The news that last year's best-selling funds are among this year's worst
performers has worrying implications for the IFA community – not least
because it comes within days of Ron Sandler's accusation that IFAs lack
Figures published in the UK Fund Industry Review and Directory 2001 reveal
that just two of last year's 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's
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's best performers and it is
very rare that funds perform well two years in a row. Not many managers can
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
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' 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.