Unit trusts that put the market in its place

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For my coming book, Investment Made Easy, I recently reviewed the performance of unit trusts in comparison with the UK stock market. I asked Micropal to prepare statistics showing how UK equity growth, equity income and equity general unit trusts have fared against the FT-A All-Share index.

Micropal's figures show that pounds 100 invested in the index with net income reinvested would have grown to pounds 472 over the 10 years ended 1 October 1993. An investment of pounds 100 in the average unit trust in the sectors would have grown to pounds 425, with 44 of the 157 funds beating the market.

The five-year figures were worse: pounds 100 in the market would have grown to pounds 190 against pounds 155 for the sector. Only 13 of the 288 funds beat the FT-A All-Share index although 87 of them managed to beat the FT-SE 100 index.

There are two main reasons why most unit trusts fail to beat the market:

The statistics are prepared on an offer to bid basis. This is the accepted practice, but it is harsh because the heavy initial charges of 5 per cent to 6 per cent are deducted from performance, as are the annual management charges of about 11 2 per cent. These are hefty handicaps for fund managers to overcome.

The FT-A All-Share index is difficult to beat as it operates without charges. Also, the portfolio management is efficient in its way; profits are run on companies that succeed and any company that falters badly is cut out of the index by the Review Panel as soon as its market capitalisation falls below the minimum level. A new, vigorous contender then takes its place.

Of course, some unit trust managers beat the market regularly. If you are seeking a unit trust investing in UK equities you should always look for consistent performance; trusts in the top quartile of their sector over the last year or so and the last decade. Detailed performance figures are published regularly by Money Management.


A more safety-first and constructive alternative is to invest in a tracker fund that simply tries to match the index.

They usually fall just short of the market's performance, but the low charges ensure that most tracker funds regularly appear in the top quartile of their sectors. Gartmore's UK index fund, for example, has tracked the FT-A All- Share index to within 0.15 per cent in 53 of 56 months. It has no initial charge, a spread between the bid and offer price of only 1.9 per cent and annual charges of only 1 2 per cent per annum.

Another way of beating the heavy unit trust charges is to invest directly in the shares. If you are risk-averse, you would need a portfolio of at least 20 shares to give you a reasonable spread and a feeling of


Say you invested pounds 500 in each of 20 shares, representing an outlay of about pounds 10,000. With this kind of sum you could no doubt negotiate with your brokers a deal to cut their normal minimum charge of about pounds 25 on small transactions.

I would be surprised if you could not do a deal at around pounds 15 per transaction, which would be 3 per cent of your pounds 500 investment in each share.

Then there is the market- maker's turn and stamp duty, so one way or another, the small investor would not save much on the 5 per cent initial charge of most unit trusts. However, you would save the 11 2 per cent annual charge that is such a large proportion of today's average dividend yield of only 3.6 per cent. Over 10 years, with income reinvested on a compound basis, that 11 2 per cent would make a substantial difference to the performance figures.

You should, however, bear in mind that 20 shares is much less of a spread than you would obtain with a unit trust. In addition, owning as many as 20 shares can be a bit of a hassle.


In May, I selected 10 shares for a high-income portfolio that had an average yield of 62 3 per cent per annum. When I review that portfolio later this month and choose a new one, I will relax my selection criteria a little to let in another 10 shares.

If you want to start your own high-yielding portfolio then, I hope that my suggestions will be of interest to you.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. He has agreed not to deal in a share within six weeks before and after any mention in this column.