PEPSDiscover the best of British

PEP funds investing in the UK are by far the most popular, and a good starting point for someone just beginning to put money into equities. The huge range of UK PEPs can be confusing, so what's the best way of spotting a decent fund?

David Thomson, investment services director at Aitchison and Colegrave, says UK funds are popular for two reasons - familiarity and the fact that earnings overseas can be hit by currency fluctuations, which adds another element of risk: when the pound is strong, earnings abroad will fall.

"We favour large groups with a disciplined investment style and considerable resources. These are also less reliant on individual managers, who are likely to move on," he says.

Mr Thomson prefers funds such as Hill Samuel British, Mercury British Blue Chip, Morgan Grenfell UK Blue Chip and Jupiter Income.

Charges for setting up a PEP vary greatly, from around 0.5 per cent for a fund that tracks the market, to more than 5 per cent for the actively managed funds. These charges can hit performance, although you can reduce them by buying through a discount house such as Har-greaves Lansdown (see page 8). Nevertheless, Mr Thomson says investment track record is the most important thing.

"The difference between the best and worst funds is so huge that the difference in charges pales into insignificance," he says. "Only if all else was equal would we consider charges."

Tracker PEPs that replicate the FT-SE 100 or All-Share index have proved popular in recent years. Mr Thomson warns that the common perception that all trackers are equal is wrong: "In the year to September 1998, the best- performing FT-SE 100 tracker grew by 16 per cent, the worst by 8 per cent."

Of the two types of tracker, he says the All-Share funds are a safer bet than 100 funds. The FT-SE 100 is largely made up of just four sectors - financial services, oil, pharmaceutical and telecommunications. Under- performance in just one of these areas could hit your investment.

Nick Fletcher, director at MGP Investment Management, says that with the index at an all-time high, it is hardly a surprise tracker funds are doing well. Nor will they reflect the investment needs at different stages of your life, he cautions.

"Maybe half your investments should be in low-risk funds and trackers, the rest should meet the special needs that come at different times in your life. Younger investors may be looking for higher-risk funds, older investors may want an income fund or a safer PEP."

Mr Fletcher says that no matter how much you research, you are taking pot luck. "It is not a science and you will inevitably get some decisions wrong. Even previously successful funds face problems," he says.

Funds he recommends include Jupiter Income, Threadneedle UK Monthly Income and Invesco Income.

Martyn Page, investment researcher with Countrywide, a network of independent financial advisers, says investors should be looking at actively managed funds. He says buying a tracker PEP with the market at an all-time high is like buying a house in 1989, at the peak of the Thatcher property boom.

He recommends the Schroder UK Enterprise fund. Although recent performance has not been spectacular, he says it is a relatively secure and low-priced PEP investing in solid companies that should ride any stock market storms.

Mr Page says time spent perusing performance tables in magazines like Money Management is worth while. "Of course, if you only have 10 minutes then you can buy a tracker PEP and get on with your life."

Another option is to invest in a multi-fund or fund of funds, which allows you to spread your money between different PEPs. Skandia Life's MultiPEP gives access to 97 funds run by 20 different fund managers.

"Unless you are very lucky, no PEP is going to be successful over a long period of time," says Peter Jordan of Skandia Life. "With this fund you can diversify from day one."

The fund charges a relatively high initial fee of 4.5 per cent for the service combined with a 0.25 per cent charge when you place your funds. Annual management charges depend on the funds you choose. The advantage is you can spread your investment and switching from a weak to a strong performer is relatively cheap, with around 1 per cent charged.