Why investors should not put too much trust in the experts: Few managed funds have beaten the market over the past 10 years

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The Independent Online
PRIVATE investors are piling into unit trusts with an enthusiasm not seen since 1987, but they will be lucky to get their money's worth out of them, writes Richard Thomson.

They are likely to find after a few years that they could have made more money doing their own investment rather than paying a fund manager to do it for them.

Very, very few of those smart, highly paid fund managers succeed in keeping up with the market, let alone beating it. Look, for example, at the performance of UK equity general unit trusts over the 10 years to 2 August 1993. (General funds invest overwhelmingly in stocks included in the All Share Index.) Over the past 10 years, the All Share Index has risen by 353.13 per cent. Over the same period, the 57 general funds turned in an average performance of only 293.76 - and that includes dividend income reinvested while the index does not. A mere eight funds managed to outperform the index.

In other words, pounds 1,000 invested in the All Share Index 10 years ago would now be worth pounds 4,531, but on the average, unit trust performance would be worth only pounds 3,937. If you had put your money into Abbey Income & Growth, the worst, you would have made only pounds 2,770.

Managed funds incur charges (typically of around 1.5 per cent of funds invested each year) and dealing charges (usually around 0.2 per cent), so even when they exactly track the index, their investment return will be slightly lower. But this does not explain the average unit trust shortfall of nearly 60 points below the market.

So what went wrong? 'One reason for the underperformance of the funds is that many of them invest heavily in blue chip companies,' says Rachel Medill, at M&G. 'This is a good defensive ploy during a recession but means they miss out on recovery.'

Over short periods, therefore, the performance of general funds may diverge substantially from the index. But over 10 years, the swings in the market will even out the funds' performance, leaving them with little excuse for falling so far short.

As one investment expert points out: 'There are more than 1,300 unit trusts in the UK, but there just aren't that many good investment managers.'

'The point of investing in unit trusts is to pick the best funds,' says Victoria Nye, at the Unit Trust Association.

If you had been lucky enough to pick the right fund - such as M&G's Midland & General, which rose 552.49 per cent over the past 10 years - you would have made handsome gains. But anyone that good at picking unit trusts could probably pick their own shares and avoid the fees.

----------------------------------------------------------------- POOR PERFORMERS ----------------------------------------------------------------- The 10 UK general unit trusts with the lowest return over 10 years, compared with the stock market index ----------------------------------------------------------------- Fund % increase Abbey Income & Growth . . . . . . . . . . . .177.68 S&P & UK Equity . . . . . . . . . . . . . . .190.22 GRE Guardhill . . . . . . . . . . . . . . . .193.44 Scottish Widows Equity . . . . . . . . . . . 212.79 Prosperity General . . . . . . . . . . . . . 215.61 MGM UK Growth . . . . . . . . . . . . . . . .217.39 S&P Scotshares . . . . . . . . . . . . . . . 219.11 Prudential Equity . . . . . . . . . . . . . .232.02 CU Quilter . . . . . . . . . . . . . . . . . 233.42 NM UK Equity . . . . . . . . . . . . . . . . 241.83 FT-A All-Share Index . . . . . . . . . . . . 353.13 -----------------------------------------------------------------

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