After a depressing three-year bear market, last year finally brought some cheer for fund investors. Confidence in investing has returned, although few expect a re-run of the late 1990s.

But which investment ISA will be best for 2004? There are more than 2000 funds to choose from, and it’s easy to pick the wrong one.

To help you choose, this month’s edition of Money Observer identifies its top ten Isas for 2004, based on a detailed analysis of fund re turns over the discrete periods of 2001, 2002 and 2003.

Andrew Pitts, editor of Money Observer, says: “Managers who have made their way into our top ten have had to keep losses on their portfolios to a minimum when markets were going down, as well as producing good gains when they recovered. Investors can have confidence in the ability of the funds highlighted to continue posting top-ranking performance.”

1 Best investment fund Merrill Lynch Gold & General. Gold is a traditional safe haven in times of economic and political uncertainty. And investors have enjoyed three glittering years of returns, while most other funds were struggling.

It has seen its fortunes improve dramatically in the past few years. By 1999, the gold price was at a 20-year low. Then came the stock market downturn in 2000 and investors started to recognise the attractions of gold again.

Fund manager Graham Birch says: “Being in gold mining shares rather than the metal itself gives you more bang for your bucks,” he explains. “As the cost of producing the gold remains relatively stable, any increase in the price of gold goes straight on to the profit margin. So a 10% rise in the price of gold, for example, could result in, say, a 33% increase in profits.”

Being in the right gold-mining shares is also crucial, says Birch. “It is important to position yourself in the companies with the best reserves. This way you get maximum exposure to gold.”

The fund has a broad global spread. “Gold is found in some pretty peculiar places, from the Andes to Russia and not just in the more obvious locations like South Africa. Now China is starting to open up, so we will go wherever the gold is.”

2 Best UK Equity Fund Rathbone Special Situations not only appears to contradict the argument that past performance is of little relevance to the future, but also that when a fund manager changes horses, investors should, too.

Carl Stick, who took over this fund two years ago, has proved every bit as successful as his predecessor, Patrick Evershed, in producing outstanding returns.

Its share price has risen five times, but its manager still feels it is undervalued.

For UK investors, who by definition need a good exposure to UK equities in their portfolio, this fund also solves the dilemma of whether to choose a large, medium or small-cap fund. This is because one of the key elements is the flexibility. It can invest in any size of UK company and even overseas if good opportunities present themselves.

3 Best Global Growth Fund GAM International Growth. Andrew Green has been running this fund for the last 20 years and prides himself on being a contrarian – someone who goes against the herd. He looks for countries, currencies and stocks which are depressed, ignored or bypassed by investors. He has been biased against the US over the past three years and is only 2.5% invested there. “I thought the US was too expensive, so I have had a reasonable exposure to the UK, instead,” he says.

He also bought into Japan before its recent rebound. More recently, he has built up exposure to continental Europe to around 16%. Green explains: “I felt people were being too negative about economic recovery there, in Germany in particular.”

Other countries he has bought over the past three years when he felt they were undervalued were Canada, Thailand and New Zealand.

4 Best UK Income Growth Fund Liontrust First Income. Equity income funds are starting to regain popularity, offering not just an income but capital growth as well.

Jeremy Lang, manager of Liontrust First Income, says the fund has outperformed over the past few years because it has been “very easy to find cheap stocks”. He likes stocks where the share price has fallen to a level where the yield is at least 2% above that on long- dated gilts.

“The key is survivability. As long as I think the company is not a complete basket case and there is a good chance things will be better in five years, I will buy the shares and enjoy the high dividends.’ He points out that good examples in recent years have been Reuters and Carlton, which he was able to buy on yields of 8% and 10% respectively.

5 Best UK Smaller Companies Fund First State British Smaller Companies.

It was a good year for small-company investors last year, with the FTSE Smaller Companies index up 39.6%. An even better return was achieved by this fund, run by Paul Jourdan.

Based in Edinburgh, Jourdan has been running the fund its inception in September 2000. Typically he meets 30 to 40 companies a month, as well as making site visits and talking to analysts. Once he is convinced about a share, he likes to take a “chunky” position.

One of his biggest holdings which has continued to earn a place in the fund over the past three years, is Nursing Home Properties, the largest owner of nursing homes in the country. “We bought it when it was on its knees, when nursing homes had gone through a cyclical downturn. But NHP was setting up its own operating company and we saw a good future ahead for it.’

6 Best UK Bond Fund Marks & Spencer High Income. During 2003 there were worries that the wheels may fall off the “bond bandwagon” but returns on this fund topped 9% in each of the last three years.

M&S clearly made a good choice when it decided to subcontract the running of this fund to the fixed interest team at Rothschild Asset Management, part of Insight, the investment arm of the HBOS group.

Investment-grade bonds always make up the bulk of the portfolio. They are mainly UK, sterling-denominated, combined with some euro bonds. But over the past 18 months the emerging market bond content has been at or near its maximum 30%.

7 Best Emerging Markets Fund New Star Pacific Growth. While most stock markets went up last year, the emerging markets shone brightest. New Star Pacific was well placed to capitalise as it had managed to limit its losses when markets lost ground.

Instead of investing directly in equities, it invests in investment trusts to gain its exposure to Asia-Pacific markets. During 2001 being overweight in Korea and Thailand helped, while over the past 18 months being overweight in India and Thailand was a key advantage. Manager Richard Scott now admits he “could have done better” if he had allocated more to China, but he felt India had many of the attributes of China without as much of the attention.

8 Best North American Fund Schroder US Smaller Companies.

This is the second time this fund has been eligible for our award, although last year it was disqualified due to a recent change of fund manager.

Ira Unschuld, who had managed the fund so successfully since 1992, had left Schroders in December 2002 to run his own hedge fund.

However, the new manager of the fund, Jenny Jones, has proved a worthy successor. She tends to be more value-oriented and prefers to run a more concentrated portfolio than her predecessor.

She seeks out companies “with solid positions in growing or niche markets, with strong management and sustainable profitability”.

9 Best European Fund Fidelity European. Tim McCarron formally took over this fund from industry guru Anthony Bolton at the beginning of last year, but, like Bolton, he favours small and mid- cap stocks as this is where he finds most value.

They typically make up 65-70% of the portfolio, helping its performance significantly last year.

McCarron says: “We were underweight in the core eurozone countries – such as France and Germany – and overweight in peripheral countries where we felt there was a better potential for growth,” he says.

“In mid-2002, we switched out of Ireland into Spain and Greece, where we felt there were similar but less advanced dynamics.’

10 Best Global Fund Insight European Bond. Rather than trying to get the highest possible yield for investors, it aims to produce the best total returns.

“This means we don’t have to compromise on the quality of the bonds we invest in,” says fund manager Adrian Grey.

It invests in government and investment-grade corporate bonds. Another reason for its success has been Grey’s country selection.

He invests not only in the eurozone but also in peripheral countries such as Sweden and Norway.

He has also had exposure to the next wave of EU members: Poland, Hungary and the Czech Republic.

This is an abridged version of a feature in the latest edition of Money Observer, available at newsagents now.