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After the downturn…will fund firms fall on their feet in 2002?

The fund management community will no doubt welcome the end of 2001. With markets having headed southwards for 11 of the past 12 months, assets have plummeted in value, sales have been weak and customers have generally been unhappy with their depressed fund valuations.

The year will be remembered principally for the terrible events of September 11 and their devastating effect on the world economy.

Fidelity says its Isa sales fell steadily over the year and, in August, were 76 per cent down on the same month last year. By September, sales were down by almost 50 per cent and have remained at that kind of level for the rest of the year.

Unsurprisingly, the industry hopes the new year will be an opportunity to put the past 12 months behind it. There is a general belief that 2002 could be a more solid year in the equity markets, with some even predicting double-digit returns. The worst prediction is for little movement at all.

Britannic Asset Management investment manager Graeme Johnston does not believe 2002 will be a remarkable year but is optimistic that it will be better than 2001 for equities. He says: “We expect it to be a reasonably subdued recovery. We are not buying into forecasts for sharp increases in growth. We expect average growth in 2002 to be similar to that achieved for 2001 – US 1 per cent, EU 1.5 per cent, UK 2 per cent, Japan -0.5 per cent. However, economic activity will be accelerating rather than slowing like it has been in 2001.

“The biggest risk to the markets is that the US downturn is prolonged. Private consumption has slowed but not yet to the extent seen in previous recessions. Further sharp increases in unemployment or a downturn in the US housing market suggest things could take longer to get back on track than the markets are assuming at present.”

But 2001 has not been all bad. Credit Suisse Asset Management and ABN Amro have seen record sales while Aberdeen has been aggressively acquisitive, snapping up several property firms, as well as Isle of Man-based Old Mutual International last week.

The long-awaited New Star Asset Management came into existence, taking the industry by storm and bagging more than 10 per cent of gross retail sales in its first month.

Both CSAM and Jupiter launched multi-manager services. This turned out to be one of the strongest trends of the year, with a growing realisation by fund managers that many IFAs do not have the time to actively manage clients&#39 portfolios and are happy to contract out their investment services to professionals.

Last week, Scottish Widows became the latest to make its move, teaming up with Frank Russell to provide a multi-manager offering.

Fund selection certainly appears to have become more difficult in recent years. CSAM recently conducted research showing that just 22 of 853 funds in the top 10 sectors have been consistently top quartile over each of the last three discrete years. Furthermore, more than one in four funds saw a change in fund manager last year – a further difficulty for IFAs.

Many had predicted that 2001 would be the year when hedge funds took the retail market by storm. Deutsche Bank, Matrix and Henderson launched funds of hedge funds with the promise of achieving absolute returns. However, none were massively successful in the retail arena and the fad appears, at least for the moment, to have passed.

On the investment trust side, 2001 will unfortunately be remembered for the split-capital trust saga. Many split caps ran into trouble as markets plummeted in the wake of September 11 and there are now fears that we will soon see the first zeros default.

Three months on from the market&#39s bottom, the sector appears to have survived relatively well but, at the time, the national media were speculating that the industry was on the verge of collapse.

The fund supermarket war began hotting up in 2001, with Cofunds launching at the end of January. Shortly afterwards, Skandia embarked on its mammoth project to extend its site&#39s capability and match both Cofunds and Fidelity&#39s FundsNetwork on price.

Legal & General was the next to reveal plans for a best-of-breed platform for the public and IFAs although some questioned its commitment to the adviser side. Norwich Union is also looking at the best-of-breed fund supermarket model while Old Mutual laun-ched its Selestia platform in November. But direct supermarket Virgin Money bowed out.

IFAs are yet to fully embrace the online culture and, oddly, fund supermarkets have so far been most successful through paper-based solutions. Instead of capability, the supermarket battle is still very much being fought over which platforms have which fund managers on board. Having maintained their exclusivity agreement, the four founders of Cofunds can still only be found on their own and Skandia&#39s platforms. Skandia is the only supermarket to have the full range which has, without doubt, given it a competitive advantage.

Next year promises much in terms of action in the fund management industry. New Star has made it clear that it is now on the acquisition warpath, along with several of the major foreign investment players, such as Old Mutual, Investec and First State.

From a regulatory perspective, 2002 looks set to be the most significant year for IFAs since the Financial Services Act 1986. A decision will finally be taken on the future of polarisation, while Sandler will make his proposals for the industry, with fund managers hoping they are the least hardest hit.

While markets in 2002 are likely to be better, the regulator could provide a whole array of new challenges.

Recommended

Optima Fund Management – The Lee Munder Growth Fund

Monday, December 17, 2001.Type: Oeic.Aim: Growth by investing in US small and medium cap stocks.Minimum investment: $250,000.Place of registration: Bermuda.Investment split: 100 per cent in US small and medium capstocks.Isa link: No.Charges: Implicit.Commission: None.Tel: 00441 295 8658.

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