The Treasury is recommending that the equity products in its suite of stakeholder products should have a maximum equity exposure of 60 per cent, mirroring the constraints of a cautious managed fund. Do you think this balance is right, or is the Treasury simply substituting advice with a conservative product?
MB: I think the fundamental problem with the Treasury's recommendation is that it is trying to micro-manage advice without being responsible for the consequences. An examination of almost any fund in the cautious managed sector shows a significant fall over the last three years. If the Treasury wants a cautious managed fund with specific weightings to be offered, it should be honest enough to say that. It should not call it an equity fund, or pretend that it is like a deposit account on steroids. That is misleading.
PC: I am concerned about Sandler's proposals to sell the suite of stakeholder pensions without advice. The objective of this appears to be to sell investments on an execution-only basis to unsophisticated investors. This approach is fraught with danger. What comeback do these people have if they purchase an inappropriate product?
I would whole-heartedly agree that, by imposing these restrictions, they are substituting advice with a more conservative product although there could be further problems if these are promoted as low-risk products. The average cautious managed fund has fallen over the past three years and this at a time when corporate bond investments have performed well.
JS: Capping the level of equity exposure in stakeholder products shows the Treasury's lack of confidence in the understanding of simplified investment products by the general public. It is a widely held view that equities outperform other asset classes over the long term. If a stakeholder pension is bought for a child, with an investment time horizon of 40-50 years, then surely capping the equity exposure would be restrictive to the performance of the pension. Something certainly needs to be done to make stakeholder products more attractive to the Treasury's target audience but this initiative is not it.
Richard Craven, managing director of Money Portal, a company set up to buy discount brokerages, believes that in two years only execution-only firms and huge IFAs with high-net-worth clients will exist. Do you think he is right, or will the loosening of the polarisation rules help preserve the current situation?
MB: He is probably not far wrong. The FSA's deliberate strangulation of smaller IFAs by a combination of red tape, rules that would fail the cost-benefit test and exorbitant and worthless compulsory professional indemnity cover cannot fail to lessen choice for the consumer. If there are only a handful of oligopolistic product providers left, then the benefit of independent advice becomes rather less clear. Execution-only further insulates the few remaining providers from responsibility for badly designed, crass products. A very bleak outlook, unfortunately.
PC: If Richard is right and advice only becomes avail-able to high-net-worth clients, then Sandler's review will certainly not have achieved its objectives. The loosening of polarisation rules makes Richard's prediction more rather than less likely as the big bancassurance companies will have more opportunity to flex their financial muscles at the expense of medium sized and smaller IFAs.
Other factors such as a rising compliance burden and PI insurance costs will put further pressure on all but the biggest IFAs. That said, I believe there will still be a place for well run medium and smaller IFAs that have a strong business model and offer good service to their clients at a reasonable price.
JS: If Mr Craven has his way, then of course there will only be one execution-only firm left in the industry. However, I think that to a certain extent his views are correct, we have certainly already seen considerable consolidation in the industry. However, forecasting the future is a dangerous business and I do believe there will always be a place for the smaller, local IFA who offers personal service to those on middle incomes. Financial planning is becoming increasingly important and I think that we will see greater concern being taken by those middle earners.
Cater Barnard has teamed up with an entertainment financier to launch a film fund to help finance UK films. They hope to raise £50m but similar schemes have failed in the recent past. Do you think there is an appetite for these kinds of initiatives and enterprise investment schemes at the moment or do they need to put more emphasis on their investment case, as opposed to the tax advantages?
MB: Film partnerships that are geared towards income tax saving may have a greater appeal than EIS which largely aim to shelter capital gains tax. However, I have yet to meet a client who does not unwaveringly think of Mel Brooks' The Producers whenever I raise the topic, which is a major hurdle to overcome since few would actively choose to be Angels to a remake of Springtime for Hitler. The promoters need to convince both myself and my clients that the investment will be sound and intrinsically profitable.
PC: Regardless of tax advantages, investors are currently very, very nervous of risk. There was more of an appetite for specialist investments when stockmarkets were rising as investors were prepared to take a gamble with a small part of their portfolio, feeling secure that whatever happened the rest of it was rising.
JS: These initiatives appeal to such a small sector of investors that it seems unlikely that they will raise such an amount. The high-net-worth individuals who invest in such schemes particularly wish to be assured that there is a positive investment opportunity as well as a tax advantage.
Fidelity's global focus fund raised less than £2m in the month following its high-profile launch. Was the problem the risky nature of the fund or does the lack of interest simply reflect worsening investor sentiment? Would this relative failure discourage other fund groups from launching funds over the next few months?
MB: It is a very young or immensely stupid investor who is not nervous about the future direction of world markets at this moment, having the choice of global recession or World War Three, either being enough to send most people back under the duvet. Throw in a healthy dose of cynicism (if they're so smart now, why have they just lost 40 per cent of my fund over the last three years)and any fund manager launching now must like the idea of betting on salmon swimming up the outlet pipe of a nuclear reactor.
PC: The major reason for the poor response to Fidelity's fund launch is investor sentiment. Investors are extremely nervous of the equity markets. They are concerned about the money that they already have in the markets and many are not even contemplating putting in more.
Of those that are brave enough to commit new money into equities, it is going into a very select number of funds, typically the leading equity income funds.
Fidelity's low uptake was certainly not helped by launching a higher-risk fund into this market and one that has no obvious target audience. What type of investor would be suited by this fund launch? Even then, what is it likely to add to their portfolio?
These are two questions that we asked and are the reasons why we have not invested any of our client's money into this fund. Other groups are likely to be discouraged from launching higher risk funds, regardless of this episode.
JS: Investor sentiment is incredibly low. Three years of successively lower valuation statements have caused them to resist further investment, if not retire from investing altogether. Certainly, investors' appetite for risk has all but disappeared. However, I do question the validity of a global focus fund – who would want such a thing? Global funds, to my mind, are for the smaller investor, who does not have enough funds to provide a global spread of investments. If, however, you were such an investor searching for global exposure, I do not see that a focus fund could provide such an investment. Certainly other fund groups must surely be discouraged from launching such a fund.
Skandia Investment Man-agement has appointed Goldman Sachs Asset Man-agement to run its new retail European equity fund. SIM claims it will mark the first time that GSAM has run retail money. Do you believe that the institutional processes global firms such as GSAM add real value to investors? Can you see more deals like this being struck in the future?
MB: SIM might do well to check GSAM's claim to still be a virgin, for is this not the same Goldman Sachs that has run the European equity portfolio for GE Life since 1999? Comparing its performance with Skandia's own Euro index monitor it is very difficult to see what value will be added. My personal belief is that a good stockpicker will add more value than a committee but then, of course, a bad one does nobody any favours.
PC: Institutional processes can add value and may prove attractive to investors, especially at a time when investors are very conscious of risk. The institutional approach is strongly risk-controlled, taking small bets and aiming to produce performance in a target range of their benchmark. This is in contrast to some other actively managed funds that could outperform or underperform the benchmark by a significant margin.
Therefore, institutional funds have less risk of major underperformance. Another consideration is that the team approach of institutional funds means there are not concerns of star fund managers disappearing. This provides more stability, both in terms of the fund's management and also possible large outflows of money if a star manager leaves. In the current environment, it is likely that further deals will be struck.
JS: Institutional processes tend to be more stringent, risk-averse animals and, in the current environment, are well suited to investors' attitudes. GSAM have a good reputation and I imagine that this may well be the start of a new trend.
Michael Both, proprietor, Michael Philips
Patrick Connolly, director, Chartwell Investment Management
Juliet Schooling, head of research, Chelsea Financial Services