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Fundology puts the fun back into funds

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For investors who don't have the capital, the time or the market knowledge to construct their own portfolios in an economically efficient and diversified way, investing in funds makes a lot of sense. However, apart from articles in newspapers, there is precious little readily-available information to help the amateur to pick funds, as opposed to individual stocks.

Now John Chatfeild-Roberts, head of the fund of funds team at Jupiter Asset Management, who has won a quiverful of industry awards for the funds' performance, has come to the rescue with his book Fundology: The Secrets of Fund Investing, which takes the reader step-by-step through what funds are, how they work, and how to pick the winners.

Funds offer ordinary investors an easy way of spreading their investments relatively cheaply and, by pooling their money with others, give them a means to benefit from advantages of scale and diversification. The key to success, though, is finding a manager who can maximise returns.

As Chatfeild-Roberts points out, "The best performing funds over the last five years in the UK turned £10,000 into £38,843, a gain of 288.4%, whereas the worst one reduced the value of £10,000 to only £2,183, a loss of 78.2%." In other words, the first fund would have nearly quadrupled your money in five years, while the second would have lost four-fifths.

Fundology: The Secrets of Fund Investing

He goes on to say, "You would have been very perceptive to have invested in the best fund and unlucky to have been in the worst. But from these figures you can draw the conclusion that by picking funds with some degree of skill you stand to make good money, whereas if you pick funds with the proverbial pin or without having done sufficient research, you are likely to be disappointed."

With more than 2,000 unit trusts and OEICs (open-ended investment companies) available to choose from, the knack, of course, is getting it right. This is what this very useful and easy-to-read book sets out to help the reader to do, by telling the investor what to look out for, and indeed what to avoid.

"The trick is to identify the best fund managers, work out which conditions they tend to do well in (and when they do badly), invest in their funds at the right time, and finally take your profits at the correct time as well," says Chatfeild-Roberts.

One of the pointers that Chatfeild-Roberts highlights is past performance. While all funds carry the standard FSA warning that past performance is no guide to the future, Chatfeild-Roberts says it is equally important to put past performance into context. A competent fund manager outperforming the market is quite likely to continue to do so, if performance is the result of his skills rather than luck or market conditions. Putting his money where his mouth is, Chatfeild-Roberts continued to back James Findlay when he left F&C to set up Findlay Park, and this decision has paid off handsomely.

The chapter on fund management charges is particularly revealing. Experts often deride the apparently high costs associated with investing in managed funds, but Chatfeild-Roberts - who as a fund manager is suitably dismissive of trackers - defends paying the rare breed of above-average performers for their superior returns.

He can justify this position: Jupiter's funds of funds are reliably good performers, and over the past 12 months the Merlin Growth portfolio is up 36% over the past 12 months, and 114% over three years.

The reverse of this is that it is foolish to continue to pay above the odds for inferior returns.

The book concludes with chapters on the importance of managing risk through asset allocation and an analysis of the Jupiter teams own investments.

Fundology is an essential read for anyone starting out and wanting to get the most out of their investments. It is also a useful reminder for the experts about what contributes towards success.

Fundology is published in hardback by Harriman House and is available from the Moneyextra Bookshop, price £14.44.

21 February 2006 © Moneyextra.com

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