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•Five Greatest Ways of Winning in the Stock Market 35

ment usually put forward for unit trusts is more questionable. The managers will
claim that they are experts in picking shares that are going to perform well. They
certainly need to be to earn their money so let’s see how well they have to do.

Looking at what has happened over the last five years of the bull market to
£1000 invested in the average unit trust you will find that, at 1999 prices, it had
risen to £1580. This is a compound rate of return of just under 9.6%. Could the
private investor have done better? If you take into account that the FTSE All Share
index, an index of capital growth without taking account of dividend income, did
over 16% per annum over the same period you should be able to take a view.

Of course the investor could have been lucky and chosen the best performer who
managed an incredible £4278 – or something over 33% per annum. But they could
have picked the other end of the spectrum and lost more than half the original stake.

According to the Association of Unit Trusts the value of funds invested in unit
trusts went up between April 1998 and March 1999 from £170 billion to £192
billion. The managers’ initial charges that year at say 5% gave them £1.1 billion and
their annual 1.5% cost investors £330 million. Of course they have their expenses to
find out of that, but arguably they have very little risk.

That describes the good times when people were investing in unit trusts in a long
bull market. March 1999 saw the start of what now looks like an equally long bear
market, and investors are seeing the value of their funds and pensions diminishing
very rapidly – over three and a half years at the time of writing. Again, it does seem to
be a heads-you-lose, tails-the-unit-trust-manager-wins situation, since most unit trusts
are losing much more money than the general stock market. They are simply not
appearing to be the hedge or buffer against hard times that they boasted of in the past.
And they still draw their initial fees and annual charges – great idea or what?

Here comes the twist

• Read the next great idea.
• Form or join an investment club.