THE search for investment wisdom can take newcomers to the world of unit trusts down unexpected roads, or even on to the streets. However, the Doonesbury cartoon strip would seem one of the most unlikely advice centres of all. But Alice, the suddenly wealthy bag lady, appeared to know what she was talking about last week when faced with investing her newfound millions. Her 'contacts' on the street had told her that 87 per cent of all fund managers failed to match the long-term gains in the Standard & Poor's 500-stock index, a broad gauge of the New York stock market. So she was buying trackers. These are funds whose managers make no attempt to outperform the market in which they invest. Instead, they build a portfolio that mirrors the market's movements, and sit back. The advantage for investors is that passive management makes the funds cheap to run, so fees are lower. But in a world where glossy financial magazines regularly laud the bull-market heroes of the fund-management world, how can it be true that so many managers can't even keep pace with the market? How do they earn their money? These are questions asked regularly by professionals and experienced individual investors. I don't know which out-of-work broker gave Alice her information, but a study produced by Chicago-based fund-tracking company Morningstar - admittedly a bit old, going back 10 years from April 1995 - broadly bears out her conclusions. As fund management is a long-term business, the broad results probably still apply. Over one year, only 110 of the 1,097 funds followed by Morningstar - or 10 per cent - beat the S&P 500. At 10 years, the S&P's performance remained elusive for all but 56 of 262 funds measured - or 21 per cent. Another telling statistic - over 25 years, only 32 per cent of the actively managed funds beat the index. So a US$10,000 investment in an S&P-index fund over that period would have become $217,000. In an average actively managed fund, you would be $61,000 poorer. Potential investors might see this as no problem. Just pick the funds that bet the index, and plump for them. But it's not so simple, as Alice probably will tell you. If the previous year's performance was exceptional, it can pump up the long-term record enormously. (Watch what happens once the boom year of 1993 drops out of the five-year performance figures for Asian funds.) Picking which fund is going to outperform is a hard trick to master. That caveat about previous performance being no guide to future returns means just what it says. That is all very well for investors in the United States, but what about investors in Hong Kong? Ours is a much smaller market. Surely fund managers' local knowledge means that beating the Hang Seng Index over, say, five years is easily achievable. Sadly, no. Out of 21 Hong Kong funds tracked by Lipper Analytical Services Asia, only 13 would have been a better bet than an index tracker over the period. Even the best performer - HSBC's GIF Hong Kong fund, with a total return of $693 - would barely have kept the original $10,000 stake intact. Even so - and this is where it gets less simple, Alice - that was a relatively good performance. The same $10,000 invested in the index tracker, would have been worth a really sad $7,536, thanks to the bursting asset bubble and Asian meltdown. But even that's better than the $3,058 value of the bottom performer: the MBF Hong Kong Special Situations Fund. Compared with the US managers, the small band of Hong Kong wizards don't look so bad - 61 per cent outperformed the index here, while in the US it was 43 per cent. Five years ago there were no HSI trackers. Today, there are three. Hang Seng's Pooled Index fund ranked 11th out of 23 funds over the three-year period - so well done the 10 managers who beat it. Manulife's Global Fund Hong Kong Index product has only a one-year track record and placed 14th out of 21 funds - so once again the defensive managers proved their worth. The third fund, Hang Seng's Investment Series Index fund, was launched only in June. Yet, to September 31 this year, only four funds - EK Hong Kong and China, Thornton New Tiger Selection Hong Kong, AXA Institutional Fund Hong Kong and Fidelity Funds Hong Kong and China - out of the 15 funds that beat the index over both three and five years stayed ahead of the HSI fund. The trick will have been to choose the winners in advance. How? As Alice said later: 'Anyone got a coin to flip?' Ray Heath is pleased to receive general queries about investing in funds, but he cannot offer investment advice or recommendations.