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Boutiques win on the roundabout

Helen Pow reports that the continuing carousel of fund manager moves means that IFAs are turning to multi-managers and boutique investment firms

Another year of high turnover among fund managers is causing a problem for IFAs.

Results released last week from Investment Solutions’ third annual Staff Turnover Survey showed a level of turnover of over 50 per cent among UK equity investment professionals and over 60 per cent among UK fixed-income professionals for 2006.

In the past few years, fund manager turnover has increased dramatically. and many IFAs are looking to multi-managers for help.

Hargreaves Lansdown senior analyst Meera Patel says: “It is a nightmare for IFAs. It is so hard to keep track and, as a result, a lot of smaller IFAs are favouring multi-managers.”

Fidelity Multi-Manager managing director Simon Ellis agrees high turnover amplifies the reason for IFAs to use multi-managers. He says: “We are among the first to hear of these situations and act accordingly. There is generally a PR and marketing lag so IFAs take longer to find out. We deal with fund managers all the time so our access to this information allows us to understand and react quickly.”

Blackadder director of investment services Keith Thomson says IFAs tend to use multi-manager expertise for lower-net-worth clients in particular because it ensures their portfolios are being managed on an active basis without the IFA having to commit many resources.

But IFAs are also researching smaller asset management companies with low turnover and good performance.

Brooks MacDonald Asset Management fund manager director Simon Clark says: “We are benefiting as a result of this phenomenon. Our traditional market of IFAs is getting more and more disconcerted at bigger investment houses so are targeting more business to smaller companies because the turnover level is lower.”

Why is the high level of turnover continuing? Ellis says a lot of corporate activity on in the industry means many fund managers are no longer working in the environment in which they were once comfortable.

Clark believes that many bigger companies are adopting a more centralised decision-making process which is giving fund managers less control to pick and mix the stocks of their choice.

He says: “Big companies are disenfranchising fund managers by imposing a centralised matrix in the interest of banks and the firm’s own balance sheets, not the interests of their clients. This is making smaller niche operators much more attractive.”

Ellis adds that around half of turnover is people changing positions within a company and firms merging and separating funds.

Clark believes competition in the industry is at an alltime high. He says many boutique businesses have started up in the past few years and are giving big firms a run for their money, particularly when it comes to remuneration packages.

Patel says equity in a firm is the major incentive luring fund managers. She says: “I do not think that bigger companies have cottoned on to the fact that it is not about salaries and bonuses. Fund managers need to have a meaningful impact at the company as well as managing the fund.

“Equity ownership is important because it makes managers more involved in the business rather than just the funds they are responsible for. Some bigger businesses do not have this and that is why you see them moving to boutique firms.”

Thomson considers it is vital that a fund manager’s interests are aligned with the interest of their clients and he says having shares in the company proves the manager has confidence in their performance.

But Ellis points out that the number of managers leaving companies to start up boutique firms has slowed in the last 12 months.

He says: “There is a lot of poaching going on but far more from large to large companies than large to boutique companies. Big firms have worked out how to defend themselves. In the last 12 months, the number of significant moves has slowed down. Companies are much more savvy at keeping their best talent.”

Patel says how the fund fares when a fund manager moves can vary widely. As an example, she cites Schroders handing over its UK select growth fund, previously run by Tom Carroll, to a manager that was unknown to Hargreaves Lansdown, without demonstrating his track record.

She says: “There are always risks when someone takes on a fund. If the new fund manager cannot deliver we would be quick to suggest better funds for our clients. Since Errol Francis left Credit Suisse, the company seems to be in a complete shambles and we have lost all confidence. We heard the news and wrote to all our clients encouraging them to switch.”

But Thomson says: “Shifting funds is going to cost the client through initial charges so it is not something we would advocate. We would not blindly follow a fund manager to another company. Lots of people are moving from Fidelity’s special sits fund after Anthony Bolton announced he was leaving but we trust that Fidelity will not choose a less able fund manager.

“A lot of fund management companies say it is not a problem because they work in a team and as long as they have the resources and it is a seamless transition, then we are not that concerned.”

Ellis believes there is usually no reason to panic when a fund manager leaves. He says: “We are not flighty. Our preference would be to not move our clients’ money but we need to be convinced that the performance will continue.

“It is rare that the portfolio goes down the toilet but in a big company we have to ask whether this is an indication of what is happening in the company in general.”

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