For your final PEP choice...

The best advice on corporate bond and income funds.

MOST OF the fund managers with the leading investment groups highlight Europe as the main sector for growth investors. If income is the aim, or you are nervous about the stock market's current volatile condition and the direction share prices are heading, they recommend either corporate bond or high income funds.

There are hundreds of funds to choose from in these sectors. More new corporate bond and high income funds are being launched - in the past couple of weeks we have seen Fidelity, Perpetual and Societe Generale, among others, promoting new funds in these sectors - to attract last-minute PEP investors before PEPs end.

To help you make a choice, The Independent spoke to a number of leading independent financial advisers about the funds they would recommend for your final PEP.

Among the 130 or so unit and investment trusts specialising in Europe, the IFAs all highlighted the funds run by Fidelity, Gartmore, Invesco, Newton, Scottish Widows and Jupiter. These have all had outstanding performance records

According to Graham Bates of Bates Investment Services: "The European message will continue for some time. Only five funds that were in the top 30 PEP performers for the five years up to the end of 1993 were still in the top 30 for the five years to the end of 1998.

"These included Fidelity European Opportunities, and the European funds run by Lazards, Royal & SunAlliance, and Scottish Widows - the other consistent performer was Jupiter Income. I particularly like the Fidelity fund, as it invests in leading blue chip European companies rather than the higher- risk small and medium sized ones."

Although not a qualifying fund, and therefore subject to the pounds 1,500 limit on PEP investment, Kim North of Pretty Financial recommends the Societe Generale Technology fund for the long-term growth investor who does not mind taking a higher than average risk.

While less than a year old, the fund is run by Alan Torry, who had outstanding success when running the technology fund of Aberdeen Prolific, one of the leading long-term performers. "The new technology battleground, while it has risks, still presents some exciting investment opportunities over the long term, and the manager of this fund has proved that he can make the right stock selection," says Ms North.

If you are a first time PEP investor, or someone wanting a low-risk UK investment, then a tracker fund could be the answer. "I would favour either the Legal & General or the Scottish Widows fund," says Paul Penny of Financial Discounts Direct. These are low-charging funds, which can be bought from discount brokers such as his firm, reducing the cost even more. You could also look at other funds, such as Virgin and Marks & Spencer, that have shown good performance when compared against actively-managed UK growth funds.

Among the UK growth funds, David Tomson of Aitchison & Colegrave recommends Old Mutual UK Growth: "It is going through a purple patch. Valued at some pounds 200m, it is slightly smaller than most funds run by the larger groups, and it has performed well by investing in telecom and pharmaceutical companies, as well as the blue chips."

Graham Bates gives his recommendation: "Save & Prosper Premier Equity Growth - a consistently good performer run by a manager with a proven stock-picking record, and Fidelity UK Growth, a solid, well-run fund."

When it comes to income, IFAs are split between those who prefer corporate bond funds and those who like the total-return approach of income funds. With a corporate bond that invests largely in company loan stock, the starting yield of 6 per cent or more is very attractive. But, as rule, the underlying investments do not rise and fall in the way equities do.

So while they offer a good deal of protection against falls in the stock market, they only offer limited growth potential. Income funds, on the other hand, tend to invest in the ordinary shares of leading companies such as BT and BP, that offer the prospect of rising income over time, as well as capital growth in the price of their shares.

Among the conventional corporate bonds, not those investing in the more risky, almost junk bond sector, the IFAs recommend the funds offered by CGU, which pays a monthly income, and M&G, both of which have good, consistent performance records.

"Corporate bond funds are ideal for someone who wants to maximise income, but equity income funds make a lot of sense if investors want a mix of growth and rising income," says Jason Hollands of BESt Investment. Among the funds he highly recommends are Newton Income and BWD Equity & Fixed Income.

To these, other IFAs add Jupiter Income, Perpetual High Income, Premier Dividend Fund and Save & Prosper Premier Equity Income. "The latter, like its sister growth fund, has shown steady, consistent performance," says Graham Bates. "But most importantly, the manager has an obsessive approach to stock avoidance, meaning not buying into the wrong companies."

As an alternative course of action for investors averse to taking any high risks, Roddy Kohn of Kohn Cougar, suggests investors could look at the HSBC Capital Protected Income PEP. With a listing on the Dublin Stock Exchange, this has the added advantage of also offering a single company PEP for anyone who wants to make use of their full PEP allowances.

With a target yield of 7.25 per cent, it also guarantees a full return of income after five years. It invests three quarters of its money with leading high street names such the Halifax, which will return the guaranteed amount at the end of the fifth year. The rest it invests in various derivatives to generate the high income.