Adventure with a Safety-Catch
Durman, Paul, The Independent (London, England)
FOR SAVERS accustomed only to building society accounts, unit trusts can prove an unnerving investment.
They cannot offer the steady growth of interest-paying deposit accounts, with the value of your savings forever rising and never falling. As financial advertisements always warn, share prices (and therefore unit prices) go down as well as up.
Like any stock market investment, the progress of unit trusts can be erratic, continually swayed by economic news, political turmoil and the varying fortunes of a multitude of businesses. The risks are as numerous as uncertainties about the future.
However, while the short-term performance of unit trusts can be volatile, the long-term returns from investing in shares have far outstripped the growth from building society savings. A unit trust allows small investors to take advantage of these potentially higher returns while eliminating the worst risks of the stock market.
If you invested your money in the shares of a single company, you could lose your entire investment if it went bust. If you spread your stakes across 40 or 50 companies, these dangers are greatly reduced. While one company may fail, and others perform badly, the overall returns should hold up because of good results from the majority.
A unit trust does just this, pooling the savings of many individuals and investing the total across a broad portfolio of shares or other investments, particularly interest-bearing securities called bonds. This fund is then looked after by a manager whose job it is to buy and sell the investments to make the best use of the trust's resources.
There are more than 1,500 unit trusts, run by banks and life insurers as well as specialist fund management firms. Investors can choose funds that specialise in providing an income, or those that aim to provide capital growth; funds that invest entirely in the UK, or in the US, mainland Europe, Japan, the Far East, or right across the world.
The tables show the best and worst-performing unit trusts over the past one, three and five years. The results show both the high returns possible, and the potential dangers.
For example, if you had invested in the Beckman Bio-Tech fund at the start of last year, you would have virtually doubled your money. A pounds 1,000 investment made five years ago in Prolific Technology would now be worth more than pounds 4,800.
Notice also the performance of the average unit trust over each of the periods: 16 per cent over one year, 48 per cent over three years and 109 per cent over five years. This is far more than investors will have earned on their building society savings.
Equally, however, it is quite possible to lose money over the shorter term. An investment in Edinburgh Latin American last year, or in Govett Gilt Bear three years ago, would by now have lost you more than a quarter of your money. Only over five years is the worst-performing fund showing a profit. So the rule is: if you are going to need your money in the foreseeable future, do not invest it in unit trusts.
The one-year figures also illustrate another stock market lesson: the importance of fashion (or sentiment), and the need to be wary of it. A couple of years ago, City pundits were full of enthusiasm for Latin America, tipping it as the next big emerging market. The miserable results of this can be seen in the table, with Latin American funds claiming four of the bottom five places. …