Expert tips on how to pick your own

PEPS AND TESSAS

IN principle, a self-select PEP looks the ideal way into the stock market.

A self-select PEP combines tax savings with an almost unrestricted choice of investments, allowing investors to pursue their own ideas and tips and to create a portfolio that exactly matches their financial outlook.

The reality is rather different. The freedom to invest in any company, unit trust or investment trust creates as many problems as it solves. Most investors do not have the time, the knowledge or the interest to watch over their own portfolio of shares.

Additionally, the pounds 6,000-a-year PEP investment limit makes it difficult for small investors to split their money between enough individually chosen shares to achieve an adequate spread of risk. It is easier, and often cheaper, to opt for a pre-packaged PEP managed by one of the big investment companies.

Paul Killik, of the retail stockbroker Killik & Co, argues that there is no need for the self-select option to appear so daunting. It is perfectly possible for investors to limit their risks by buying only unit and investment trusts, the same pooled investment vehicles that are the basis of many managed PEPs. The difference is that a self-select plan will not restrict you to one investment group.

To examine the possibilities, the Independent on Sunday asked three experts to suggest investments for a self-select PEP.

With pounds 250m in what it calls its Unrestricted PEP, Mr Killik's firm is one of the biggest players in the self-select market. Mr Killik's plan also has one of the simplest charging structures - a 1.65 per cent dealing charge (minimum pounds 40) and a pounds 7.50 dividend collection fee.

Lloyds Bank is even bigger, with pounds 768m in general PEPs and another pounds 209m in its single company plans. Unlike the self-select PEPs available from most stockbrokers, the Lloyds scheme is not completely unrestricted. Investors have a choice from a wide but not unlimited range of more than 1,000 UK shares and investments. Additionally, their choice of unit trusts is restricted to just three Lloyds Bank funds. The Lloyds PEP is an "execution-only" or no advice scheme. So the Lloyds' recommendations come from Charles Galbraith, assistant managing director of the bank's stockbroking arm.

Charles Levett-Scrivener is product manager with Towry Law, a large firm of independent financial advisers, which is itself quoted on the stock market.

Besides the execution-only plans, investors can also choose PEPs that offer advice on investment selection. These are generally more expensive but Killik offers advice as part of its standard self-select package.

Paul Killik, Killik & Co

Income: Mr Killik recommends splitting a pounds 6,000 PEP investment evenly between City Merchants High Yield Trust and Govett High Income Trust. City Merchants is a small investment trust that is yielding 8.5 per cent. It invests in securities that are convertible into shares. Mr Killik says City Merchants has outperformed the much larger BZW Convertible Trust. It is also much cheaper, its shares trading at a 7 per cent discount to the value of its underlying investments (called Net Asset Value). Govett High Income is producing a dividend yield of 9.2 per cent from an unusual portfolio made up of high-yielding UK companies, fixed interest stocks and emerging market shares. Mr Killik is also attracted by the 13 per cent discount.

Income and growth: Investors could split their money between British Assets Trust and the CF Quantock unit trust, Mr Killik suggests. He believes British Assets, the flagship fund of Edinburgh managers Ivory & Sime, is on the up after years of poor performance. It yields 6 per cent and stands on a discount of 15.8 per cent. In tipping the new CF Quantock, Mr Killik is backing the strong record of Bob Brown, its manager. The expected yield is 4.5 per cent.

Growth: Mr Killik recommends putting pounds 4,500 into Fidelity Special Values Investment Trust. Another recently launched fund, Special Values, is managed by Anthony Bolton, the manager of Fidelity's highly successful Special Situations unit trust. Special Values yields 1 per cent and its shares trade at a discount of 10.4 per cent. The remaining pounds 1,500 could go into TR Technology, a high-risk split capital investment trust that has only two more years to run. Mr Killik says: "If the value of the portfolio stays the same, the ordinary shares will rise by 30 per cent. If it rises by 20 per cent, the shares will rise by 130 per cent. If it falls by 30 per cent, the shares will be valueless."

Charles Galbraith, Lloyds Bank Stockbrokers

Income: For inexperienced investors Mr Galbraith suggests the investment trusts, Fleming High Income and TR High Income. Both offer a yield of about 6 per cent, trade at discounts and offer the possibility of growth. For more experienced investors, BT and Allied Domecq both pay a high dividend yield - a reflection of the poor performance of their shares. Mr Galbraith warns that Allied Domecq, yielding 5.6 per cent, may have to cut its dividend. BT is yielding 6.1 per cent.

Income and growth: Mr Galbraith's favoured investment trusts are Malvern UK, which, he says, is essentially an index tracking fund, and Finsbury Trust, a special situations fund with a good track record. Malvern pays a yield of 3.9 per cent, while Finsbury Trust pays 3.2 per cent. The trading companies he singles out are the building materials firm, Caradon, which yields 5.4 per cent, and Cadbury Schweppes, the chocolate and soft drinks group.

Growth: Scottish Eastern and Fleming Enterprise are large investment trusts investing predominantly in the UK. Scottish Eastern provides an element of overseas exposure. Fleming Enterprise shares are about 8 per cent below their net asset value, while Scottish Eastern looks even better value at an 11.5 per discount. For the more adventurous, Mr Galbraith suggests two smaller company funds, Fleming Fledgeling and Invesco English & International. After a disappointing year in 1995, he believes smaller companies may be due a return to favour. For experienced investors looking for single stocks Mr Galbraith tips BAA, the company that runs Gatwick, Heathrow and five other UK airports, and the leading drugs group SmithKline Beecham. More speculatively still, he suggests the oil company, Burmah Castrol, and the supermarket group, Asda.

Charles Levett-Scrivener, Towry Law

Income: Mr Levett-Scrivener recommends Henderson Highland, an investment trust that is currently yielding 6 per cent. The trust, which is managed by Henderson Touche Remnant, the UK's biggest investment trust manager, invests in UK companies. Its shares trade at a small discount of about 2 per cent.

Income and growth: The new manager of USDC Investment Trust is Nick Train, who managed the top-performing GT Income fund. Mr Levett-Scrivener believes Mr Train's own record makes USDC a good bet. The intended yield is 4.4 per cent, and the trust trades at an 8 per cent discount.

Growth: Mr Levett-Scrivener suggests investing in the new "C" share issue from Schroder UK Growth. This trust is managed by Jim Cox, who also looks after the highly successful Schroder Enterprise unit trust. At the end of January, Schroder UK Growth had risen by more than 31 per cent since its launch in March 1994. The trust's shares currently trade at a 2.7 per cent premium, meaning they cost more than their share of the underlying investments. The "C" share issue should be a relatively cheap route in.