Live by the sword ...

'Fund managers are as capable of making mistakes as any of us'

The other day a neighbour accosted me in my local village pub, wanting to know how I invested my own money. When I told him that my portfolio was probably little different to thousands of other investors he clearly didn't believe me. Surely there must be some "special" investments I have made that are just for those in the know, he queried. Not so. Like most reasonably successful investors, it is all down to planning and discipline. Inside information seldom plays a part these days. Indeed, it would be illegal if it did.

The other day a neighbour accosted me in my local village pub, wanting to know how I invested my own money. When I told him that my portfolio was probably little different to thousands of other investors he clearly didn't believe me. Surely there must be some "special" investments I have made that are just for those in the know, he queried. Not so. Like most reasonably successful investors, it is all down to planning and discipline. Inside information seldom plays a part these days. Indeed, it would be illegal if it did.

Perhaps most surprising of the answers I gave him, from his point of view that is, was that a fair proportion of my investment capital was held in managed funds. This is a way in which the more thoughtful and knowledgeable investor can add value. Knowing how good a fund manager is or appreciating the strengths of a particular investment house - particularly understanding the way in which they manage their investment process - will give an edge (see funds survey, page 6).

Like many who work in the investment industry, my portfolio is a combination of funds and individual shares, but there are plenty of investment professionals who never bother investing directly. Is it better to invest directly or use funds? There is no simple answer.Different people have differing opinions and there are pluses and minuses on both sides.

Take cost. Investment funds have a management fee, but the managers and administrators have to be paid. But fund managers are likely to deal on more advantageous terms than individuals, paying small, if any, commission to stockbrokers and benefiting from the offerings of new issues that are not always available to the general public. And there are tax advantages. Changes to a portfolio that take place within a unit or investment trust are not subject to Capital Gains Tax. The only time the Capital Gains Tax may become payable is when the fundholder sells.

But fund managers are as capable of making mistakes as any of us. These days fund management groups tend to adopt much more disciplined processes to ensure the people they employ are diligent in the pursuit of the particular policy that the funds they are managing require. Still, it is quite possible to take the wrong view of the market - such as ignoring technology shares or adhering to the value approach at a time when growth and momentum techniques are making the running.

Investors would do well to remember that managed funds are often the most effective way of gaining access to specialist markets. They provide a broader spread than most people are likely to be able to achieve themselves, which in turn should limit the risk. But the value of your investments can fall as well as rise. In the end you can only be as successful as the manager in whom you are entrusting your money. Making that choice is just as important as picking an individual share.

* Brian Tora is chairman of the Greig Middleton Asset Allocation Committee