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Chain reaction

JO Hambro Capital Management is looking to bring performance fees to the mainstream retail market with the launch of an Isa wrapper on its range of Dublin-based Oeics. Are you a supporter of performance-related charges?

Alan Adam: Performance-related charges are definitely a thing of the future. Hedge funds have been using them for some time and, as long as the targets are reasonable, I think clients should have no problem with them. Where it gets messy is if companies receive big fees for moderate or below-average performance against their peer group.

James Dalby: Performance fees are already widespread among investment trusts and I do not see any reason to discourage them on unit trusts. The key issue is how the performance fees are structured and what the total costs are to the investor. It is critical that a performance fee does not come on top of a full annual management charge. I would not support the idea of a 1.5 per cent annual management charge which then had a performance fee on top. But if the basic annual charge is, say, 1 per cent, then I can see scope for performance fees being charged as well if certain levels of performance are achieved.

Mark Dampier: In general, I am a supporter of performance-related charges. However, I do have a big caveat. I do not think there should be performance-related charges on top of existing management fees or, if there is going to be an existing management fee, it should not be much more than 0.5 per cent. If fund managers believe they can outperform, they should have the courage of their convictions and not have to fall back on annual management charges. For example, the Gartmore Focus range allows it to charge 2 per cent but in the worst-case scenario it still gets 1.25 per cent. This is hardly a penalty for poor performance. I would like to see unitholders&#39 and fund management groups&#39 interests aligned.

Liontrust is bridging the gap between active and passive fund management with a new index-based product incorporating two quantitative screens. The fund will look to deliver consistent index outperformance. Do you think such a fund will be well received by the retail market?

Alan Adam: Liontrust&#39s scheme will be well received, partly because it is Liontrust which is offering it. If it was being launched by one of the big banks, I would be concerned. But Liontrust, to its credit, is always open and transparent on its funds and fund management style. No doubt, with the quality at Liontrust, I think there is the potential for outperformance.

James Dalby: One of the key issues in the retail market is being able to produce funds that have the ability to provide consistent outperformance of a benchmark index. If Liontrust has the ability to do this, then I am sure the concept will be well received.

However, it is equally important to acknowledge that the view of most investment intermediaries is that the current market environment is most suited to stockpickers. I agree with this and would expect that any index-based product will not be able to deliver the same levels of performance as a good stockpicker. In an environment of single-digit investment returns, I expect that most investors will be better served by IFAs who select the strong stockpickers.

Mark Dampier: If Liontrust is able to deliver consistent index outperformance, then I believe the fund will become a big part of most IFA/client portfolios. I have not examined the product yet so it is difficult to comment further. However, delivering consistent index outperformance must be an investment holy grail. Is it really possible?

Invesco Perpetual has tied in its key fund managers, including income star Neil Woodford, with a new five-year rolling incentive scheme. Are you satisfied that the post-merger period of unsettlement is now over?

Alan Adam: I am happy to see some of the top ex-Invesco people signing on for the future. We had been using Invesco Perpetual less of late due to our concerns about the current fund managers going off to a new boutique. We are starting to use it more recently as we feel the worst of the rationalisation is over.

James Dalby: Whenever you bring together two established organisations, you will see unsettlement. As far as I am concerned, Invesco Perpetual can now move ahead on a firmer footing and I am very pleased that Neil Woodford has opted to stay on.

But while unsettlement linked to the merger may be over, it is going to take some time for it to get back on track in certain areas. Europe is a big headache for it. Not only did Rory Powe leave at the end of last year but two European analysts also left. Until Europe starts firing on all cylinders, Invesco Perpetual will not be out of the woods.

Mark Dampier: I am extremely pleased to see the key fund managers sign up to a new incentive scheme. From my understanding, the only person yet to deal is Stephen Whittaker and we need to await his outcome. However, I have spoken to Neil Woodford and Paul Causer, who seem extremely happy with the deal they have signed. I therefore hope to see a long period of settled fund managers as the market is increasingly looking more like a football transfer market. I wish I was an agent.

The split-capital investment trust industry has seen a wave of further dividend suspensions over the past fortnight, with several analysts predicting that the sector has seen the worst. Do you still have any clients invested in the sector and would you consider committing any new money?

Alan Adam: The split-capital story has certainly been depressing for investors of late. However, I believe that, once current negative sentiment is out of the way, value will return to this market. We are happy for clients to buy into this sector as we feel there are significant bargains to be had although, in the short term, it might be a little bumpy.

James Dalby: We have a very small client exposure to the split-capital sector, mainly in the form of zeros. We are not committing any new money to the sector and, as it has never formed a significant part of our recommendations, we are under no pressure to change our stance on this.

Chris Fishwick of Aberdeen Asset Management has suggested there may be another three months of poor news flow. I would not be prepared to bet on him being wrong and feel it is sensible to await the outcome of the FSA review before considering whether or not to use this asset class.

Mark Dampier: Existing clients have had a torrid time in the split-cap market in the last six months. Therefore, there is almost a total absence of buyers. However, the good has come with the bad, to such an extent that there are some real bargains out there. I would, therefore, dare suggest that this is an area where new money can be committed with the possibility of making some excellent returns.

Deutsche Asset Management is rebranding under the name DWS and restyling its investment process as part of a new push into the retail market. How do you think it will fare?

Alan Adam: I do not believe the rebranding will make a major difference unless there is a change of culture or emphasis at the same time. Rebranding for rebranding sake is not enough. Look at Consignia – need I say more? Undoubtedly, following the Allied Irish debacle, the big banks will be putting their fund managers under even closer scrutiny and controls, so it will be more difficult for an individual&#39s investment flair to shine.

James Dalby: Any investment house embarking on a major push into the retail market will have its work cut out. I challenge anybody to convince me that the market is not saturated in terms of the number of funds available and investment houses vying for IFAs&#39 approval. Unless you are bringing something new, as opposed to simply refreshed, to the party, you are in for a fight. I am convinced that nobody who launches or relaunches will be able to achieve the early success of New Star last year. That was a one-off.

Mark Dampier: DWS sounds considerably better. However, a rebranding is superficial if there is not the resource and energy to push the business forward. Much will depend on whether DWS wants to be a serious player in the UK market. It certainly seems to have wasted a fair amount of time in the last few years, much in the same way as Dresdner has done although there are signs of improvement there.

Alan Adam, consultant, Alan Steel Asset Management

James Dalby, head of research, Bates Investment

Mark Dampier, head of research, Hargreaves Lansdown


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