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Global positioning

Our panel discuss the new Platform Committee and reveal whether they will be backing Fidelity’s new global special sits fund

Henderson Global Investors head of UK wholesale Phil Jefferson is leaving the firm, along with his European and Asian counterpart Mike Clare. What is your opinion of the group as a fund house? What do these latest exits tell you?

Lincoln: We do not use Henderson as an equity house as none of its funds has demonstrated adding enough value to warrant them replacing funds that we already use. It is much stronger on the bond/ fixed-interest side and we are beginning to use the preference & bond fund and strategic bond fund. John Patullo is an extremely well regarded manager in the area of fixed interest. If he leaves the group, I do not really know what it would have to offer at all.

Modray: It suggests that Henderson is still very much trying to find its feet, having lost its way somewhat in recent years. Jefferson is a likeable character and appeared to be trying to push through change for the better so his departure is certainly not something to be rejoiced at.

But it is ultimately fund managers, and not sales managers, who have an impact on performance and in this respect the jury is still out as to whether the changes Henderson has made over the last couple of years will be enough.

Yearsley: Henderson is a business still in transition. I thought that the future looked promising when Phil joined and, to be fair, it has got some interesting funds and fund managers, such as Graham Kitchen and John Patullo. But it has lacked and still lacks the killer fund – the one you have to buy from it and no other group.

What do you make of the newly formed Platform Committee, which comprises Cofunds, FundsNetwork, Skandia, Selestia and Standard Life?

Lincoln: I think this can be considered a positive move. All these players have much to gain from expanding the platform market. If this means they are going to work together to help to exchange best practice and resolve issues, then all the better for advisers and their clients.

Modray: At best, it will help drive forward stan- dards and cross-platform compatibility in the fund platform industry. At worst, it could promote a cartel, allowing the senior individuals from each platform to work together to protect their collective businesses from non-committee rivals.

The biggest issue that our clients consistently raise is platform providers’ unwillingness to allow cross-platform re-registration. This is a restrictive practice and one that I hope the Platform Committee has at the top of its agenda.

Yearsley: I think on balance it is probably a good thing. It is obvious that the majority of investment business will be conducted on platforms of one sort or another. Therefore, an industry body is probably needed to help iron out issues, such as stock transfers, that could be potentially thorny topics.

Fidelity says that almost three out of four advisers will recommend its new global special situations fund to clients. Will you?

Lincoln: Not initially. We will wait and see how the fund beds in before recommending it. Having said that, if the fund can be anywhere near as good as its UK sister has been over the last 27 years, then it will be a fabulous vehicle. Special sits are all the rage and, so far, advisers have only had access to those funds with a UK focus so we wait with bated breath. We currently use Templeton growth for clients seeking long-term investments in unloved, undervalued companies. This fund has a deep-value approach and so has some of the attributes that you would associate with a global special sits fund.

Modray: No. While Jorma Korhonen may turn out to do an excellent job running the new fund, he is still a relatively unknown quantity facing a very tough task. Given that there are alternative global funds with more proven managers at the helm, then why take a risk on Korhonen?

The unconstrained nature of Korhonen’s fund could also play havoc with clients’ asset allocation and the post-split reorganisation could compromise performance in the shorter term.

Fidelity’s survey suggests that most advisers are either more trusting than me or simply do not want the hassle of having to move clients’ money elsewhere.

Yearsley: Our stance is that we will give Jorma Korhonen the chance to prove his ability. We have met him and were fairly impressed.

It is now up to him to deliver the goods. Therefore, we will be recommending a hold at least for six months, giving time for Jorma to prove his worth.

What is your opinion on HSBC’s decision to shift its £2bn UK equity business from its fund management arm Halbis Partners to its multi-manager team?

Lincoln: Ambivalent. We do not use HSBC at all presently. My only concern would be for those clients who are now seeing their investments run in a completely different manner from that which they were originally going to be. Are the clients aware of this? Are there additional charges to cover the multi-manager costs?

Modray: It has finally admitted that it is not very successful at running UK equity funds which, for one of the world’s biggest banks, is a disappointing state of affairs. However, I prefer a provider to accept its failings and try to improve the situation for investors rather than struggle on underperforming, so HSBC has probably done the right thing in this respect.

I doubt that anyone will get very excited by the multi-manager approach, so investors in the affected funds who want some decent alpha should be looking elsewhere.

Yearsley: I can see the logic behind the move as Halbis was set up to be the high-octane business of HSBC. Therefore, why would it want to manage core (dull) products. It does free up fund managers such as Bob Morris to concentrate on the exciting funds that it manages.

This is not the first time that HSBC has done this. It did the same on its American fund and has chosen an excellent replacement in the US-based Davis Advisors. However, until we know who it has chosen for the UK, the jury will remain out. It is quite refreshing to see a group admit that it is not very good at core products.

Martin Currie North America fund manager Tom Walker believes that investors should not be shying away from the dollar. North America has tradition-ally been a difficult region to find funds consistently performing well. What North American funds do you currently like, if any?

Lincoln: Aside from the UK, we do not generally pick specific geographical funds, opting instead for global growth and/or multi-manager funds for our clients’ overseas exposure.

We do tend to choose those global funds that have a sizeable proportion in the US as, regardless of valuation issues with the S&P 500, it is very dangerous to ignore the US, especially in the long term.

Where clients explicitly ask us for US funds, we use M&G, Franklin Templeton and Legg Mason.

Modray: North America is a difficult sector as almost all managers struggle to outperform consistently. Even the legendary Bill Miller, who has beaten the S&P 500 for 15 consecutive years, is having a nightmare year to date, having underperformed the index significantly.

His long-term management style means that the fund is still worth holding but it highlights that even the best will struggle at times.

JPM US is a good core holding and Schroder US smaller companies is worth considering for more aggressive exposure.

Yearsley: The US has been the hardest market of all to outperform and very few have done it consistently. We currently have five or six funds on our recommended list but my personal favourite is probably JPM US.

I tend to agree with Tom Walker. The US is generally unloved, not necessarily for the right reasons, and most investors are seriously underweight in the US despite the fact that it is the world’s biggest economy and stockmarket.

Property was the top- selling fund sector for the eighth month running in August, according to the Investment Management Association. Is this a concern? Is there a risk of a bubble or is a compression of yields the worst that we will see?

Lincoln: Yes, it is a concern. We are firm fans of commercial property and have been for a long time.

We never put more than 25 per cent of a client’s total invested worth in property. Our concern is that some investors/advisers may be piling in way more than this in an effort to catch past performance.

Now property funds are awash with cash and being forced to buy sub-quality properties.

Commercial property bubbles do happen but I do not foresee a crash imminently but yields are falling to near equity levels. Investors should expect no more than around 8 per cent a year total returns for the next few years.

Modray: It is a concern if investors are overweighting commercial property in the hope that returns will be on par with those over the last three years.

It could also mean that property funds continue to suffer from cash drag if they are raising money more quickly than they can invest it.

I do not think that the bubble will burst but yield compression is almost inevitable, which means managers will have to rely increasingly on rental income growth to boost returns. Commercial property remains a worthwhile diversifier and even if returns fall they should still beat cash. But I fear that some investors are entering the market based on recent past performance and not a realistic outlook.

Yearsley: Yes, it is a concern as it is seen as the investment panacea whereas the reality is that it has just had a good run over the last few years. Yields have already compressed. You have to ask if you getting paid for the risk you are now taking.

However, I am not convinced there is a bubble. It is more likely that there will be much slower growth over the next few years compared with the last few.


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