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Could ceiling fall in on stake suite?

The Treasury has finally laid out its specifications for Ron

Sandler&#39s stakeholder suite of products. Predictably, it has

disappointed some and enraged others. Few in the industry seem

pleased, to say the least.

The principal problem is the recommendation that the unit trust and

the underlying assets of the with-profits and pension stakeholder

products should be subject to the same investment restrictions as a

cautious managed fund. That means they can invest no more than 60 per

cent in equities, with the rest invested in bonds.

The Treasury, which admits the measure is something of a halfway

house, believes this level of equity exposure offers investors an

appropriate level of risk control.

But as far as most fund managers and IFAs are concerned, it simply

highlights the Government&#39s belief that advice is unnecessary.

Michael Philips proprietor Michael Both says: “I cannot believe it is

possible to design a product that could be understood without advice.

The Treasury is asking for trouble. Every time I think it cannot do

anything more stupid, it manages to surprise me.”

Both believes the Treasury is suggesting that a fund with an equity

ceiling carries an acceptable level of risk and does not need to be

sold with advice. But he fears this multiplies the risk of misbuying.

Even some bond houses, which have most to gain from the proposals,

insist there is an obvious need for advice even with a cautiously

constructed fund.

Threadneedle communications director Richard Eats says: “For a

long-term product, a cautious managed fund might be the right option.

It would give people diversification. But the issue remains that

distribution is difficult if there is no advice built into the


Another potential problem is whether investors will understand the

investment mix of their fund. Unlikely as it may seem, companies

could theoretically offer a product with a mix of tech stocks and

junk bonds, making a mockery of the cautious managed moniker.

It is a point the Treasury acknowledges in its consultation paper,

which asks for feedback on whether it should set limits to ensure the

fund is diversified across sectors and geographical markets. It goes

so far as to put forward a quantitative approach where it would be a

regulatory requirement for firms to have minimum and maximum levels

of exposure to each region, sector and company.

Fidelity executive director Paul Kafka says: “We are keen to be

involved in the future of the savings industry but proscriptions are

not the way forward. It is better to allow flexibility so that the

products can evolve. We would find it very tough to offer such a


Like many providers, Fidelity highlights the unsuitability of the

fund for many segments of its target market. For an investor with

more than 20 years to save, it says the 60 per cent equity ceiling is

probably too low. For a risk-averse 65-year-old, it is probably too


Liontrust Asset Management marketing director Jonathan Harbottle

believes the Treasury has simply allowed the current investment

environment to cloud its judgement on what is best for investors. He

says: “It is a knee-jerk reaction to what has happened over the last

three years. Had there not been a bear market, the Treasury would

have gone for a much higher equity weighting or even stuck with a

tracker fund.”

Harbottle believes the fund may appeal to multi-managers which can

select the best asset managers for each component part of the fund.

Jupiter director John Chatfeild-Roberts, who heads its independent

funds team, says the caution of the fund sits well with the

fund-of-funds best-of-breed approach. But in common with

single-manager providers, he calls into question the wisdom of

imposing the 1 per cent price cap, which negates the viability of the

fund for most companies.

If a lack of potential providers were not bad enough, there could be

problems with the funds that are eventually offered. Artemis product

development and communications director Nick Wells believes the price

cap could adversely impact the fund&#39s structure and performance.

He says: “The real issue is that outperformance cannot be achieved

within a 1 per cent charge. Beating the index costs more than that.

By imposing the cap, the Treasury is effectively limiting companies

to offering closet tracker funds.”

Ironically, tracker funds – Sandler&#39s preferred choice of product in

his original proposals – come in for criticism in the consultation

paper, which laments their lack of risk protection in falling

markets. As a result, the Treasury has simply designed a tracker with

a variable fixed-interest element. This has led fund managers to

question whether investors will be happy to accept tracker-like

performance the FTSE 100 fell by almost 25 per cent last year alone

– on the basis that they are not paying much for it.

Refusing to be drawn into a debate as yet, the Treasury simply says

it welcomes feedback on its proposals. But no matter how much

negative feedback it gets on the issue of the cap, few can believe

the Treasury will change its mind when it says it has “a high

threshold for persuasion for moving from a flat 1 per cent charge”.

The prospects for companies which intend to lobby against the

composition of the stakeholder fund look bleak.

As long as the Treasury remains set on creating a mythical product

offering safe but decent performance which can be sold without

advice, protests will surely fall on deaf ears – as will the

Government&#39s complaints when it finds that few providers will

distribute its fund.


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