The Sunday Times recently accused the fund management industry of cheating investors and taking half of all investment growth in charges. Do you believe industry charges are too high?
MB: It is value for money which is most important. Larger funds should have lower charges due to econ omies of scale – index trackers are mostly too expensive, and “closet trackers” are the worst value of all. A manager's income should be performance related. Total expenses are what purchasers need to know – separating out custodian fees etc confuses rather than clarifies.
BY: No, I do not think fund management charges are too high. However, if you compare retail annual management charges to institutional funds then they do look high. But there is one thing that will probably bring down annual management charges – stakeholder.
Stakeholder pensions and the general press and stories about them will force fund management companies to ultimately lower their charges more towards 1 per cent per annum. Otherwise they will miss out on such a huge potential market.
JD: Generally I do not think industry charges are too high. Clearly, in addition to initial and annual management charges, there are other costs. However, I consider these to be genuine costs of running an investment fund as op posed to direct charges to the investor.
The way forward is for total expense ratios to be more widely used which is a much better representation of the charges and costs associated with a fund. In other words, the full picture. In respect of initial charges I think that the days of 4.5 per cent or more are numbered. There is such a big focus on this area of charging and I think that fund providers will find it difficult to sustain a charge above this level.
Specialist, global and Euro pean funds have all seen a rise in sales at the expense of UK funds this year. Why do you believe the industry is seeing this shift?
MB: The grass is always greener elsewhere – but di versification is usually to be encouraged. Importantly, the geographical restrictions which apply to Peps do not constrain Isas, thus it was natural for the emphasis to move as it has. When it becomes possible to combine all Peps next year under Isa rules, the shift is likely to continue.
BY: Most investors have traditionally followed the Pep rules in terms of where they are invested. Therefore, most portfolios have been dominated by UK and European funds.
When Isas were introduced, the rules were relaxed so that investors could, in effect, invest anywhere in the world. By the time the technology boom happened last year, investors were ready to leave the UK and be more adventurous and diversified. I do not think that investors are deserting the UK because of poor investment opportunities, in fact some of the best funds in the last six months would have been UK equity income funds. It is just down to diversification.
JD: I see three main reasons. First, many investors have been overexposed to the UK. This has been the result of placing their Pep money year after year into UK funds but also because of the comfort factor of staying close to home. Consequently, I think that investors and their advisers have become more aware of the need to diversify and have done so.
Secondly, investors have become much more tolerant of taking some overseas risk. In our daily lives we all use products made by foreign companies whose brand names are very familiar to us. Investors are becoming more tolerant of investing in such companies.
Thirdly, many non-advice sales are made as the result of how well a fund is marketed. I think specialist, global and Euro pean funds have had a high marketing presence this year.
The average return on a unit trust for the year to date is now almost -4 per cent. Why has this been such a poor year for performance?
MB: Writing as a qualified technical analyst, most technicians had been expecting a major correction for some time – and it is not over yet. Many unit trusts are closet index trackers and consequently have suffered from the herd mentality. Managers who have been more willing to think for themselves have better results. There are good profits to be made now, but it is much harder than in the last few years, and requires a trader's mentality which is anathema to most funds.
BY: This year has only been poor for funds that have large amounts in technology. Many equity income funds have done very well, especially since March. After the stellar returns that many markets saw last year, mainly due to technology-related investments, this year was almost bound to be a bit of a damp squib. Most technology funds are actually down by at least 10 per cent, despite such a meteoric rise at the beginning of the year. Then compare that to Perpetual high income as an example, which is up almost 8 per cent. Many in vestors overall will not have had a bad year.
JD: Last calendar year was notable for stockmarket volatility. Clearly, the underlying reason was the boom and bust scenario in the TMT sectors. But generally markets lacked rationality and were extremely fickle. Market sentiment seemed to change with the latest news flow and the change didn't always reflect the content of the news flow. This year is going to be different.
Old Mutual Fund Man agers has cut its charges across the board in an effort to build its brand within the IFA market. Are you impressed with the new-look company?
MB: I do not rate cost above value for money. Henderson's Global Technology fund is one of the most expensive unit trusts around, yet in terms of value for money to its investors I think there were few complaints while the old team and the “tech boom” lasted. Like any of its competitors, it is the return on investment which will attract my recommendations.
BY: Yes. Old Mutual has transformed itself into a very serious investment outfit. It has got some excellent fund managers, such as Ashton Bradbury (ex-HSBC and Hill Samuel) and Adrian Far thing (also ex-Hill Samuel) and looks to have new funds on offer in the new year.
JD: The new-look company is more like a new company. I would be pushing it if I said all that is the same is the name – but that is not too far from the truth.
I am impressed with how the management is shaping the company to make it a serious investment force. Deep pockets should ensure its ability to buy in further fund management talent and I suspect we will see more activity in this respect in this first quarter. The bottom line is that the company cannot afford to fail.
The likes of Adrian Far thing and Ashton Bradbury could have joined other groups managing much larger portfolios. Instead, they are bringing their track records and pretty much starting from scratch. There is too much at stake for the company not to succeed.
Finally, what do you believe will be the main developments in the fund management world this year?
MB: Like the rest of the fashion industry, investment managers need new launches to pull in the money. Technology etc will take a very long time to come back into favour, so my guess is that established companies will deservedly come back into consider ation.
If interest rates are cut, as seems likely, bond funds will do well, but discrimination will be required since in the coming recession there will be plenty of corporate failures, meaning junk-bond holders will lose their capital.
BY: The first authorised hedge fund will almost certainly be launched next year. IFAs should be able to promote and sell these by the bucket load. A product that has the ability to outperform in any market conditions should prove attractive to the investing public. Despite IFA indifference they ignore stakeholder at their peril.
JD: The focus on charges will continue and we will see other groups following Old Mutual's example of cutting initial charges. I think there will be a shift away from using UK and European funds for small first-time investors towards using solid globally diversified funds – it makes sense. Alternative investment funds and manager of manager products will be launched. Although fund of funds multi-manager products have been around for some time, true manager of manager products are now on the scene. The likes of SEI and Premier Asset Management will be followed by others I'm sure.