securities. These include government gilts, bonds issued by companies, and convertibles.

The advantage of these PEPs is that they should prove less volatile than their share-based equivalents and offer a higher level of income than is currently available from a building society - around 7.5 per cent tax- free is typical.

But Prolific's Mike Webb warned: "It does not follow that the trust offering the highest yield is the best deal - in fact the opposite may well be true."

In order to achieve a high yield, trusts may be forced to invest in bonds issued by poorer- quality companies. These have to offer a high yield, but there is a danger they will go bust or not pay the interest on the bond.