Find the right way to grow

PERSONAL EQUITY PLANS With hundreds of PEPs available, Patrick Collinson offers a guide to choosing one that suits you

THE PROMISE of higher returns at a time when building societies are offering a paltry 3.5 per cent on deposits is luring many people into the stock market via PEPs. But if you are going for growth, which of the hundreds of plans is for you?

Lucky PEP investors who put pounds 1,000 into the St James Place UK & General Progressive unit trust five years ago have seen the investment soar to more than pounds 2,700 - an average gain of 22 per cent a year.

Left in an average building society account, the pounds 1,000 would have crept up to pounds 1,299, a rise of just 5.4 per cent a year, and only just ahead of inflation over the same period.

Yet the building society depositor who is wondering wheth- er he or she has been over-cautious need look no further than the Equitable Life Special Situations trust for comfort. PEP investors in that fund have seen pounds 1,000 converted five years later into pounds 979 - a reduction of some 2 per cent.

The figures, from adviser Chase de Vere's analysis of nearly 400 PEP- able unit trusts over the five years to this summer, demonstrate just how risky or rewarding investing in a PEP for growth can be.

It also shows that leaving money in a deposit account is not the best option in the long run - the average unit trust PEP grew by 9.25 per cent a year, compared with the building society's 5.4 per cent.

So how should a growth investor go about selecting a PEP from among the hundreds of qualifying unit and investment trusts on offer from a multitude of fund managers?

q Check the fund's performance, volatility and consistency.

q Decide between shares, unit trusts, investment trusts, or a combination.

q Assess the level of risk you are prepared to take.

q Choose your level of exposure to non-UK markets.

q Check the level of charges - initial, annual and exit.

Getting good advice is essential. Unless you are a stock market professional, you might be well advised to visit an independent financial adviser.

Amanda Davidson, an adviser in London, says: "If you are picking a growth PEP, you should be looking at consistency, and finding a fund group with good performance across the whole range of its funds.

"Short-term volatility should not worry you - if it does, you shouldn't even be looking at growth PEPs."

First-time investors are inevitably drawn to unit trusts or investment trusts which are the latest top performers. But what many advisers look at instead is how consistently a PEP has stayed in the "top quartile", which is fund manager-speak for the highest 25 per cent of funds.

Take Hill Samuel's UK Emerging Companies Trust, which occupies the No 2 spot in Chase de Vere's PEP rankings over five years. If one looks at the one-year performance figures, the fund is firmly in the bottom quartile, ranked 431st of 472 funds.

Advisers also keep an eye on the individual who runs the trust at the fund management group. No one in the UK quite matches the investment cult that built up around Fidelity's Magellan Fund run by Peter Lynch in the United States, but investment advisers here would shudder if Fidelity's Anthony Bolton (Fidelity European, Fidelity Special Situations) or Schroder's Jim Cox (Schroder UK Enterprise) were to stop managing their respective funds.

Consistency of performance and volatility thin down the 500-strong PEP field, but still leave the investor with a perplexing range of choices.

Which sector of the stock market should you pick? PEP investors may choose from a fund entirely invested in the UK or in Europe, but may also put up to pounds 1,500 in "non-qualifying" funds that invest in global markets. Within the UK, they can also choose between blue-chip companies, smaller companies or special situations funds.