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&#39Good funds being left on substitutes&#39 bench&#39

It is no surprise that investors have turned away from investment bonds in favour of building a portfolio from a range of collectives. The managed fund may conceptually be a good idea – diversifying across asset classes and negatively correlating to create a balanced portfolio – but how can it be good for the same fund manager to manage all the asset classes for the investor?

The astute adviser built their own portfolio across a range of collectives but, in turn, a new problem was created -30 unit trust statements twice a year.

So fund supermarkets became the answer to every investment adviser&#39s prayers – or did they? Competitor after competitor came in to the marketplace and charges were driven down. But the market began to stagnate and, in an attempt to decommoditise and move away from double charging, supermarkets brought in tools to help their distribution channel that were at best, well, useless. Any back-testing on their capabilities of assisting in building a portfolio would have concluded that they were dysfunctional. What use is cumulative performance and three-year volatility? What use is discrete annual analysis? Great argument about style analysis but can you call markets and decide what style to be invested into? It started to look like the supermarket had reached its peak. I am not saying it is the end but it is definitely a peak.

I think it is worth pausing, sitting on the rocks with our feet in the sea and reflecting. The benefit of the supermarket was the ability to spread across a range of funds and managers in one holding. This wasn&#39t really available at the time of the supermarket launch. Is this available now in a more efficient form?

With the supermarket, the IFA and consumer had to do all their own analysis and fund manager visits. It is difficult to see how this could be done effectively.

Development has been considerable in the fund of funds arena and maybe it is this that spells the end of the supermarket. I recently analysed how many of the top funds are held by supermarkets. I used PPV analysis, which highlights the discrete quarterly analysis, decile ranking and five-year standard deviation as well as overall performance. Skandia held only 47 of the 74 top funds, Fidelity 58 and Cofunds 54. Supermarkets have really been superseded by the Fof.

Supermarkets are expensive and double charge. Any switches create capital gains tax issues. There is a restriction on fund choice and the IFA is effectively gambling that their research will not only outperform the Fof manager but also the extra charges. Sure, there is an element of double charging within a Fof but nothing like that of the supermarket. Although Fidelity is the clear leader in the supermarket range, it must have recognised this. Supermarkets have nothing to fear from a circling shark but a big one armed with a cello – and boy can he play – is just around the corner.

What is the cello? The cello is the wrap. The ability to buy collectives at creation price and manoeuvre efficiently and effectively. With the advent of more Fofs with highly sophisticated processes and varying styles, it is possible that IFAs may become managers of these managers by holding portfolios within wraps and monitoring the success of the managers.

If you were asked to head a project today to launch a new idea called a supermarket, would you do it? Hardly.

Peter McGahan is managing director of Worldwide Financial Services The huge array of fund choices means multi-managers are having to reject perfectly good funds because they cannot hold them all, says Isis director of fund of funds Richard Philbin.

He says many good performing funds are being placed on reserve lists until other funds fall short of the mark.

Philbin&#39s strategy for choosing the 20 to 30 funds that he holds in the various Isis multi-manager portfolios is based on a rigid process where each fund has to pass one of six tests.

He believes that the multi-manager sector will become increasingly challenging as the number of funds continues to grow while the number of fund groups declines. Philbin thinks that investors want the increased stability that a multi-manager fund can bring and points to the high turnover of managers in the industry.

Statistics show that 1,200 managers have spent less than three years managing the same fund. Philbin celebrates his third anniversary running the Isis proposition fund this week.

He says: “You will find that good multi-managers have to be increasing cynical in the funds that they choose. Often you have a long substitutes&#39 bench with funds just waiting to get on.”


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