Unit trusts facing east: Gold investments justify the high risks involved

THE FAR EAST had a powerful influence on all the top performing unit trusts over last year.

Half the top 10 funds were invested in gold. A significant factor in the increase in demand has been growing wealth in the Far East, particularly China, which has meant a bigger market for jewellery.

The top fund was Mercury's Gold & General, which showed a one-year rise of 275 per cent. All the gold funds showed one- year returns of more than 100 per cent.

Gold funds' performance is being driven by demand outstripping supply.

The gold price has risen over the year from dollars 320 to dollars 380 after four years of languishing at a static level. Performance was also boosted during the year by the public endorsement of gold investment by George Soros and his Quantum funds.

David Hutchins, manager of M&G's gold fund, said: 'When the Chinese start to get some money the first thing they buy is a refrigerator, the second is a colour television set and the third is gold jewellery.'

He emphasised the high-risk nature of gold investment. 'Obviously, for a long time gold funds have been at the bottom of the performance tables,' he said. 'We are coming from a very low base.'

Julian Baring, manager of Mercury's gold fund, which now has pounds 266m under management against pounds 24m at the beginning of the year, believes that gold will still be a good investment next year.

But he said: 'It is unlikely that we are going to see the spectacular returns that we saw last year.'

The other top performers were invested in a spread of the Far Eastern economies of Malaysia, Singapore, Korea, Thailand, Taiwan, China and Hong Kong - but not Japan.

The spectacular rise in the Hong Kong market has underpinned the performance of many Far Eastern unit trusts. The market rose 100 per cent over the year, boosted by money from China and from US mutual funds.

However, a graphic illustration of the risks in this sector is this week's tumble in the Hong Kong market, which lost 6 per cent in one day.

The bottom performing unit trusts were invested either in the US or in derivative-based tracking funds designed to hedge investments in a falling market.

Govett's bear funds, which occupy four out of the bottom 10 slots, work in reverse to the index they track. For example, if the index falls by 10 per cent they will rise by 10 per cent.

The poor performance of US-invested funds reflects the length and severity of the transatlantic recession. However, many fund managers are bullish about recovery in the American market over the coming year.

James Capel attributes the poor performance of its Far Eastern fund to the 50 per cent invested in Japan, which has performed very badly over the year.

Capel has rectified the performance of the fund by stripping out the Japan investment.

------------------------------------------------------------------- BEST AND WORST FUNDS OF '93 ------------------------------------------------------------------- Top 10 % change Mercury Gold & General 275.80 Waverley Australasian Gold 144.72 Fidelity Asean 143.69 M&G Gold & General 128.55 Murray Pacific Growth 121.66 NM Gold 120.49 James Capel Hong Kong Growth 120.28 S&P Gold & Exploration 117.24 Thornton Little Dragons 115.93 City of London Emerging Mkts 113.10 Bottom 10 Fidelity CR America -5.10 Govett MIS US Bear -5.37 AXA Equity & Law N American -5.66 City Fin. American -6.64 Thornton American Smaller Cos -7.21 Govett MIS UK Bear -16.96 Beckman Bio-Tech -17.50 James Capel Far Eastern Grth -17.60 Govett MIS Gilt Bear -26.98 Govett MIS European Bear -31.39 -------------------------------------------------------------------