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F&C’s balancing act

Chris Salih analyses F&C’s three-year accelerated growth plan.

F&C has been in a quandary. The constant loss of mandates from the likes of Resolution and Dutch pension fund Vervoer has meant the group has been forced to make a move to ensure the long-term profitability of the business.

But the company’s decision to cut its dividend has not met with a positive response in some quarters. The media have been quick to label this as a “last-gasp’ attempt.

Shares in the company plummeted by 18 per cent following the announcement that the board had endorsed a three-year, accelerated growth plan which will see the development of a number of more specialist and higher-fee products, particularly for the institutional side of the business.

The problem that F&C faces is that it appears to be in perennial transition. However, according to head of communications and strategy Jason Hollands, the move should be welcomed by advisers. He says: “This is good news for advisers as we will be investing in new products and fund manager talent as we look to match the growth of specialist products in the institutional market.

“The latest business flow figures and assets under management were in line with what the market expected as it is very old news that in 2005 we were told that Resolution Life would be withdrawing funds as a result of its merger with Britannic.

“This has been covered hundreds of times in the press over the last two years. Also, long known and written about has been the loss of some big Dutch institutional assets from a move from balanced mandates to a model called fiduciary management.”

Standard & Poor’s concurs with Hollands’ view by announcing that the group’s credit rating remains unchanged. S&P also commended F&C for the strategic logic behind its plans.

F&C is to announce further details on the new products once the group’s results are unveiled in March but heavy demand on the institutional side has pre-empted some initiatives, such as more hedge funds, a collateralised debt obligations platform and global tactical asset allocation products. The company is also hoping to bring in new talent to match the products.

The cost of the expansion is expected to damage profitability as operating margins will drop from around 40 per cent to 30 per cent in the short term.

Chelsea Financial Services managing director Darius McDermott says: “This decision is one of those grey answers. On the one hand, F&C wants to spread its wings while on the other the group has to face the fact that big mandates have been cut and, regardless of the passage of time, something has to be done to counteract the leakage.”

F&C has intentions to raise the dividends each year as the expected influx of new business on the products sets in. Meanwhile, Hollands has rubbished any possibility of a big sell-off of its shares as 75 per cent is held between Friends Provident, which has 52 per cent, European group Eureko, which owns 20 per cent, and the staff.

However, with the firm’s fund sales increasing by 98 per cent in 2006, how much of F&C’s expansion will be retail-centric? And how much needs to be?

McDermott says: “As a retail group, F&C is not that far away at all. There is the likes of Ted Scott on the stewardship fund, while Phil Doel and his team have gained huge momentum on the UK opportunities fund. That is adding on to the fact that they are one of the biggest bond houses around.

“I think the next step for F&C is to make sure that, as a maturing group, it does not accept where it is on the retail ladder and pushes to make itself one of the elite groups around.”

BestInvest head of communications Justin Modray believes the group has more to do on the retail side.

He says: “F&C is middling on the retail side to be fair. The fund range is not that bad but it is not that great. For a retail fund range to tread water, it needs a couple of star performers, in F&C’s case the only one it has is stewardship.”

The 889m stewardship growth fund is easily F&C’s biggest offering in the retail market, the next being the 348m FTSE Allshare tracker.

Modray says the fact that stewardship is F&C’s flagship is worrying. He says: “While having a flagship fund is never really a problem, the difficulty facing F&C is that it is a niche vehicle and some investors who are not ethically friendly will prefer to invest in funds that have no restrictions.”

He says F&C needs a balance because a focus on the institutional side could see it fall back in the retail market.

Modray says: “It is almost impossible to be optimistic or pessimistic on the decision at the moment.

“If the group needs a warning, it must look no further than M&G which had a number of false dawns and fell back into the pack before being rescued by head of equities David Jane.”

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