Study the form to find the best bet

The golden rule of investment is that past performance is not necessarily a guide to the future. Nevertheless, all investors should study the past performance tables before picking a unit or investment trust PEP. Past glory doesn't guarantee future success - but the funds that have produced consistently good results are the best place to start when you're looking for a Pep.

First, you need to decide whether you most want your Pep to provide income, capital growth or a combination of the two. Then work out how much risk you want to take. Smaller companies, for example, generally produce more volatile returns than the big blue-chip stocks.

Based on these decisions, concentrate on certain unit and investment trusts sectors. The many funds are divided into categories such as UK growth or emerging markets. This enables you to make meaningful comparisons between their past performance records.

Index-tracking funds have become popular in recent years. These mirror a particular stock-market index, usually the FTSE All Share or FTSE 100, rather than trying to pick shares that will outperform the rest of the market. The risk of the latter strategy is that you end up underperforming.

Thanks to charges, however, index trackers can have quite different past performance records. Over the past five years, the value of investments in the best index trackers, such as Gartmore UK Index and Legal & General UK Index, has increased by some 10 per cent more than the worse funds.

Over the past year, the discrepancy is smaller. But the trackers from Direct Line, Lloyds Bank and NatWest Bank have done better than the rest, partly because they track the FTSE 100 Index. This index has outperformed the All Share, tracked by funds such as Virgin's.

Among the UK growth unit trusts, Exeter Capital Growth, Johnson Fry UK Growth and Jupiter UK Growth have all produced consistently good returns over the past five years. Jupiter's Income fund has also been a top performer over this period, though returns have dropped off in the past 12 months. Other UK equity income funds that have done consistently better than their peers include BWD Rensburg's UK Equity Income unit trust and Royal & Sun Alliance's UK Equity Income fund.

Investors looking for income and prepared to sacrifice capital growth should also study the corporate bond Pep performance tables. Roddy Kohn of Kohn Cougar recommends the M&G Corporate Bond Pep, which is currently yielding around 6 per cent a year tax free.

Those looking for growth should consider investment trust Peps before unit trusts, according to Mr Kohn. The share prices of many investment trusts are currently at a discount to their assets, giving you cheap exposure to their portfolios. "This gives investment trusts a defensive quality you just can't get from unit trusts," says Mr Kohn.

Among the UK general and UK growth investment trust Peps, the performances of Fleming Claverhouse, Mercury Keystone and Fleming Enterprise have stood out for much of the past five years. Meanwhile, income-seekers should look at Henderson's City of London and Kleinwort Benson's Merchants for the same reason.

"More adventurous investors should look for funds which invest across Europe," says Mr Kohn, who particularly likes Kleinwort Charter investment trust. TR European and Gartmore European have also done well in recent times, as have Gartmore's European unit trust and the Friends Provident European unit trust.

Smaller companies are an alternative gamble for less risk-averse investors. Martin Page of the Countrywide network of independent financial advisers says: "Smaller company funds are currently raising lots of money simply because smaller companies in the UK did so poorly last year." He warns investors, however, not to expect a good year automatically to follow a bad one.

If you fancy this sector, the Gartmore and Schroders smaller companies unit trusts have done well over the past five years, while Henderson Strata stands out among the investment trust specialists.

There have also been new products launched in the run-up to the end of the tax year. Martin Page says that the managed Peps from Fidelity and Schroder are proving popular with investors. These allow you to put money into three of the managers' funds within the same Pep.

However Mr Page cautions investors to disregard slick marketing campaigns and concentrate on the best funds, on the same basis that you would choose any investment. "Look at your current portfolio in order to decide where to invest this time. Ignore all the flim-flam," he says.

USEFUL NUMBERS

BWD Rensburg: 0113 245 4488, Direct Line: 0181 253 7737, Exeter: 01392 412144, Fidelity: 01732 361144, Fleming: 0171 638 5858, Friends Provident: 01722 413366, Gartmore: 0171 782 2000, Henderson: 0171 638 5757, Johnson Fry: 0171 451 1000, Jupiter: 0171 412 0703, Kleinwort Benson: 0171 623 8000, Legal & General: 0171 528 6618, Lloyds Bank: 0345 418418, M&G: 0171 626 4588, Mercury: 0171 280 2800, NatWest Bank: 0117 940 4040, Royal & Sun Alliance: 01403 232563, Schroders: 0171 382 6000;

The writer is features editor of the `Investors Chronicle'.