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Highly charged

Our panel consider the FSA probe into multi-manager charges and whether fund firms can justify performance fees

Is the FSA right in invest-igating IFAs’ use of multi-managers in relation to the higher charges imposed by these managers?

McDermott: Multi-managers do have higher charges and I am a strong believer that they should be careful to keep them at a reasonable level. That said, it appears to me that the increased use of multi-manager has come from regulatory pressures set down by the FSA and I would find it confusing if the FSA were to punish IFAs for use of multi-manager funds.

However, it is not as if multi-manager funds are a new concept. It is widely known that multi-managers do have an extra level of charges and, as a result, total expense ratios will be higher. I am not quite sure why the FSA is taking the time to look into this now but it occurs to me that maybe the FSA might look at multi-manager charges and, once and for all, set a framework that they are happy with.

Lakey: Multi-manager is somewhat of a copout, in that it removes the fund selection obligation and dilutes the asset allocation process. There is also the other analytical problem that such funds distort the comp-arison tables, making a moc-kery of quartile positions.

With additional charges for the selection process, the whole basis of multi-manager is placed in question and the FSA should enquire and assess the basis of the charges. Better to do it now rather than when the horse has bolted, as with the false Lautro charges applied between 1988 and 1995.

Thomson: The FSA seems to have a preoccupation with charges, believing that higher charges are bad and cheap is best.

Certainly, investors should be made aware of the charges applying to any fund in which they intend to invest, and be aware that the total expense ratio of the fund is likely to be higher compared with a fund investing in direct equities.

They also need to understand that multi-manager funds are designed to provide wider diversification to asset classes and investment styles rather than sticking to a one-trick pony. Perhaps all fund managers should declare their TERs and not their annual management charges.

Do you expect other asset management houses to follow JP Morgan Asset Management’s lead in standardising the ‘other expenses’ charge at 18 basis points and setting the initial charge at a stand-ard 4.25 per cent across its range of Oeics?

McDermott: JP Morgan were proactive with its newsflow just after the retail distribution review. It had obviously been doing some work on transparency, particularly in the area of “other expenses”.

The one thing that I am fairly confident about is that the setting of those charges at 18 basis points will not be costing it any money. Firms will probably be eyeing JP Morgan’s changes with interest but I do not expect a lot of similar moves for other asset managers.

Lakey: My guess is that one or two will do this, although most will want to retain their current charging structures.

Foreign competitors are likely to come in aggressively with no or little initial charge and reduced AMCs, particularly where it offers passive fund management.

Clarity of charges is always welcome and helps blunt the arguments contained within the recent RDR document.

Let us hope that other fund groups are able to promote their wares in a concise way.

Thomson: I think this is unlikely. It will depend on each fund manager’s costs and cashflow models, as well as marketing strategies to attract fund inflows.

The costs of running a small fund tends to be proportionately higher than a big established fund due to economies of scale.

I very much doubt that a one-size-fits-all approach would work effectively among all fund managers, although some of the bigger players may be able to foot the bill. It will only happen with certainty if the FSA forces such a charging structure on the industry, which may well upset some players.

Statistics from the Investment Management Association show the amount of new Isa money invested in July was down by 17 per cent on June and down by 28 per cent on July last year. Is the market volatility putting people off investing in securities?

McDermott: Inherently, market volatility does put people off. We certainly had slightly less business in February and March than we were expecting. That was primarily due to the market volatility at that time.

Over the last six to eight weeks, market volatility has picked up, this traditionally has been a quieter time for investors but a noticeable proportion of our clients have used the weakness as a buying opportunity.

So while market volatility can be frightening to potential new investors, experienced clients are using it to buy cheaper units.

Lakey: The mortgage woes in the US and subsequent worldwide market volatility has most definitely had an effect. It is also true to say that canny investors have been taking profits made during the previous four years. It’s not so long since the 2000-2002 market slump and many investors remain cautious. Nevertheless, those who drip-feed their savings will benefit from volatility and it is down to advisers to promote this message.

Thomson: The fall in Isa sales is due to a combination of volatile markets, increasing savings rates and debt servicing costs, as well as some of the attractions of Isas beginning to wane.

Isas are not as attractive as they once were, the costs to advisers of justifying an Isa sale is increasing, and the forthcoming changes to Isas next tax year have yet to be fully clarified.

I suspect that when April comes, the bancassurers will be cornering the Isa market and IFAs will need to be proactive to capture anything like what they have so far.

Will Graham Ashby’s continued management of the Sarasin Chiswell UK equity income fund prove a distraction from his new role as manager of the Credit Suisse UK equity income fund?

