Skandia Investment Management has become the fastest-growing investment group in the UK, with net retail sales of £228m in the first quarter of this year. This eclipsed every other company – Fidelity, Jupiter and Invesco included – except Halifax, with its huge distribution capability. What do you think has driven SIM's success? Does this signal a boom in multi-manager?
Yearsley: I think there has been a move towards multi-manager and fund of fund investments in the last 12-18 months. There are a lot of good reasons for many IFAs and investors to use Mom or Fof. In theory, you can invest in these funds and largely forget them and leave it up to the fund manager to monitor the underlying investments.
Apart from the increasing awareness of Fof and Mom, another reason that Skandia has a good net inflow compared to more established fund groups is simply that they are a new group and have relatively few redemptions compared with a more established group such as Fidelity.
Adam: Skandia Investment Management increasing its level of sales is well justified when you think of a number of factors. First, we have had musical chairs yet again among fund managers, which highlights among advisers the need to be able to change funds pretty quickly and cost-effectively for our clients.
Second, the multi-manager concept is one that is going to grow as more and more advisers come to the realisation that they are not qualified or have the time to construct client portfolios.
Third, I also believe there is probably one eye on the pension legislation that will come out in 2006 where, if you change your pension provider after the legislation date, you will be caught with the new rules. Therefore, advisers will be putting clients into schemes that they can amend within the plan without ever having to change their provider again.
Haynes: I believe Skandia's success has been driven by its ability to effectively exploit the shift in demand within the intermediary market towards outsourcing investment management. Following three years of difficult markets between 2000 and 2002, many advisers have come to the realisation that portfolio management is a full-time job and that they do not have the time or expertise to manage clients' investments directly as well as provide a full all-round financial planning service. I believe this trend will continue and that multi-manager will continue to grow in importance.
Isis is launching a CPPI fund linked to its flagship ethical Stewardship portfolio, one of the oldest in the market. Although there are a few major groups offering soc-ially responsible funds there appears to be little enthusiasm for them among investors. Why do you think this is? Can you see the situation changing as people become more aware of environment and ethical concerns?
Yearsley: I have never been able to get that excited about ethical funds. The performance of many has been ok over the last year but with a mid and small-cap bias you would have expected that. Even if investors become more aware of the environment, I do not think there will be a great surge in investment in this area. The majority of investors invest for performance and, over the long term, most ethical funds just have not delivered.
Adam: I think the environmental and ethical fund argument is one that has always been questionable and has been more marketing hype than actual substance. Some of the ethical and environmental players say it does not affect returns but the long-term position would suggest something different. In addition, you have also got the situation where Eagle Star used to run an ethical fund but it was part of a major tobacco group, which always struck me as strange.
I have clients who have said that they want environmental and ethical investments even at the expense of returns, but these are still very much in the minority and I do not really see this changing in the years ahead.
Haynes: I think it is purely down to the nature of the vast majority of private investors, with performance more important to them than ethical criteria. Due to the restrictions placed upon the areas in which socially responsible funds can invest, many of these funds have been disappointing performers. However there are funds such as Ted Scott's Isis Stewardship income fund that have provided the best of both worlds – strong performance with an ethical framework.
I believe socially responsible investing is a growth area of the market but we need to see a shift in people's attitude towards environmental and ethical concerns, before such funds become common use.
Giant investment trust Witan plans to scrap its benchmark and replace it with a totally revised strategic allocation when it switches to an open architecture structure this year. Witan says it wants to avoid its managers following benchmarks, which can mean them shying away from taking bets. Can you see other trusts taking this route? Will a manager of manager approach become commonplace in the investment trust sector?
Yearsley: Managing large global mandates is increas-ingly difficult. Far from being a new trend, investment trusts such as RIT and British Empire have been to a degree “outsourcing” for a while now.I think there is a growing realisation that no one fund manager can be a specialist in every single geographic region.This will probably prompt others to follow suit.
