Investor alert: what's it all about, 'alpha'?

You might expect that funds with this label bring the best returns... You might be wrong

Think "alpha", think the first and best. Think alpha males like George Clooney. Or perhaps in your school days you achieved an alpha mark - the highest score in an exam. Or what about the alpha star, the brightest in any constellation?

You might think any of these things, but one association that won't spring so easily to mind is alpha investment - though it will soon be rolling off your tongue if the marketing departments of fund managers have their way.

For "alpha" has become the latest buzzword as rising markets tempt more people back into shares, and investment houses seek a piece of the action. A growing number of funds are now carrying this label, with the suggestion that they can deliver outstanding returns.

Yet concern is mounting that this sexy title doesn't necessarily mean stellar performance. In many cases, say independent financial advisers (IFAs) and rival fund managers, the returns are either flat or lag behind those of competitors promising lower performance.

"Having heard the catch-phrase, clients are asking for alpha funds, simply because they think the word demonstrates some form of certainty of higher performance," warns Philippa Gee of IFA Torquil Clark.

Jason Britton, at fund manager T Bailey, says several alpha funds do "nothing different" from others that carry a less glitzy name.

In fund management parlance, "alpha" is defined as the return on your investment that a skilful individual fund manager is able to add. Crucially, it is extra to, and separate from, that made by normal stock market movements.

What you get back from general share moves is known as "beta". In other words, for managers to describe their funds as alpha, they should be talented enough to choose the best individual companies available in order to outperform the broader stock market.

Naturally, investors might well get the idea that in exchange for the usual annual fees, these specialist, higher- risk alpha funds will "shoot the lights out" with their performance.

Today, there are 10 alpha funds available to individual investors within the UK All Companies sector, which includes many mainstream popular funds.

But some of their performance barely grazes their peers and is found wanting instead.

For example, the Credit Suisse Alpha Growth fund rose by 26.47 per cent in the 12 months to 2 May this year - significantly less than the average fund rise of 33.41 per cent in the UK All Companies sector, as measured by the Investment Management Association, an industry body.

Over three years, only three out of the five funds that have been around that long beat the same measure.

"Put simply, the word alpha effectively means out-performance," says Ms Gee. "But the point is that most funds should strive to achieve this anyway, without the need to include the word within the fund name."

Clever marketers have "brainwashed" investors into believing alpha funds are the best form of stock picking, adds Mr Britton.

"Stock picking" funds are those where the managers are not influenced by the weightings of stocks in a relevant index - the FTSE All-Share, say - when constructing their portfolios.

Rather, in theory at least, they will hunt out less well-known companies with greater potential for growth.

With alpha funds, the fund manager's skill is even more in the spotlight. But research from T Bailey suggests that the approach of these managers is nothing out of the ordinary.

Rather, their leading stock holdings largely mirror the FTSE All-Share - a mainstream list of companies. And a close look at the nine alpha funds that have been in existence for more than one year shows there is still a herd mentality among their managers.

Among the nine, says Mr Britton, BP and GlaxoSmithKline feature eight times in the funds' top 10 holdings - and the oil major and pharmaceuticals giant can hardly be said to be hidden gems.

Among other stocks, the banking leviathan HSBC appears six times, oil giant Royal Dutch Shell five times, and HBOS bank and mobile group Vodafone four times, Mr Britton says.

The fund that most closely resembles the FTSE All-Share is Allianz RCM UK High Alpha. Its three largest stock holdings are BP (8.9 per cent of the fund), GlaxoSmithKline (6.6 per cent) and Royal Dutch Shell (5.4 per cent).

With their patchy performance, similar holdings and a bias towards the largest companies on the stock market, the jury is still out on alpha funds, warns Mr Britton.

"Fund selection comes down to performance, the people involved and the investment process employed - not the name of the fund."

Ms Gee cautions that the alpha label is not bad news but says that investors should find out more before putting their money in the funds.

Within the UK All Companies sector, she recommends New Star UK Alpha, managed by Tim Steer. Another fund she cites as worthy is Schroder UK Alpha Plus, managed by Richard Buxton.

In their defence, alpha managers say their funds are flexible enough to choose large-cap stocks - instead of rooting around for smaller shares - when they think it's right to do so.

"It's all about the potential returns each stock can make," says Mark Lovett, manager of the Allianz Alpha fund.