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IFAs wait to see the block buster show

With combined sales of UBS’s absolute return bond fund, and DWS’s Ratebuster product topping 90m in their offer periods, the industry has been reflecting on whether these apparently safe products can deliver on their promises.

Hargreaves Lansdown investment manager Ben Yearsley says the most important thing with new products is that they have good investment teams behind them, with the ability to produce the returns that are being stated.

The UBS absolute return bond fund aims to generate a return of 2.15 per cent over the base rate regardless of market conditions, with a volatility of just 3 per cent – lower than gilts at 5 per cent.

The DWS product aims to deliver returns of 7 to 8 per cent annually by investing the interest from depositing cap-ital and provides a capital guarantee with the option to draw out every six months.

Yearsley thinks that the assumption that 99 per cent of investors would make on these products is that they are safe. The DWS product, he feels, was launched as an alternative to building society accounts. The biggest risk it represents is it could disappoint clients and Yearsley thinks most IFAs will hang fire on it for six months to a year.

He says: “If in the first six months, DWS fails to deliver, then investors will walk out of the door and they will not come back. The sales have been high because people are obviously attracted to a 7-8 per cent return with relatively low risk.”

Bates senior investment adviser Paul Ilott thinks it is important to understand the position of these products in a client’s portfolio. He sees the DWS product as slightly higher risk and is standing back to see whether it delivers after the first six months and what risks the team will have to take. He thinks it is brave for DWS to launch this product with such an obvious benchmark by which investors can monitor performance. He wonders if the pressure on the team to produce the returns will tempt them to take extra risks.

On the other hand, the UBS product has a lower-risk profile with a lower targeted return. Ilott sees it performing well in the short term with the potential for a rise in interest rates but warns that in a more benign environment, conventional bond products are likely to outperform.

Ilott says: “The risk level is low and that is how investors and IFAs will see the absolute return product but when interest rates fall again, and eventually they will do, conven- tional bond funds are likely to do better.”

Yearsley thinks it will take a while for clients to understand absolute return products like the UBS one and their scepticism is natural but he thinks the market for them will pick up considerably over the next couple of years.

Investment Management Association head of communications Mona Patel is unable to comment on the marketing of specific funds to the public. But she says that if a company markets investment products they have a duty to be clear, fair and not misleading.

Patel says: “The prospectus that goes with these products will spell out clearly the risks associated with them, and if they have been authorised then they are allowed. The investors will have seen the key facts and will buy them on the basis of the information they have been shown.”

Tru-est chairman James Anderson says naming the DWS product Ratebuster is designed to appeal to the investment-cautious general public. He says finance and inv- estment is, for most people, a very boring subject and the industry can start drawing in people by giving products attractive names but he questions whether naming a product well is the best way for the industry to build trust in the longer term.

Anderson says: “The retail sector has lessons to learn from the wealth management sector, where relationships are often built up over several generations. IFAs need to carry out research and decide which bandwagon they are going to jump on, not try to chase commission constantly and then disappoint their clients.” director Ashley Clark thinks it is irrelevant whether these products are any good,because so many IFAs are sceptical of any structured product after the precipice bond debacle.

Clark says the David Aaron Partnership went into liquidation because it sold too many structured products that failed and he cites the rocketing IFA levy for the Financial Services Compensation Scheme over such failures as a solid base for scepticism.

Ruth Whitehead Associates principal Ruth White-head says the UBS marketing department should be congratulated on getting people’s attention by targeting a return of 2.15 per cent above base rate but she remains sceptical.

Whitehead says: “It is really just another cautious managed product. If it is from UBS then it is worth looking at but it will need to take its place in the market alongside all the other products that are out there. It is nothing new – surprise surprise.

“For a jobbing IFA like me, you just look at the advertising and smile before looking underneath it and consid- ering whether or not it is right for your clients.”


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