Money Mail Fund League

SMALL investors have had their fingers badly burnt by buying funds after they have turned in a short period of spectacular performance. Now Money Mail is tackling the problem with new fund league tables highlighting those which have offered consistently above average returns through investing in top management.

Click here to see how the funds you've been contemplating stack up against their competitors.

For private investors, it's all too tempting: a fund sits at the top of the performance tables, and the statistics tell us it has turned £1,000 into £3,000 in the past five years. Investors plunge in, committing all £7,000 of their Isa allowance. But six months later they discover that far from having soared to £8,000 their investment has fallen to just £5,000 - and it is still losing money.

The investor has made a fundamental mistake because they have bought a fund at its peak. Traditional performance tables show a single snapshot in time. It takes only a very short period of rapid growth based on one good guess to thrust a fund to the top and catch investors' eyes. But from here it can all be downhill, and you will have invested too late.

The most obvious example was the spring of 2000, when technology companies and the growth funds that invested in these shares dominated performance tables. Many of those who invested lost a packet. When the regulator, the Financial Services Authority, produced its investment fund tables, it chose to ignore past performance completely - instead focusing purely on price.

At Money Mail, we believed it was possible to produce tables which would highlight those companies which invest in good management and produce consistently above average returns.

Most people who buy into investment funds are long-term investors who need consistently above average performance. We asked independent financial adviser Hargreaves Lansdown to help us come up with better tables which would help investors find those funds which had shown consistently above-average performance.

To achieve this, we looked at the month-on-month performance of each fund and awarded a score depending on performance, highlighting funds which more often than not turned in above average performance. Each fund could earn a maximum of ten points and a minimum of one point each month.

We divided the total score by the number of months to come up with a rating out of ten. The higher the score, the more often the fund has beaten its sector average.

We've also printed how much money each of our top funds would have produced over one, three and five years. But, remember, these figures show returns from just one point in time. If you invested at any other time, you'll have made more or less money than our tables suggest.

We looked at funds in the three main sectors UK investors use: UK All Companies, UK Equity Income and Europe excluding the UK.

Top of the UK All Companies sector over five years is Exeter Capital Growth, a highly specialist fund investing in a type of investment trust share. This is followed by JP Morgan Fleming UK Equity Income and Newton Income.

All produced good returns for investors over the medium term - though they have suffered over the past year or so amid the general stock market malaise.

Over five years tracker funds do very well, outperforming all but a handful of managed funds. But over the shorter term, since the stock market turned down, trackers do less well.

However, the longer the period, the closer all funds get to the average score as investment trends and fads are evened out. Both the UK Equity Income and European sectors show a similar trend, with funds increasingly veering to the average over the longer term.

Remember that these tables are just one tool when making your investment decisions. You also need to look at the investment strategy of the fund manager and accept that some styles of investment will go into and out of fashion.

No matter how good the manager, there will be periods of underperformance. These tables also take no account of the degree of risk involved with funds.

Ben Yearsley, a researcher at Hargreaves Lansdown in Bristol who compiled the tables, says: 'You should always look under the bonnet to understand how the fund works.

Managers such as Anthony Bolton at Fidelity Special Situations will have periods of underperformance, but this is more to do with the sort of companies they are investing in rather than mistakes by the manager.

'It is only really the quality fund managers who consistently beat the trackers. There are a lot of bad fund managers you really shouldn't trust with your money.'

Other important things to look for include whether the fund manager has changed. For instance, star manager Nigel Thomas no longer runs Solus UK Special Situations but its longer-term results are influenced by his management. Since he left, it has clearly gone off the boil.

Sanwa European Growth has also lost a star manager and financial advisers warn performance could drop off. But replacements for management changes at Newton Higher Income and Continental European are causing less concern.

Some funds which don't appear near the top of our tables could be on the way up because of management changes. Mr Yearsley says a good example is M&G Capital. This had a terrible performance in the past but has now been taken over by M&G's chief investment officer, Vivian Bazalgette, and is on the way up.

Click here to see how the funds you've been contemplating stack up against their competitors

NEXT week, we reveal the worst investment funds.