Personal finance: Can CATs get the cream?

Regulators want to promote the kitemark on domestic ISAs, but unmarked ones can give a better return, writes Paul Slade

Regulators have hinted that they may force mortgage, pension and ISA (individual savings account) companies to give the issue of Government CAT marks much more prominence in ads and literature.

CAT - charges, access, terms - marks provide a kitemark to identify plans which meet specified minimum standards for low charges, easy access and simple terms. So far, the marks have been applied only to ISAs, but some argue the CAT approach should be extended to stakeholder pensions and mortgages. However, financial regulators are not convinced that product providers are using the marks properly, even on ISAs.

Speaking at a financial regulation conference recently, the Financial Services Authority (FSA) consumer relations director, Christine Farnish, said: "It appears that some retail firms are being very coy about telling customers what it is all about and whether or not their products are CAT standard.

"If kitemarks are going to work, we need to put an awful lot more effort both into consumer education and, possibly, disclosure requirements for firms."

Norwich Union's investment funds director, Mark Skinner, says: "I think that the authorities could make a bit more noise about the advantages of CAT standards. If the CAT standard is going to mean something, it has to be more widely publicised and more widely understood.

"CAT standards don't give you a performance guarantee, but what they do guarantee is that your charges are going to be capped. If you control your charges, there is no question that you have more of your money working for you."

However, others fear that a greater emphasis on CAT marks will tempt savers to conclude that any fund lacking the CAT seal of approval is not worth buying.

Fidelity director Ann Davis says: "I think it is potentially very misleading. It's saying that the CAT mark is the prime consideration in judging your fund, and I don't think it should be. Value is not just low charges - it's good overall returns.

"A lot of the funds that are never going to qualify as CAT funds are the ones that invest internationally.

"Those funds are more expensive because of the research involved in running an international fund. Those that have a more diversified investment from a geographical point of view, will probably perform better in the longer term."

Both Norwich Union and Fidelity have CAT funds as well as non-CAT funds in their range. The key question in assessing the value of CAT marks is whether or not the higher charges, which disqualify some funds from winning CAT status, produce any worthwhile extra return. If this is the case, then the higher charges may be a price worth paying for the better performance they bring.

We asked the independent ISA experts Chase de Vere to look at the performance of 157 ISA-qualifying funds in the UK All Companies sector over the past three years.

We then divided the results into two tables - one for those funds which now carry a CAT mark in their ISA form, and another for those which did not.

The results show that the best CAT funds cannot hope to match the performance of the best non-CAT funds.

The top CAT fund over three years was Scottish Widows' UK Index Fund, which shows growth of 77 per cent. The best performing non-CAT fund over the same period - Henry Cooke Solus Special Situations - shows much more impressive growth of 126 per cent . None of the top eight funds in the sector have a CAT mark.

On the other hand, the average CAT fund's growth of 73 per cent over the past three years considerable outperformed the average non-CAT fund's growth of 54 per cent.

The message would seem to be that, if you want the very best growth of all, a CAT fund is unlikely to deliver it.

If, on the other hand, you are prepared to settle for average growth, there is no harm in picking a CAT fund for the extra peace of mind that it offers investors.