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Bluster to buster

I imagine that IFAs are going to have to handle a number of embarrassing phone calls from clients invested in the much hyped DWS Ratebuster fund. Barely six months after it opened for business, investors have received letters telling them that Ratebuster is to close.

It is DWS which should be embarrassed, not IFAs. It was happy to market such a unique fund even though it would have been fully aware that its ownership was in doubt.

The structure of the investment vehicle – five of DWS’s seven teams were involved in managing the fund and it was underwritten by Deutsche Bank – was always likely to cause problems for a new owner.

Yet this paper reported a story of the launch team holding a sweepstake on runaway sales figures while head of UK retail distribution Andy Clark boasted that it was “the biggest industry launch in over five years”. Roadshows were sold out as IFAs rushed to see what all the fuss was all about.

I admit that DWS probably did not know who its new owners would be at the time and it is hardly surprising that Aberdeen felt “uncomfortable” with Ratebuster or that it would not “fit in its portfolio”. A complex investment product aimed at the risk-averse masses would not be high on Aberdeen’s agenda at the moment.

At the time of writing, it appears that investors are not going to lose out financially from the early closure. But it is only a few months ago that DWS ads were depicting a building society passbook with a cashier’s stamp blazoned across it with the words: “Account closed, money transferred to DWS Ratebuster.” The irony will not be lost on many.

Ratebuster will certainly go down in the archives as one of the big end-of-tax-year fund pushes, yet it pales into significance when you consider the F&C high-income fund which raked in 450m from 72,000 investors when it was launched in 1993.

F&C high income was arguably the first-ever target return fund and advisers lapped it up due to its promise of 10 per cent income a year – almost double the Bank of England base rate then.

The fund’s secret weapon was to use options to secure the income but there was a nasty sting in the tail for unsuspecting investors. The income would come at a price and their capital was put at risk. Investors who drew all their income in the first 18 months saw their capital fall by nearly 20 per cent. The fund came under fire and has haunted many IFAs who recommended it.

Performance failed to improve and, as the generous income levels became ever more unsustainable, F&C was forced to change the way the fund was run. In October 1998, the fund changed its remit to beat base rate by 2 per cent a year.

F&C high income has long since been off IFAs’ radar and the number of investors in the fund has fallen off a cliff. Performance was not the only problem. F&C closed its IFA salesforce and many of its investors, who were elderly clients on the hunt for decent income, have passed away.

If you take a quick glance at the tables, the performance numbers make pretty grim reading. Sitting in the equity and bond sector, the fund has delivered fourth-quartile performance over one, two, three and 10 years.

But this fails to tell the whole story because it has actually been delivering what it says on the tin – beating base rate by 2 per cent every year since 1995. The total return has failed to deliver a positive return only once over the past decade and that was in 2002 when it fell by 4 per cent.

Do not for one-minute think this has not gone unnoticed by the marketing folk at F&C. They know full well that IFA clients cannot get enough of target return funds. Not only will F&C lay claim to launching the first target return fund, it will have something that the new kids on the block do not have – a 10-year track record which can be manipulated to look pretty decent (capital return has fallen three times in the past decade).

Money Marketing50 Poland Street, London W1F 7AX

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