Picking just any kind of investment fund is not the solution for a successful long- term investment strategy. Three major questions remain:

q Which markets should be chosen with what priorities to create the best asset allocation for the investor's risk profile?

q Which trusts are the best in their specific region or sector?

q Which trusts have the best risk/ earnings ratio ?

Fund specialised investment managers have the answers to these questions. Two main features describe such managers:

q The investor entrusts the investment manager with a certain amount of money and authorises it to invest in investment funds and to manage it actively considering the indivdual tax situation. The investor selects which managed deposit is suitable in terms of risk and general strategy which means the investor decides whether he prefers an emphasis on bond or on equity funds.

q Based on this strategy the managers create a balanced portfolio by choosing promising markets and sectors. Any change of opinion might lead, after consideration of the investor´s tax situation, to a different asset allocation. Apart from choosing the right markets and sectors it is as important to choose the best performing funds.

Therefore it is definitely essential to analyse and to monitor the fund as well as the qualification of its management. The investment manager stays in permanent contact with the fund management.

It is not important to select ex post the best performing fund of a specific year. Often the winner one year is a big loser the following year, and vice versa. Therefore a good investment fund has an above-benchmark track record - that means that the fund should every year be within the first quartile of its specific region or sector.

Fund specialised investment managers also analyse the risk/earnings ratio: the risk necessary to achieve the performance. Two funds can achieve the same performance with more or less risk. It is always better to select the fund that achieves good performance with low risk. Usually this is measured with the Sharpe ratio, defined as the annualised average return less the risk free rate, divided by the logged annualised volatility.

What would a particular trust managed deposit look like? The example shown in the figure is for a client who has chosen the two-thirds model (a maximum exposure of 66 % of the assets in equity funds).

At first glance the investor might have the impression that the managed deposit might lead to the same economic result as an investment in only one mixed global equity and bond fund. But in reality there are considerable differences:

q There is no defined chance/ risk profile in a mixed global equity bond fund. Through a fund specialised investment manager the in-vestor can choose the managed de-posit or general strategy that fits best his chance/risk profile.

q Country or sector specialised fund managers have in the past realised better results than their global investing colleagues. Therefore in the long term better results will be achieved with a managed deposit than a global invested fund.

Besides the long-term above-average performance of managed de-posits, fund specialised investment managers were able to reduce investment risk remarkably. The first 'risk-brake' is to diversify assets in different equities in one country. The remaining country-risk is reduced by asset allocation in different countries and sectors. A third risk-brake is the permanent monitoring of the funds and their management.

Therefore, it is not surprising that even conservative investors give their money to these fund specialised in-vestment managers. A managed de-posit is not for the short-term investor as volatile markets can lead from year to year to a different performance. Thus, in 1993 successful fund specialised investment managers realised profits of 20% and more. But in 1994 they had to accept a reduction of of nearly 4% in comparison to average market losses of more than 10%. In the long run fund specialised investment managers try to achieve a performance of 8% per annum after tax. Therefore the minimum investment horizon of an investor should exceed five years.

Independence in the choice of investments linked with a disciplined and consistent investment approach focusing on outperforming markets and sectors is the best way to secure long-term performance.

Gerhard Single and Markus Stahl are portfolio managers at Baden-Württembergische Bank in Stuttgart