Adam: I would strongly commend Witan for its changes, but it has to be sure that it gets this aspect right. Strategic allocation is really about covering all the angles, ensuring your fund is never too far adrift of the competitors but it does tend to mean that it is never going to give star performance.
The avoidance of benchmarking, if done properly, can make a significant difference to the investment returns but the fund manager really needs to know what he is doing or it can go horribly wrong. Other funds do tend to have this approach at present and you hear quite a lot about the successful ones – those that go dramatically wrong tend to disappear into the sunset.
I think the Mom approach will become the norm in the investment trust sector as I do believe the investment trust industry in particular is needing to move more up to date.
Haynes: The move by Witan following a disappointing period of performance is to be welcomed. Investment trusts have undergone a difficult period and it is important they take notice of shareholder demands to return to favour.
I believe that many investors would prefer a focus towards absolute/ risk and return, I would not be surprised to see other trusts follow this route. I think the Mom approach could become more common with the big international general trusts which could benefit from spreading the management between specialists in different markets.
Jupiter says it is very unlikely to apply performance fees to its existing funds after its consultation with IFAs revealed widespread contentment with the existing discounting arrangement. Would you like to see performance fees introduced on either new or existing funds?
Yearsley: Performance fees are a useful way of incentivising fund managers. I have nothing against them as long as there is a reasonable hurdle to beat. I think the problem with performance fees currently is that the fund manager often does not share the pain for underperformance.The base level of annual management fee should be lower for underperformance if they want to charge a performance fee for outperforming.
Adam: I do not have a major problem with performance fees but so far in my experience, performance fees have been set by the companies themselves and tend to be so modest that the company very rarely receives its remuneration. I think proper performance fees properly targeted or even absolute return fees, similar to hedge funds would be much more beneficial and particularly acceptable to clients and adviser alike.
Haynes: I believe there is a place for performance fees but they must be transparent and structured so they match the interests of the investor. Performance fees should be linked to a manager's outperformance relative to a suitable benchmark and managers should not be rewarded simply for matching market movements. Furthermore, if a manager underperforms the cho- sen benchmark, then this should result in a below average return for the manager.
However, I am sceptical of fund managers implementing complex performance fee structures, that could result in excessive fees being paid by the investor. I believe that Bedlam provides a case in point and I have steered well away from its funds.
Liontrust seems set to pull the shutters down on new investment into its existing funds after admitting that performance would be hindered with more than £6bn under management. As this ceiling is likely to be hit this year, Liontrust says it is looking at launching hedge funds to counter the capacity problems. What do make of its decision? Would you like to see more groups making strides to protect performance?
Yearsley: I think it is refreshing that a fund company admits that it can only manage a finite amount of money before performance starts to deteriorate. Other groups that have done this are JO Hambro and First State. It is obviously far easier for offshore funds, such as JO Hambro, as UK onshore funds cannot technically close.
I think that more fund management companies should consider capping funds if they think that performance will decline. It is responsible because it is the investment case, not the marketing one that is doing the talking.
Adam: I commend Liontrust as I believe there is no doubt that adding too much money going into a fund can affect the long-term investment performance of a fund, although there are always exceptions to this rule such as Anthony Bolton at Fidelity special situations). I would like to see more groups making strides to protect performance because without performance, what is it these companies are really selling?
Haynes: The managers at Liontrust follow strict investment philosophies and have always stated that performance could be hindered by excessive monies under management. I certainly welcome their move to restrict entry on their funds to protect existing investors, once this ceiling is reached. However, I would be keen to find out more about their intentions regarding hedge funds, to ensure this will not have a detrimental effect upon the performance of the existing long-only funds.
I would like to see more investment groups' act in the best interests of existing investors by capping funds when they have got to a size where liquidity could prove a problem. New Star (select opps) and First State (GEM and Asia Pacific) are two groups that have been proactive in doing this.