Informed choices

Ratings are a good rough guide for novice investors, says Simon Read

Picking a winner when it comes to investing in unit trusts can be a real problem. No investor has knowledge of what the future holds, so it's very much a matter of crystal-ball gazing when it comes to predicting which funds will perform well.

But it doesn't have to be total guesswork. Novice investors can take a leaf out of the professionals' book and use the same information that the experts get in making their investment decisions. Rating companies such as HSW and Micropal analyse performance and produce statistics to help investment decisions, whether made by professionals or not.

Indeed, Independent readers already have easy access to this professional data - Saturday's edition includes a whole page of unit trusts statistics supplied by HSW. Deciphering the statistics may not seem easy, but the point of any performance table is to provide a comparison - offering investors a handy guide to how well or badly individual funds are doing compared to others in their sector, or across the market as a whole.

Ratings guides should not be the only information you use to decide which funds to invest in. They can only reveal details about past performance, which may be no indicator to the future. The wise investor will find out more about fund managers and investment philosophy.

Fund managers are important to the performance of any fund as they are the people who make the investment decisions. They are experienced - and highly paid - professionals who should be ahead of the game and the trends and give you the inside track to sensible investment. So if a fund has done well it is often because of a fund manager's performance. It's worth checking that the same person is still managing your fund - a different hand on the tiller could make those past performance statistics totally irrelevant.

It's also worth checking on different companies' investment philosophy and stock selection techniques, as explained opposite. Once you know why funds invest in a certain fashion it can help explain why past performance has been good or bad.

But for starters the ratings figures can give a good indication of which funds may be worth investing in. Both the ratings specialists, HSW and Micropal, have been around since the mid Eighties, but they use slightly different methods when calculating their figures. The sharp-eyed will therefore spot what seem like inconsistencies when comparing the two companies' figures, but either will serve as a useful guide.

The good news is that both are independent companies so you can be assured that the figures are genuine. HSW, whose full name is Hardwick Stafford Wright, set up its Hindsight service some 10 years ago. This is a PC-based fund performance analysis and presentation system used by many of the UK's leading fund management houses.

It allows the professional investor to interrogate past performances, prices and distribution details of more than 15,000 funds, trusts and equities. The company has also developed the statistics service used by the Independent and a number of specialist financial magazines.

Micropal also provides performance figures for unit trusts, life, pensions and offshore funds for the press, and fund analysis for many investment management institutions.

But past performance figures can be misleading. The biggest criticism is that they are simply a snapshot of a particular time-span, and all sorts of influences could have distorted the real picture. Take Micropal's much-trumpeted Star Rating system. The system assesses funds based on their risk-adjusted performance over a three-year period. "Our research has shown that three years is the optimum period over which to review the performance," says Micropal. That may be, but it still won't stop misleading figures emerging.

Let's say that three years ago, in 1993, a fund manager was on top form and all his or her investment decisions hit home. Great news. But what if, since, then, everything that fund manager has touched has turned to dust? Under the three-year rating system the fund may still look marvellous, even though it's currently a very poor performer. Taking a snapshot of performance over other periods, whether months or years, can be equally misleading.

Such information can lead investors to make a very wrong decision, which is why it is important to take factors other than performance into consideration before choosing an investment fund n