General selection issues

29 January 2010 8:00 am

A lot of IFAs are expected to stop picking their own funds and turn to modelling services on platforms, multi-manager solutions or private client portfolio models in the post-RDR environment. With the sheer number of fund changes experienced over the past year, it is easy to see why many might make that decision. There is no denying the fact that the job of fund selection has become increasingly difficult, posing a challenge for advisers to keep pace.

There are more than 2,100 onshore funds across more than 30 different sector classifications. The wide performance and price variance across the world, as well as the individual sectors, have made wading through this growing fund list both vital and difficult. With the typical fund manager merry-go-round not even abating in the difficult recent past, keeping up with changes on funds is quite a challenge - as is whether or not the fund chosen will even still exist in a few years time.

Performance, or lack thereof, is one of the many drivers for advisers to switch, even if the fund itself stays open or the manager stays. Robert Burdett, co-head of Thames River Capital’s multi-manager team, says that his research shows there is a low degree of any performance consistency among fund managers.

Speaking at the Alpha Generators series of conferences, Burdett questioned just how many managers of more than 2,000 funds were actually good. Only 11.8 per cent of funds have delivered above-average performance over the past three years, he said.

OBSR research director Richard Romer-Lee agreed there were many funds that charged for active management, where perhaps the fee was not deserved. However, he remains a big believer in the sector, he said, noting that good managers could be found with proper research. “Yes, there is a lot of stuff out there that is not great but you could say the same about cars. As an industry, we have become too impatient, too short-term in the market.”

But short-term is what fund managers have also become, with the average manager now said to be spending less than four years on the same portfolio. That could be one of the reasons that so much attention is paid to managers who do stick around, and why the performance is so strong. Neil Woodford and Anthony Bolton are considered two of the UK’s best fund managers. Woodford is still running the income fund he took over in 1990 while Bolton ran Fidelity special situations for over 20 years before his retirement from the fund.

Research from advisers Independent Financial Solutions shows there were more than 60 high-profile manager moves last year, much of it resulting from ongoing industry consolidation. The Henderson-New Star deal caused some manager shake-up, as did Credit Suisse-Aberdeen, but these deals will also have an impact this year as the merged groups consolidate their expanded ranges. The expected mergers come on top of the large number of funds that were closed across the industry last year.

The IFS research shows that there were around 200 fund closures and/or mergers in 2009, and a further 100 were launched. The number of closures may have been unusually high last year but the figure for launches certainly was not. The number of funds in Trustnet’s database with a three-year track record is 1,781 while those with a six-month track record number 2,759, meaning that just under 1,000 funds have been added in the past three years alone.

Premier Asset Management sales and marketing director Simon Weldon believes fund launches are the easiest way for a fund management group to improve its market share. For instance, last year, fund flows favoured the fixed interest sectors and absolute return strategies. For a company without a presence in either sector, an easy way to gain assets was to launch a product.

With the additions made to ranges over time, there eventually comes a point where they have to look at consolidation. The difficult outlook for 2009 probably helped companies to make the decision to focus their ranges on their more successful products. It has long been considered unfeasible for a fund to survive if it is below £10m in size but Weldon said the casualties of a consolidation were more than just size.

There could be funds in areas that have gone out of fashion, he noted, pointing to the flux in the number of available tech and property funds.
Performance sells a fund, so, if returns are low relative to its peers, firms may opt to shut the fund or merge it with a better performer. Whatever the reason, it is not a decision taken lightly or quickly.

“It takes time to close a fund,” Weldon said, commenting that it can take up to six months in some cases. “And the costs are not insignificant.” Closing a fund could run up to £50,000, although it is easier to merge than to close fully.

IFS partner Jon Foster said the constant changes in funds, plus the sheer number in the onshore universe, are making it virtually impossible for advisers to keep pace. Last year’s launches, manager moves and closures equated to around 360 fund changes that advisers needed to monitor and make decisions about and then communicate to clients.

“This is on top of the usual asset allocation and fund changes an adviser would make in the course of a year. If they were really unlucky, they could have spent all year simply writing to clients about fund switches,” he said. “There are so many advice issues involved in one fund manager move that it is very time-consuming to address such changes. Should the client follow or stay? Should the adviser wait and see?”

Foster asserts that advisers are not well equipped to add much, if any, value in trying to keep up with all of this, when it is the job of fund or fund managers to analyse the importance of manager moves and fund changes. He said using a multi-manager solution, which IFS does, frees you to add value in other ways and concentrate on broader issues of financial planning.

Weldon expects that other advisers will move to some form of outsourced solution in increasing numbers. Premier, which operates a private client division, has already noticed a sharp rise in demand for its portfolio services. Advisers that do not have sufficient assets to launch their own funds, and which do not want to use the widening range of multi-manager products, are turning to modelled private client portfolios, he says.

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