The trick is to pick exactly the right time: Recovery funds have failed to maintain their gains of earlier this year. Christine Stopp looks at the risks and rewards

OVER five years to 1 July 1987 the Brown Shipley Recovery fund returned an almost unbelievable 500 per cent growth to investors, turning pounds 100 into pounds 600. Over the next five years it turned pounds 100 into a mere pounds 35.

These sobering figures make a number of points about recovery funds: they are high-risk growth funds; they are cyclical; and it is important to get in and out at the right point in the cycle. The investor who held on beyond the summer of 1987 would have seen his 500 per cent gain reduced to 124 per cent over 10 years to July 1992.

Recovery unit trusts have had a tough time for the past five years. Of the seven with a five-year record only one, M&G, has produced a positive return over the period. Only this and one other outperformed the UK Growth unit trust sector average. Not one beat FTA All-Share growth of just under 23 per cent.

From the start of this year to the end of May it looked as though recovery funds might be on the way back. Since then the recognition, heightened in the past week, that the economy is still sluggish has depressed their value once more. 'Things look difficult,' said Patrick Evershed, who has spent the past few years nursing the Brown Shipley fund back to health.

Mr Evershed feels that the short-lived gains of the early months of the year at least 'give a good demonstration of how these funds can perform when there is some optimism around'.

Under a former manager the fund had too much invested in very small companies. When the crash came investors rushed to redeem units and the fund manager had to raise cash by selling his most marketable holdings. Those left were the dross of the portfolio, whose value plummeted, leaving the fund very badly affected.

This is a familiar post-crash story among smaller, specialist funds caught between falling markets and unit redemptions. It has taken Mr Evershed a long time to clear away dead wood and rebuild a well planned portfolio.

After a bit of activity followed by a correction, is now a good time to buy recovery funds? Perhaps not surprisingly the three management groups we spoke to all felt that it was, though they admitted that patience would still be necessary as dramatic growth may not be around the corner.

Prolific, which launched its recovery fund a year ago, feels it touched exactly the right moment in the cycle. Hitting the lowest point in the GDP growth graph it was able to set up 'a portfolio of extremely undervalued assets', with the result that it is 12th in the 147-fund growth sector over a year, and one of two recovery funds to beat the FTA All-Share index (the other was Legal & General UK Recovery).

Only four recovery funds have beaten the UK Growth sector average over a year. Three of these were set up after the crash. A new fund can make a fresh start, choosing a whole portfolio of undervalued but attractive stocks with good performance prospects in the short term. The old portfolio's performance is inevitably hampered by a number of holdings which may or may not perform but which the manager does not yet feel it right to sell.

This does not necessarily mean one should choose the new funds in preference to the old. Their 'start-up' performance effect may already be played out. What one should look for, according to Prolific's Mike Webb, is continuity of management and a record of management expertise.

Mr Webb underlines the risk involved with a recovery fund. 'People should understand that these are not blue chip funds. They are an investment in companies which are in trouble.' As such, they should form only a small part of an investor's total assets.

Management style, as the comparison between Brown Shipley and M&G shows, can make a difference. In the boom year of 1986 the Brown Shipley fund grew by 80.3 per cent, while M&G was up by 47.6 per cent. In 1990 Brown Shipley fell by 52.7 per cent compared with M&G's 23.3 per cent. Following reconstructuion work by Mr Evershed, Brown Shipley hopes its portfolio will chart a steadier course in future.

A commonly expressed view about recovery funds is that they cannot perform if they are too large. The extraordinary M&G fund, at pounds 750m, disproves this. Richard Hughes, its manager, feels the recovery philosophy still holds. Indeed, M&G launched an investment trust to emulate its recovery unit trust in March this year. The packaged units in the split capital trust were launched at 100p and were trading this week at 98p.

Mr Hughes manages this as well as the unit trust. He has seen holdings such as Midland Bank go from a share price of pounds 1.80 to pounds 4.80 over the past year. 'The recession throws up lots of good opportunities, but we need to see an upturn in the economy as well to produce really good returns.'

Mr Hughes feels that after the recent price correction now is a good time to buy, especially if investors reduce their risk by using a regular savings plan. Investors should expect to hold for at least three years, though longer terms are better. 'Over any 10-year period we have never done much worse than double the building society,' Mr Hughes said.

Those who have not the time or the nerve to hold for so long should take advice from Mr Evershed: 'Never stick around in a recovery fund when the economy is booming.'

----------------------------------------------------------------- RECOVERY UNIT TRUSTS ----------------------------------------------------------------- Figures show trusts from UK Growth Sector, offer-to-bid, income reinvested over periods to 1 July 1992 Growth of pounds 100 invested (sector ranking) over: 1 year 5 years 10 years Number of trusts in sector 147 96 47 Aetna Recovery 100.92 (78) - - Allied Dunbar Recovery 99.76 (92) 97.04 (51) 442.35 (18) Arkwright Recovery 104.35 (41) 52.99 (95) 164.24 (47) Barclays Unicorn Recovery 95.93 (121) 89.64 (63) 397.89 (25) Brown Shipley Recovery 90.91 (137) 35.55 (96) 224.34 (45) CCL Recovery 100.48 (85) - - Fidelity Recovery 103.88 (45) - - Guinness Flight Recovery 83.54 (145) 67.58 (90) 480.40 (11) L&C UK Recovery 109.47 (15) - - Mercury Recovery 94.52 (126) 81.83 (79) 514.59 (9) M&G Recovery 100.95 (77) 104.70 (32) 554.53 (6) PC Cam Int'l Recovery 79.56 (146) - - Prolific Recovery 109.63 (12) - - Sector average 101.03 97.01 424.20 FTA All-share 108.63 124.96 523.01 ----------------------------------------------------------------- Source: Micropal -----------------------------------------------------------------