The latest buzz words in the investment industry include "multi-manager", "fund of funds" and "focus funds", but history shows that savers lured by the latest investment fads can suffer heavy losses.
The investment craze of 2000 was technology funds - but once the tech bubble burst the average fund plunged about 80 per cent in two years.
"When I get a new client, their portfolios are often like an archaeological dig: on the top layer they usually have some firm partnership investments, then the older investments include technology funds and a mixture of guaranteed bonds and with-profits," says Mr John Baxter, certified financial planner at Baxter Fensham in the UK. "Independent financial advisers tend to recommend the flavour of the month to their clients."
In the past, many investors have simply bought the latest trend or top-performing fund only to watch it slump the following year.
"It is important not to be swayed by fashion. Often if a particular area of the stock market or an overseas market is doing particularly well, a number of new funds will be launched to exploit the boom," says Mr Baxter. "Instead, they should consider a fund that is well spread and blended to optimise risk and return."
He says it is more important to look at cashflow, asset allocation and attitude to risk with reference to charges for particular investments.
"With active management, the charges can often outweigh the benefits," says Mr Baxter.
The latest trends include schemes such as focus funds, also known as dynamic, aggressive or alpha funds, which hold a smaller concentration of stocks and take bigger risks than traditional growth funds. Multi-manager funds take a broader approach with your money, spreading it across a range of investments run by different managers.
By buying into a multi-manager fund, you rely on a professional to choose investments that should do well and that broadly suit your profile. The manager of the scheme will also buy and sell when he thinks either the market conditions or the performance of a particular scheme warrant a switch.
"The wider multi-manager approach can be a strong core holding in an investment strategy because complementary managers are selected, not on the basis of past performance, but on their sustainable competitive advantage within a specific investment style," says Ms Teresa Smith, head of new business development at SEI Investments. "The best style-specific managers are then put together in a portfolio which limits volatility and reduces risk."
But some multi-manager funds are expensive because you pay the fund-picker's fees as well as the costs of the funds chosen. Total annual fees can reach close to 3 per cent, double the charges of a single fund.
Focus funds were set up to focus on the talents of a particular fund manager and are the antithesis of tracker funds, which seek to move in line with stock market indices.
The manager's goal is to pay out absolute returns to investors, regardless of what the index is doing. Investing in a limited range of stocks focus funds aim to achieve absolute returns and pay scant regard to benchmarks.
Ms Amanda Davidson, a financial adviser at UK-based Charcol Holden Meehan, says these types of funds have a place - but only as part of a diversified portfolio.
"For less adventurous investors who choose to ignore investment trends there are tracker funds which are run by passive managers that buy and hold portfolios that are designed to replicate the market," she says.
"By buying each stock in an index, or a broad representation of the stocks in an index, passive managers generally deliver returns that match their index, so in theory at least there will be no nasty surprises."
