Keeping track of your ISA

It's true that every fund has its day, but it pays to keep a track on even the best performing ones. According to fund manager T Bailey, 60 per cent of the best performing funds between 2000 and 2003 failed to maintain their original momentum in the subsequent three years.

Within the IMA All companies sector several funds once in the top quarter performance tables are now languishing in the fourth. Ballie Gifford's British 350, Halifax's Special Situations, Hiscox New Street Opportunities, HSBC UK Growth and Income, Marlborough UK Equity Growth, Newton Income, were what fund manager Jason Britton dubs 'stars' in the three years between December 2000 to 2003. However between December 2003 December 2006 all these funds dipped, and now appear within the bottom quarter of their sector.

Fund managers

To be fair, most funds will go off the boil at some point and manager change is often a major catalyst for this. For example Bill Mott's decision to leave the day-to-day management of Credit Suisse Asset Management's Income and Monthly income funds is largely blamed for the once star fund's current underperformance. "Turnover among UK equity and fixed income fund managers ran at more than 50 per cent in 2006," says Jason Britton, fund manager at T Bailey. The loss of a manager can drive down momentum, especially in the case of much-hyped star fund managers; sometimes a change at the helm can cause some more twitchy investors to move their money.

What they do

Fund management style is another good indicator of whether a fund will perform well over a number of years. Britton claims: "Some managers perform well in particular market conditions, when the markets change, they are no longer playing to their strengths and it shows. The same applies with funds - some have a particular focus, like for instance small companies, but if all the action is in the large cap arena they will struggle through no fault of their own."

And when

There's also the question of timing. Being in the wrong place at the wrong time can cause a fund to slide. Asset allocation is often regarded crucial to investment performance. For example in 2005 the Japanese IMA sector returned 44 per cent growth, but in 2006 it was the worst performing. Continental Europe on the other hand was the best performing major geographic region in 2006, but was one of the worst the year before.

Time-pressed advisers and investors, who don't have the resources to constantly check their clients' ISA investments, could consider several options. Britton says advisers should consolidate old under-performing ISA and PEP funds into what he calls a 'self-cleaning' fund of funds. He says: "The manager builds a portfolio of best of breed funds, then watches over it constantly, making changes as soon as performance in any of the funds dips, or markets change. This removes the need to worry about spring cleaning in future - the multi-manager does the job for you."

Fund of funds

Fund of funds, or any multi manager fund, will also remove the 'wrong place wrong time' variable, claims Britton. "A fund of funds will make changes quickly if a good manager moves and they are not happy with the successor. This is a really valuable benefit for those investors who only have time to review fund performance once a year with their IFA, or when the six monthly fund statement drops on the mat."

Fund of funds managers will also have the skill and knowledge to anticipate the markets and the time and resources to continually monitor them. Fund of funds will appeal to advisers because they able to delegate monitoring of the performance. The multi-manager fund manager will have met both companies - the one the fund manager used to work for and the one they are moving to, - and will have a much better idea of whether a move should be made and can facilitate that without troubling the client.

Exposure all areas

An increasing range of funds seek exposure, not just to different equity areas but also various asset classes, such as cash, bonds, property and equities; this is particularly ideal for ISAs, so you can use these as the foundation of your portfolio and then add on some satellite holdings, if you wish.

But they are not suitable for everyone, only if you are looking for long-term 'hands-off' investments. IN addition, not all MM funds are well run. Some companies view them as a money making exercise, given the level of investor interest, yet fail to deliver strong returns or a robust investment structure. Therefore you need to be just as questioning as to the merits of the fund as you would be with any investment.

30 March 2007 © Moneyextra.com

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