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Global warning

The board of the Gartmore monthly income trust is refusing to pay the full entitlement to shareholders on the basis that it would be unjust to those who voted to redeem in 2004. Is this fair to the three-quarters of shareholders who voted to red-eem in May and could it tempt other trust boards to do the same?

Kim North: I doubt that the unfortunate events that have scuppered the Gartmore trust will tempt other trust boards to do the same. In fact, this trust will force other boards to do whatever they can to avoid a repeat.

The publicity that will follow the first-ever split investment trust&#39s zero-preference shares which have failed to pay out the full amount from what is broadly perceived to be a very low-risk asset class will send shockwaves through the industry and the investing public.

Andrew Merricks: I have rarely been as angry with any group of people as I am with the board of the Gartmore monthly income trust. I understand perfectly that the value of investments can fall as well as rise, etc, etc, but when the demise of shareholders&#39 funds is brought about by a fundamentally questionable board decision, as was made by these people, I find it more unacceptable. I have no doubt that boards from other splits will disappoint their shareholders in a similar way.

Jason Hollands: Instinctively, this does seem unfair as all zero holders were offered the option of an early exit and the 25 per cent who choose to stay in the trust for longer should have understood the risks involved if big numbers choose to exit.

It just does not feel right that the interests of the minority are being protected over the majority. That said, the board will have sought legal advice on this sensitive matter and it may well set a precedent for other trusts.

Fund supermarkets accoun-ted for around 25 per cent of investment fund Isa sales in the first quarter of the year. Did this come as a surprise and can you see Skandia, FundsNetwork and Cofunds and any newcomers continuing to grab market share?

Kim North: It is no surprise that the fund supermarkets have taken such a share of fund business. Dealing through a fund supermarket makes it easier for clients and IFAs as the process is streamlined, for example, one encompassing application (in most cases) for different funds and online applications.

As the UK further emb-races the joys of online transactions led by the likes of, there is no reason why the number of online fund transactions should not increase year on year.

Andrew Merricks: To be honest, I am somewhat surprised by the rapidity with which supermarkets have caught on but, on reflection, 25 per cent of sod all (Isa sales in the first quarter were particularly underwhelming) is maybe not too far in advance of expectations.

I can see their market share increasing from here as buying through a supermarket can become habit-forming and many IFAs have not caught it yet. However, I am not convinced that there is much space for any new entrants although we hear that there are some lining up.

Jason Hollands: No, this did not come as surprise at all. Nearly all our Isa business has gone through fund supermarkets over the year and we have certainly seen more and more of our competitors start to adopt these platforms. The odd thing is why anyone would want to purchase a fund outside of a supermarket platform if the same fund is available within one?

The IMA plans to scrap the global equity & bond and global equity income sectors as part of its overhaul of performance sector classifications. As they are comprised of less than 10 funds, the IMA believes they should be abolished and their funds reclassified into other sectors. What do you think imposing this minimum would achieve and would it help the sectors most in need of an overhaul?

Kim North: Classification of funds has, for years, been an issue that has perplexed the investment powers that be. As new funds launch and funds with broad remits change shape, the classifications need to change to be relevant.

The IMA guidelines are useful to IFAs to compare sectors but do result in over 300 funds in the UK all-companies sector consisting of funds as different as Newton income to Legal & General UK index.

The only commonality is that they are both AAA-rated. I would like to see sub-categories that include further fund information such as separating the tracker funds and further sectors of classes of Oeic shares, for example, institutional shown separately.

Also, the names of funds should more closely match the type of fund. The simply named UK growth fund sector encompasses so many investment styles. IFAs and clients need to be able to compare like with like.

Andrew Merricks: I am not sure that the necessity to impose a minimum will help the sectors in most need of an overhaul as it appears that the UK all companies sector is suffering from too many rather than too few constituents.

If it is designed to make things easier for the consumer, I am not sure that it will. People generally like to see things as clearly as possible.I must confess that my favourite classification is in the investment trust sector.

If one is looking for an investment in tea plantations, one only needs look to the tea plantations sector. In there, the trust called tea plantations sits proudly at the top. Sadly, at the foot of the sector is tea plantations, being the only trust in the sector.

Jason Hollands: You may be surprised to hear that I do not lie awake at night worrying about such things. The bottom line is that a fund should be matched to an individual investor&#39s goals and risk profile. These fringe sectors are only of real interest to fund companies seeking to compare their products against a group of suitable peers but I am sure the assembled geniuses of the financial services industry are quite capable of doing this without a formal sector. It should not have an impact on the IFA&#39s view on whether a fund is a suitable investment vehicle for an investor.

