View more on these topics

FSA turning tables on fund managers

Choosing an investment fund is now apparently easier than ever before.

Investors need to simply log on to the FSA&#39s comparative tables website, select one of the six available fund sectors and rank their short list in alphabetical order or in terms of charges.

Past performance, risk and investment process need not play a part in the selection process because they are either irrelevant, too complicated or both.

This is the world the FSA has created for investors and its simplicity has certainly ach-ieved one of the regulator&#39s aims. In helping investors pick a fund which it hopes will produce superior returns, however, many argue that it has fallen far short of the mark.

While the industry has been infuriated by the regulator&#39s decision to exclude past performance from the comparative tables, the latest revelation that the investment process has been actively discredited has astounded many fund managers and IFAs.

In a note to the tables, entitled, More About Investment Strategy, the FSA says: “Investment strategy is how some fund managers differentiate themselves from other fund managers. Fund managers are people who make decisions to buy or sell investments for the funds of investment products. Investment strategy is also called &#39investment style&#39.

“This is not a wholly reliable method of selecting investments as individual fund managers change from time to time. Also, some fund management groups are owned by another company, possibly based overseas. Ownership can and does change and this might have an impact on the investment policy of the firm.”

On the issue of past performance, the FSA has at least conceded it will reconsider its decision if it can devise a satisfactory way of presenting the data. And when it comes to risk, the tables include a note explaining its importance. But while investment process was always going to be difficult or even impossible to catalogue in a table, no one is sure why the FSA has elected to actively warn investors away from using it as a guide.

Hargreaves Lansdown head of research Mark Dampier says: “The investment process is one of the most important factors when you are choosing a fund. I agree with the FSA that the process might change but it is still crucial. To dismiss it is rubbish.

“All the regulator wants is a yes or no box to tick but investment is not like that. They are trying to simplify something, which is not simple. First, they dismiss past performance, now they have dismissed investment process. What is left?”

Not surprisingly, it is many of the smaller boutique houses which have been most infuriated by the dismissal of investment strategy. Liontrust produces publications on the processes and style involved in running each of its funds, using this as its main way of differentiating itself from other management groups.

Marketing director Jona-than Harbottle says: “I accept that there is a danger that investment process might be changed. Investment processes do have to live and breathe and sway with the times. But the way the fund is managed is utterly key to inv-estment selection.”

However, there has equally been annoyance among the bigger groups, with several houses having recently laun-ched specialist style funds, focus funds or theme funds. Once again, these all differentiate themselves from the pack by their process.

Schroders director Robin Stoakley believes the fact that a firm&#39s investment process may change is not a big enough risk to discredit it.

He says: “We tend to find that if a fund management group has a very strong investment process, then it will be carried on, even if a fund manager leaves. I accept that may not be the case with firms which are made up of a group of star fund managers.”

The FSA does not go as far as to dismiss the entire detail of how a fund is run. Instead, it encourages inv-estors to look at the investment policy, which it says is the major factor which determines the risk and return profile. The regulator defines investment policy as:

“The investment policy of a fund defines the objectives of the fund. It restricts the type of investments that may be held in the fund.

“For example, the investment policy of an equity fund will usually require it to hold the majority of its investments in the form of shares in companies, whereas a property fund would require holding investments in the form of actual property or shares in property companies.

“Investment policy might also include regional restrictions. A North American fund would normally restrict its investments to those based in Canada, the US and possibly Mexico and other Central American countries.”

The industry would tend to agree that investment policy is key to a fund but many would dispute that it is necessarily the main factor which determines its risk profile. The note goes on to point out that the tables categorise funds by their Autif sector so investors can compare funds with the same inv-estment policy.

Plan Invest joint managing director Mike Owen says funds within the same Autif sector can vary dramatically in their risk and return profile.

He says: “Within the UK all companies sector, you have got ethical funds, mid-cap funds, style funds and tracker funds. I do not think that you can say these funds have the same investment policy or strategy.”

In the end, the problems with the tables may be irrelevant. Fidelity marketing director David Cowdell believes that, while the FSA&#39s tables may not be an ideal guide for selecting investments, they are unlikely to be widely used anyway.

Recent research carried out by Fidelity shows that more than 60 per cent of investors always take advice when managing their investments.

Cowdell says: “You need to consider a whole range of factors when buying an investment and that is why people go to an adviser. On most things which involve a significant outlay, people take advice.”

While the tables remain data-starved, the industry is hoping that people such as Cowdell prove to be right.

Recommended

Jersey and Guernsey fall into line

Jersey and Guernsey will no longer be listed as unco-operative tax havens by the OECD after both have agreed to address their tax practices.In June 2000 both Crown Dependencies were identified as tax havens by the international body. Both Jersey and Guernsey have undertaken to improve the transparency of their tax and regulatory procedures and […]

Zurich group chief exec steps down

Zurich group chief executive Rolf Huppi has announced he will step down and concentrate on his role as chairman of the board by mid-2002. Huppi joined Zurich Group in 1963 and became chief executive officer in 1991, before being elected chairman of the board in 1995. Zurich says his replacement will be announced at the […]

Investment analysis

It was a mixed week for global markets, with most falling on continuing concern about corporate debt levels and accounting practices. The representative FTSE World index finished 1.7 per cent lower, although both the Dow and Nikkei 225 gained ground.In the US, the markets were inconsistent throughout the week. On Thursday, the technology-heavy Nasdaq closed […]

Smile joins up ethical funds

Internet bank Smile has joined forces with Co-operative Bank Financial advisers to offer Smile invest ethical, a portfolio management service that packages four ethical funds from Henderson, Gerrard, Friends Provident and Norwich Union.Investors can choose to invest in any number of funds, depending on their requirements. The funds share a reliance on ethical screening, so […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment