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All Fof and no substance?

The M&G Cazenove fund of funds operation has failed to break the £15m barrier in its first eight months despite a high-profile advertising campaign. Yet Credit Suisse – with comparable marketing spend – saw more than £40m pour into its Fof in the months following launch two years ago.

It would appear that M&G and Cazenove have failed to fire investors&#39 imagination. Or is the huge influx of companies into multi-management creating an over-broked market where entrants stand progressively less chance of taking a sizeable chunk of money?

The market is undoubtedly dominated by a handful of major players, none of which is particularly concerned by the growing number of competitors. Why? Because they have well established multi-manager brands and, in most cases, the performance to justify their reputations.

Jupiter head of multi-manager John Chatfeild-Roberts says: “It is healthy to have competition but IFAs should always choose their multi-manager very carefully. It is the same as the ordinary market with the good, the bad and the medium. I would hope that all Jupiter has done over the past few years would make us very difficult to compete against. It depends what turns IFAs on.”

Chatfeild-Roberts believes there are a number of multi-managers – some with big reputations – which should be taken to task over their performance. Yet Fofs tend to attract sticky money, so few underperformers haemorrhage money.

When it is such an uphill battle to prise money away from even the worse performers, why do firms bother trying? According to Henderson Global Investors, one of the biggest Fof players, the answer lies in the industry&#39s herd mentality.

Head of UK retail Simon Ellis says: “It is the same as with tech funds – everybody had to have one because it is the thing to have. Most of them barely get off the ground. The trouble is that the Fof market does not lack supply any more. The companies involved need to have good fund management rather than just a strong brand.”

Ellis argues that if brand was the key issue, Edinburgh Fund Managers&#39 operation, recently acquired by New Star, would not have been the leading multi-manager last year.

Perhaps the fact that New Star chose to scoop up an existing operation reflects the difficulties inherent in building from scratch.

New Star marketing director Rob Page says: “The key in Fof is having a demonstrable longer-term performance record. It is difficult to overcome the objections to Fof without it. You need to show how you have added value. If you only have a brand but no real performance, then that is a very difficult situation to be in.”

New Star now has a multi-manager with a strong track record backed by a high-profile, trusted brand. As more generalist IFAs choose to farm out their clients&#39 investment requirements to Fof providers, Page expects funds under management to grow. However, in common with most other Fof providers, he does not believe the market will go through the roof, forecasting steady growth for the foreseeable future.

With little new money coming in to the market, the question for new entrants is how do they differentiate themselves? Brand is not enough.

Isis director, head of communications & strategy Jason Hollands says firms need to offer far more than just decent performance. He says: “It is not the same as choosing a normal fund, it is about service offering, how you position your Fof to help solve IFAs&#39 problems. It is about wrappers and the ability to get distribution. You need to reach the IFAs who benefit most from Fofs, which is difficult without a decent-sized salesforce and marketing budget.”

Where the big firms also have an advantage, Hollands points out, is their ability to mitigate the extra charging associated with Fofs. Having the financial muscle to negotiate better fees undoubtedly puts them in a good position against rivals with total expense ratios nudging 3 per cent. It also helps them recruit the premier managers, of whom there are worrying few. Gartmore, for example, is believed to have paid a huge premium to acquire the services of Insight&#39s head of multi-manager Bambos Hambi, who is soon to start building its Fof operation.

Gartmore head of UK retail Paul Feeney says: “The issue is not the number of players but the quality of them. There are a number of houses playing at Fofs without really having the expertise to do so.”

With the barriers to entry creeping ever higher, there are still a number of major firms eyeing up multi-management. Fidelity, a company few would believe needed or wanted an unfettered Fof, is launching its proposition soon, as is Abbey National.

It is unlikely that the experience of M&G and Cazenove will deter them. Fof businesses, for all their faults, seem to have transcended financial considerations.


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