Last month saw Dresdner RCM lose its fourth UK equities fund manager in just over a year, as Derek Lygo left for First State Investments. Do you believe Dresdner is a sinking ship or will it recover from its troubles of the last year?
Michael Both: To lose two UK equities fund managers is unfortunate but mislaying four in such a short space of time indicates carelessness.
Any big global fund manager should be reviewing its strategy regularly, deciding where and how to deploy resources, especially human ones. Such decimation in one important sector implies either a total failure of management to align its staff's goals with its own or a fundamental decision to scale back its UK operations. Neither of these interpretations is likely to be beneficial for UK investors in the medium term.
Michael Owen: I have a Dresdner leaflet headed, UK Investment Expertise, dated August 2000. Fund managers Derek Lygo, Justin Seager and Paul Sheehan are neatly pictured and are now all departed. If you add in the uncertainty that will inevitably follow after the takeover by Allianz and previous departures by Andrew Impey and Tony Parker, the sinking ship syndrome looks on the cards. I am afraid it is going to have to start all over again and IFAs will need a lot of convincing.
Ben Yearsley: Unfortunately, at the moment, Dresdner does appear to be sinking. A little over a year ago, it was firing on all cylinders with a superb UK team. Now, the majority of lead managers have left. It is obviously in dire straits and I presently cannot see a way out. It needs to put a lot of money and effort into recruiting fund managers and also into promoting the brand.
Dresdner has a lot going for it. Its research system is very good and it just needs to create a first-class working environment.
Trouble in the split-capital investment trust sector has sparked fears that the market may soon see the first defaulting zeros. Do you think investors and IFAs have been made sufficiently aware of the risks of split-caps?
Michael Both: Speaking for my own firm, we have been extremely alert to falling negative hurdle rates and always take the safety margin into account whenever recommending zeros. More than most securities, the link between risk and reward is very visible with zeros and, thanks to the AITC monthly information service, is accessible to anyone diligent enough to look.
The recent heavy marketing by fund managers only now launching funds investing in zeros is at best cynical and nauseatingly reminiscent of marketing tech funds just as the bubble was bursting.
Michael Owen: The problems in the sector have to be put into perspective. The problem zeros tend to be those issued recently where capital cover is a problem and those within the highly geared barbell trusts. However, the majority of zeros are still attractive low-risk investments, so investors and IFAs alike have to examine which particular zeros they are using.
There will be some IFAs who may not have done sufficient research to be aware of all the risks but the problem will be more for direct investors in my view. Many of these will be unaware of the complexities involved and I remain perplexed at the move towards encouraging do-it-yourself investing.
Ben Yearsley: It is entirely possible that we will see the first zero fail to reach its predetermined final price and I think that some investors have certainly not been made aware of the risks involved.
Zeros, especially, have been sold almost as alternatives to building society accounts when clearly this is not the case. The biggest problem, in terms of understanding them, is that the majority of investors probably do not fully understand the cross-shareholding problem and its implications.
Gearing works well when the trust and the markets are generally going up but the negative effect is compounded when markets are falling.
However, I think the risks were there to see if the investor wanted to look properly at them.
SG Asset Management recently called the bottom of the US market and believes that the US will see an upturn before the year is out. Would you confidently invest your clients' money into the region over the next six months?
Michael Both: No. While we can say with certainty that the US market is not at its peak, we can have no confidence that the market will not fall much further from here. The S&P 500 index is currently at a very significant support level and its behaviour over the next couple of weeks is likely to be indicative of its movement over the next six months. Sometimes the market is very predictable but right now things are right in the balance. We are advising clients to sit in cash until things clarify.
Michael Owen: We can hardly ignore the world's biggest economy and the driver behind all world equity markets, so I can see why companies such as SocGen are launching US funds into the current market. Nobody can confidently predict the fortunes of the US over the next six months but, over a decent timeframe such as five years or more, I think some of the American funds being launched could be very attractive. It comes down to that old problem of how do you encourage investors to buy in a falling market?
Ben Yearsley: There is no reason not to invest in the US, despite the downturn. At some stage, there will be a recovery. Federal Reserve chairman Alan Greenspan thinks that it will happen by the middle of next year.
At the end of the day, no one knows what economy or market will perform best or really where the best place to invest actually is. If the US goes down severely, it is entirely probable that everything else will collapse around it.I do not think you can be confident on any market in the short term.
Friends Ivory & Sime is to change its brand to Isis and introduce four new funds for its relaunch into the retail market. Do you believe that it has a strong enough proposition to succeed in an increasingly competitive and saturated retail marketplace?
Michael Both: Very possibly. Any fund manager with above-average returns and a degree of stability in its investment staff is in a small minority at the moment. Friends Ivory & Sime has those qualities and rebranding as Isis is exceptionally sensible, building upon one of its own well recognised marketing names rather than something supposedly “cool” but meaningless. Furthermore, a launch now, after the top of the recent boom, will not show everything as embarrassingly negative from launch.
Michael Owen: The market has never been so saturated with new or revamped companies. Friends Ivory & Sime will have to fight hard to put its head above the parapet. I think the Aim growth trust is likely to be the most interesting product, being more of a niche area, but for mainstream funds it is going to have to work very hard.
Rebranding is fine but IFAs will want to look at the methodology, the fund management team and so on.
Ben Yearsley: It is going to be difficult for any company at the moment which is rebranding and launching new funds. But Isis is playing to its strengths and launching funds where it has particular specialities. This should help it succeed but, while fund managers such as Bill Brown are very good, his Aim companies fund will never sell by the bucketload.
More fund managers are moving than ever before, with one in four funds seeing a change in lead manager in the last year alone. Do you believe the job of the investment IFA is getting harder?
Michael Both: Definitely. Market conditions are unusually unfavourable and few fund managers seem to have avoided losing investors' money. If ever active managers should be demonstrating that their higher charges are worth paying relative to cheaper tracker funds, now is the time. Unfortunately, most have proved the opposite.
Although the major indices have tumbled, plenty of shares rose or maintained their value over the same period, yet it appears that few fund managers felt these merited a place in their portfolio. If an active manager cannot pick rising shares and dump falling ones in bad times as well as good, our clients are better off holding exchange traded shares.
Michael Owen: Yes. The fund managers are simply being human but unitholders deserve some loyalty in these markets. Without getting the violins out, a combination of fund managers moving, polarisation changes, FSA problems and more competition from various sources all conspire to make the role of the investment IFA harder.
Nevertheless, we are a hardy, optimistic bunch who will feel better after a market rally (soon please). However, there are days when landscape gardening, running sandwich shops or being a soccer player's agent looks attractive.
Ben Yearsley: Yes. However, this is more a symptom of the number and variety of funds rather than fund managers moving.
More moves do not necessarily make the job any harder. It just makes it more varied. An IFA cannot make any decision based on what might or might not happen or if a fund manager may move.
Any decision should be made on the information available at the time of purchase and you have to assume that the fund characteristics will stay the same for the foreseeable future.
Ben Yearsley, investment manager, Hargreaves Lansdown
Michael Both, partner, Michael Phillips
Michael Owen,joint managing director, Plan Invest