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Are IFAs in a spin over investment?

The news that last year&#39s best-selling funds are among this year&#39s worst

performers has worrying implications for the IFA community – not least

because it comes within days of Ron Sandler&#39s accusation that IFAs lack

investment knowledge.

Figures published in the UK Fund Industry Review and Directory 2001 reveal

that just two of last year&#39s 50 most popular funds are in the top quartile

for the year to the end of July. Twelve are bottom quartile, 20 are third

quartile and 12 are second quartile in their respective sectors.

In an interview with Money Marketing last week, the head of the Treasury&#39s

financial services review Ron Sandler voiced concerns that IFAs may not

have the expertise to choose between alternative asset allocation


He believes they are better at focusing on tax planning and picking

investment providers rather than individual funds or managers.

But the story told by the statistics is open to interpretation. The top 50

funds represent only a third of all unit trust and Oeic sales and include

sales through tied agents and discount brokers as well as the institutional

and direct channels.

With IFAs accounting for around two-thirds of investment fund

distribution, it is even possible that most of their recommendations were

largely outside the top 50.

Nevertheless, one of several conclusions may be drawn from the news.

Either there is a need for more advice, there is a need for better advice

or markets have simply become too difficult to predict with any certainty.

Unsurprisingly, most IFAs point the finger at their peers while boasting

of their own record. Bigger advisers, such as Hargreaves Lansdown, Chase de

Vere and Torquil Clark, all have teams of analysts and research tools to

monitor and track fund performance. They say smaller IFAs cannot possibly

have the time and resources to advise effectively on investments.

Hargreaves Lansdown investment manager Ben Yearsley says: “Most IFAs do

not have a clue about investment. They have not got the time to research

the funds like we do. They just look at the performance figures. But the

top-selling funds are normally the last year&#39s best performers and it is

very rare that funds perform well two years in a row. Not many managers can

do that.”

Smaller IFAs naturally disagree although most will confess to having made

one or two bad calls over the past year.

Michael Philips partner Michael Both believes investment companies are

largely to blame for high sales of poorly performing funds. He says: “The

companies heavily market what is at the top of the cycle. I have several

clients who have put themselves directly into some of the worst funds.

Furthermore, firms cannot be relied on not to change strategy and they

produce literature which is of no practical use.”

Both points out that, with one in four managers moving between funds each

year, it has become increasingly difficult to assure investors that their

fund is going to offer any security.

The last year has certainly been one of the most challenging for any

investor, private or professional, to call the market. With one of the most

significant market shifts from growth to value, more people were caught out

than usual.

Credit Suisse Asset Management director Rob Burdett, who manages the

multi-manager range, says: “A lot of these funds would have had terrific

records the year before. The top quartile of any sector is like a relay

race. Over recent years, it has been a relay between value managers this

year, growth managers last year, big blue-chip index-focused managers the

year before and recovery managers the year before that.

“There was a huge switch in March last year when growth had had its day

and value took over. Looking forward, it is probably going to be those with

stockpicking abilities who perform well.”

Burdett believes increasing market volatility will lead to a sharp rise in

the popularity of the multi-manager concept as more IFAs realise that it

makes sense to outsource at least part of their clients&#39 portfolio


He says: “One of the reasons that multi-manager is a fast-growing business

is because it tries to help you smooth this process.”

However, Burdett believes volatility will start to decrease slowly over

the next few years. He points out that, in the European sector, the gap

between the top and bottom-performing funds widened from around 10 per cent

in the year to June 1999 to more than 40 per cent for the year to June

2001. Blaming the growing gap on the technology phenomenon, he believes the

difference will narrow next year.

But Sandler has already indicated strongly that he is likely to recommend

raising minimum competency standards over the next year.


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