As part of this year&#39s Budget, Chancellor Gordon Brown decided to allow venture capital trusts to merge without hitting the tax relief of both trusts&#39 shareholders. It was welcomed by the industry but represented only a marginal concession to personal investment in the Budget. What more significant measures would you have liked introduced this year?

Kim North: Far too many to mention. One of the least fin ancial services-oriented Budgets I have seen in my 21 years in financial services.

Andrew Merricks: Where do I start? Regrettably, these are mostly pie in the sky but it would be nice to see the Isa rules simplified so that maxis and minis are merely remembered as styles of frock.

Annuity rules need drastic reform to prevent the distress that so many of we practitioners see from those poor souls who are unfortunate enough to have been born so as to retire under the current regime.

The introduction of a retirement “fund” which can be drawn upon however one wishes without the patronising supposition from the Civil Service that if one has access to something one will spend it and live for evermore with one&#39s hand out and the introduction of compulsory pension contributions. By the way, is the fact that Brown froze alcohol duty anything to do with his name being a combination of a gin and a North-eastern ale?

Jason Hollands: Now you have really got me going. This Budget was one long list of missed opportunities. OK, the relaxation of rules on VCT mergers was welcome, ethical funds might benefit from some of the green tax incentives and the case for salary sacrifice to try and reduce National Insurance costs were all outcomes of the Budget. However, it was largely bereft of any major initiatives for investors.

In recent months, there has been growing concern about people being underfunded for their retirement. With final-salary schemes disappearing, people should be scared out of their wits about whether they are saving enough to scrape a decent existence. Yet at the same time, stakeholder is a flop in its target audience and investors have avoided Isas in their droves.

I am convinced that compulsory pensions are inev-itable and had hoped the Chancellor would at least announce a working party to draft such a scheme. Instead, the rise in NI has probably killed that project off for the rest of this Parliament as businesses will not be able to absorb further costs.

I would also have liked to have seen commercial property funds made eligible for Peps and Isas. The Myners report rightly highlighted the fact that asset allocation is the key contributor to portfolio return, so if it makes sense for institutions to invest across equities, bonds and property, then why are small investors being denied access to the latter class of asset within their long-term savings plans?

This Chancellor pretends he is sympathetic to investors, yet he acts quite differently. If the Government really did care about encouraging people to make long-term provision, then he should have taken the opportunity to reverse the decision to end tax reclaim on dividends in 2004 for Peps and Isas.

The FSA is investigating whether IFAs have a case to answer in terms of misselling split caps as part of its review into the sector&#39s problems. Do you expect it to find much evidence of misselling among advisers or does the blame lie with providers and their key features documentation, which misclassified funds?

Kim North: I look with interest at the “split-cap” misselling issue as the traditional route resulting in “misselling” has been linked, however tenuously, to commission. For example, endowments, pension transfers and FSAVCs. Many investment trusts do not pay commission and therefore I assume that this FSA interest may be due to the complex structure of the products.

I am interested in seeing Ron Sandler&#39s findings when he publishes later this summer. One area – the provision of investment advice – will be interesting. Split-cap investment trusts have a complex technical product structure which can appear daunting to the unenlightened.

I doubt very much that the FSA will find cause to launch a full-scale investigation into IFAs and split caps. It is more appropriate to look elsewhere. Again, I hang my hat on the importance for consumer protection of correctly named funds and trusts with risk indicators correctly stated.

Andrew Merricks: From what I saw at various launch seminars of splits during their heyday, I think there is shared responsibility. One in particular sticks in my mind, where the issuing company equated zeros with corporate bonds, refused to acknowledge what the wipeout rate was and suggested that income from ordinary shares could be reinvested for future growth without outlining the dangers of doing so.

From the IFA&#39s point of view, responsibility must be taken for not asking sufficient questions if they did not understand how splits worked and for accepting too readily what they were told by companies with a vested interest in selling them something to sell to their clients. I do not think there was much actual misselling – more ignorance in what they were dealing with.

Jason Hollands: I suspect that most IFAs were not buying individual securities but unit trust or Oeic funds in these areas. The real question then is whether or not the fund providers were presenting the risk profile of these funds adequately.

Where individual splits were purchased, there will be cases to answer. Awareness of the impact of cross-holdings was probably pretty limited a couple of years ago and anyone active in this market will have to dig out copies of past letters and marketing material to see whether or not the risks were adequately exp-lained at the time.

Kim North, Partner, Pretty Technical Partnership

Andrew Merricks, partner, Simpsons IFA

Jason Hollands,Deputy managing director,Best Invest


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