McDermott: I do not feel this will be a distraction. Graham Ashby is a good appointment and our view is that while Credit Suisse made us wait a long time before the app-ointment, it was a worthwhile wait.

There are many precedents for managers running money for other firms, most notably Neil Woodford, who runs almost £20bn for Invesco Perpetual and the £500m St James’s Place UK highincome fund. Andy Brough and Richard Buxton at Schroders are two very well respected and well performing managers in their own rights and they also run a separate mandate for Norwich Union – the special situations fund. These are just a couple of examples that spring to mind and so I do not see this causing Graham Ashby any issues.

Lakey: The Sarasin fund is tiny – just under £16m – compared with the £769m within the Credit Suisse fund. On that basis, you could argue that the Sarasin fund will not distract from his main CS goals.

However, while they are similar funds, they each have their individual aims and characteristics and I am not convinced that either fund can benefit fully from his skills.

When fund managers divide their time between different funds it tends to blunt the performance of one or more of the funds. Ultimately, I believe he will be forced to focus on CS income, probably to the detriment of the Sarasin fund.

Thomson: I would not have thought it will be too much of a distraction as most fund managers are used to managing many funds at the same time.

There may, of course, be problem if he uses the same investment style and stocks within the fund, as one would expect them to mirror each other and, of course, some observers may take the opportunity to compare the funds directly, highlighting any deviation in performance as a direct result of running two separate funds with similar mandates. We will have to wait and see how they do.

What is your opinion of managers who increase the annual management charges on their funds on the back of good performance, with First State Investments being the most recent example of this?

McDermott: We have noticed a trend of managers raising their charges as they increase their number of distribution avenues. Our view on this has always been that premium managers can demand higher fees if they can produce premium performance. If they charge 1.75 per cent and they outperform their benchmark by 5-10 per cent, then we do not have a problem.

Where we have an issue is when sub-standard managers increase their funds to “bring them in line with the industry standard” but then do not justify the increase in costs.

We have always said that if funds suffer two consecutive years of third or fourth-quartile performance – whether it is a highly rated manager or not – we think they should rebate at least 25 basis points to the investor. Or in the case of those who charge 1.75 per cent, just one year of below-average performance should be penalised.

It is OK charging premium prices for premium performance but it has to work both ways and we believe that performance penalties must also be administered.

Lakey: I have no objection to any particular level of fees being charged because market forces will dictate whether there is any significant take-up or defection.

If such funds consistently outperform the sector average, then a modest increase to charges will not prove an obstacle.

Equally, all advisers weigh up various factors when assessing the merits of different funds and the charging structure is one of these.

The differences in relative performance tends to be greater than the relatively small differential in charges, although this is an emotive subject for existing investors.

As with all things financial, the market will prove the ultimate arbiter.

Thomson: Past performance is no guide to future performance, as they say. If the charges go up because of good performance, will they come down if there is poor performance? I doubt it.

I suspect that this is not the best way of going about getting more funds under management. If they say at the outset that the charges will increase as a type of performance-related reward, then investors can accept that but they will have a dim view of charges being increased just to fill the fund manager’s pockets without justification.

The FSA may want to consider its stance on this under treating customer fairly principles.

What do you make of Psigma Investment Managements’ decision to launch a US large-cap growth fund, given the UK’s apparent lack of appetite for such investments? Are you surprised by James Abates appointment to run the fund?

McDermott: The clear feeling we have from Psigma Investment Management is that a key factor with the firm is people.

James Abate had worked with Ian Chimes and, more important, Bill Mott at Credit Suisse and is obviously a fund manager that they have very high regard for.

I would suggest that most of our clients are comfortably underweight in US funds but I think that is a trend we will see unwind a bit as soon as the US market starts to dominate again.

Lakey: It is a brave move to launch a US fund amid concerns about a possible recession. Equally, contrarian investors may feel that such an approach may pay dividends, both literally and metaphorically.

Ian Chimes reigned over a range of successful funds when he was at Credit Suisse and there is every indication that Psigma will prove just as successful in appealing to discerning investors.

The Bill Mott factor is important in focusing attention on Psigma but, ultimately, the skills of James Abate and his Centre Asset Management boutique will determine victory or failure.

Thomson: Although most advisers have shunned the US sector in recent years, partly due to the declining dollar adversely affecting sterling-converted returns, I think the future appetite for US large-cap funds will return.

Investors are showing signs of fleeing to quality stocks that continue to be profitable and generate a higher level of dividends than may have been the case in the past.

James Abate had a good run with Credit Suisse up to his departure in 2000, moving to GAM until 2006 and most recently running a niche boutique investment fund. His return to the fold, I believe, will be due to the cycle for his investment style coming back into vogue, so maybe this should be seen as a shrewd move on his part.


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