UNIT trusts are launched, promoted and recommended by reference according to their past performance, and investors pay an annual fee of one to two per cent for careful fund management - supposedly the key to strong past performance statistics. But are thedazzling past performance figures worth paying for, or are they just an illusion? The increasing popularity of index-linked funds may not provide an answer, but they may just give investors a real alternative to the more expensive ''managed'' funds. If you compare unit trusts with each other, a two per cent management fee may seem justified. But comparing the same unit trusts against the underlying markets will give you a different perspective. For example, fewer than seven per cent of British unit trusts have outperformed the FTA All-Shares Index over the past five years. Funds in the Japanese and North American sectors did even worse. Only five out of 25 beat the first section of the JapaneseTSE index, while none of the 37 American unit trusts beat Standard & Poor's 500 index over 10 years. While some analysts are quick to highlight long-term advantages, they say information on index-linked funds is not easily attainable in Hong Kong. The reason is that many tracker funds made available to Hong Kong investors are still unauthorised by the Securities and Futures Commission (SFC), preventing companies from promoting or advertising fund information. For example, Fidelity offers several funds tracking Britain, US, Japanese and European markets. ''We don't mention the funds to our clients because we do not promote them in Hong Kong but, of course, we'll answer any questions should individuals seek information about index-linked funds,'' said Ada Mak, Fidelity's director of retail marketing for Hong Kong. According to Ms Mak, index trackers offer four key benefits. ''First off, tracking a particular market gives an investor the opportunity to get direct exposure to the stockmarket indices, without the need to jump in and out of stocks,'' she said. Secondly, Ms Mak said tracker funds offered low dealing costs, and the advantage of protecting investments in falling markets or even profits from falling markets. But what about tracking the Hang Seng Index? ''We've given that a lot of thought. We believe there is a definite future for index-linked funds here in Hong Kong, but we're waiting for the market to mature and grow. At present, it is not sophisticated enough,'' Ms Mak said. Agreeing with this fact, Samuel Cheng, investment adviser for Thornton, said: ''The market also needs to be fully computerised with an auto-execution system, which is a mechanism needed to mirror the index. The SFC is working on a system right now, and it should be completed within the next year.'' Thornton, which also offers a US-linked fund, reiterated that local investors were not yet knowledgable when it came to fund-tracking. But interested investors should find the concept behind index-linked funds relatively simple. Unlike unit funds, which attempt to outperform the indexes, tracker funds aim to mirror an index, using computer models for direction. Shares are only bought or sold when they go into or fall out of the index, rather than according to the fund managers' reading of the market. Originating in the US, the concept caught on when investment experts accepted that the random nature of markets made it difficult for fund managers to outperform consistently. Such funds are designed to follow a particular stockmarket index - like the FT-A All Share index - by investing in a statistically selected set of shares, which on past performance have behaved similarly to the index. For example, to mimic the performance of the 650-odd equities in the FT-A All Share, a tracker fund invests in perhaps 200 carefully selected stocks. The beauty of this system is that any investor wanting to match the performance of the All Share index needs only to choose between one or two indexed funds. As a result, the funds are larger and costs are lower than conventional trusts. Moreover, index-trackers should promise a similar rate of growth to the stockmarket. Of course, one possible disadvantage of index-trackers is that if the market falls, you are bound to take a tumble with it. Another downside worth mentioning is the probable loss of high returns known to accrue with exceptionally successfully managed funds. It is inevitable that investors holding tracker funds notice the high returns of the top-performing fund. That is why some advisers suggest investors use tracker funds as a complementary vehicle rather than a sole investment product. When comparing your index-linked fund to the currently ''hot'' managed unit trust, however, make sure to look at the long-term picture. A fund manager that has drastically outperformed the market with annual consistency is a rarity.
