A study by AXA Wealth has concluded that UK investors are literally spoiled for choice.

The experts who compiled the report reckon that the sheer number of funds - over 2,000 in the unit trust industry alone - actually puts people off investing.

Private investors, says the study, are simply overwhelmed by the amount of choice on offer and cannot make up their minds. In some cases this means they do not make any investment at all.

On the face of it the study might seem to reach a rather surprising conclusion. After all haven’t we been told that choice is good? Isn’t more choice and more competition supposed to produce a better deal for consumers?

In theory, yes. But the study does make a very good point as far as the UK fund industry goes. More, in this case, does not appear to mean better. While the number of funds on offer has grown dramatically, there has been no corresponding rise in quality (with some honourable exceptions).

Instead we have a large number of funds which are all doing much the same thing. All too often they are acting as ‘closet trackers’, in other words they are effectively replicating their particular benchmark index while purporting to be an actively managed fund.

If this sounds like a harsh judgement it is nevertheless shared by many of the hard-headed professionals who manage fund of funds. These people generally have the freedom to select from across the entire fund universe so their choices are worth noting. And what we find is that only a fraction of the 2,000 plus funds on offer ever make it into the porfolios of these fund of funds managers.

John Chatfeild-Roberts, the highly regarded head of Jupiter’s multimanager team, says: “If you added up all the different funds selected by the main multimanagers it would only amount to a tiny percentage of the total available. In other words, while there’s a huge fund universe out there, the professionals don’t think many of them add much value.”

Mr Chatfeild-Roberts puts the figure at between 5 per cent and 10 per cent, so, on the most generous basis, only about 200 of the 2,000 funds available are any good and the rest are pretty worthless.

But how can ordinary investors sort out the wheat from the chaff? One way woiuld be to buy a fund of funds and let the manager do the selection. However you then have the problem of picking the right manager and the fund charges are likely to be pretty high. Another method would be simply to look at the portfolios of several different fund of funds managers and use that as a crude but effective sifting tool. Any funds that did not appear on any of the fund managers’ lists would be ruled out, and you would, instead, make your selection only from funds that appeared in several different lists.

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