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Is it a polar bear market

Money Marketing&#39s Poles Apart straw poll revealed 90 per cent of IFAs to be opposed to changes in polarisation laws. How damaging would any changes be to the IFA community?

MB: Any changes to polarisation are inevitably going to put the industry back where it was before the Financial Services Act 1986, with investors totally confused and prey to multi-tied agents representing themselves as independent advisers.

It would almost certainly be the death knell of 90 per cent of IFAs, much to the relief of the Government and the majority of life companies.

I cannot see any positive long-term benefit for the consumer which could not be achieved more cheaply, and less disastrously, by keeping the current polarisation rules.

BM: The principle of polarisation is relatively simple and clients can understand the concept once it is explained to them. Any dilution of that polarisation principle will produce nothing but confusion in the minds of clients and without providing one single extra benefit in my view.

It will certainly be damaging to the IFA community and, more important, it could damage public confidence in the industry, which is the last thing we need.

DA: If tied agents and direct salesforces of insurance companies are allowed to sell the products of other compan-ies without restriction, this would cause damage to IFAs, to the consumer and to the credibility of the financial services profession generally.

It would, for example, be very unwise for a salesman of life insurance companies to start selling unit trusts from one or more fund management groups even if they were trained in investment generally.

On the other hand, I would not be opposed to direct salespeople and tied agents selling health and protection products where their own company did not market such products.

Even in these circumstances, it should be clearly stated to consumers that the salesman is only representing the particular companies issuing these products.

As the first VCTs approach their fifth birthday, initial investors will be able to sell their shares without losing their tax breaks. Do you think secondhand VCTs will be an attractive investment product?

MB: Possibly, but without the tax privileges available on new VCTs and EISs, investors are likely to be more risk averse. In theory, five-year-old VCTs should include more mature companies which are more financially sound and less dependent on financial “angels”.

The market could be there for secondary offerings. It would help if the capital gains tax position on the purchaseof secondhand VCTs was more widely known.

BM: Secondhand VCTs will certainly be attractive to certain investors who are looking for an investment that will provide tax-free dividends and capital gains, particularly as some of the trusts have provided good returns quite apart from the tax advantages.

However, the usual warnings apply that these products are high risk and speculative.

The secondhand investments will probably suit someone who has used their normal tax-efficient allowances andis looking to use VCT shares as part of an overall portfolioof investments.

DA: Yes, depending on the share price and the pastperformance of the individual VCT. In order to make real money out of VCTs, I believe they should have been in existence for at least five years as it often takes some time for small successful companies to reach their potential fully.

Secondhand VCTs have the great advantage in that all dividends and capital gains are tax-free in the hands ofthe investor and the only reliefs they do not get are the 20 per cent initial income tax relief and capital gains deferral relief. This disadvantage is often offset in that many of the VCTs are standing at substantial discounts.

The well managed trusts investing in technology companies and on the Aim market may well give exceptional returns, particularly as no capital gains tax is payable.

As chief executive Orie Dudley becomes the latest departure from Scottish Widows Investment Partnership, what do you believe the future holds for Swip?

MB: I do not think it is an understatement to say they will have their work cut out building their brand. There is so much competition around, some of it very good, that a reputation for an unhappy team liable to disintegrate is not going to help retain their existing mandates, let alone gain new ones. As an outsider, it looks like a case of too many cooks spoiling the broth.

BM: There is nothing like a boardroom shuffle to guarantee some consternation and uncertainty about a company in this industry but I do not believe the departure of Orie Dudley should cause any real concern.

It is worth bearing in mind that Scottish Widows might be a soundly based organisation but so far it is not regarded as a top-flight invest- ment fund management company and some new people within the partnership may bring some benefits.

DA: Nearly all the major fund management groups go through periods of poor performance and changes in management. Scottish Widows, due to the takeover by Lloyds TSB, is obviously having some teething troubles but both Lloyds and Scottish Widows are highly responsible companies and I am sure they will be able to hire the right fund managers to produce above-average performance. Its past performance has been rather unexciting in most sectors but we would certainly use it if we felt it had hired the right fund managers.

John Duffield has made clear his intentions to start a new fund management company as soon as he receives Imro approval. Will you be interested in funds from New Star Management?

MB: Markets have become much more unpredictable over the last three years and the need for well informed, well resourced managers has not diminished.

The questions to answer will be what his team willlook like and the areas he intends to promote to begin with. SocGen did an excellent job a few years ago with a nucleus of capable, disaffected managers. I am not sure he can do the same.

BM: Yes I will be interested to look at the funds of the new company but the decision to use the funds for clients will depend entirely on who is managing the fund, the charges, the investment strategy, etc. In other words, the funds will be judged on merit in the normal way.

John Duffield is a well known personality within the industry but he cannot assume that his funds will be successful purely on past reputation.

DA: Yes, I have great respect for John Duffield and I believe any enterprise he starts will have a sound basis. If he hires fund managers with proven past records and good future potential, we would certainly support them.

Unlike some other IFAs, we are still strong supporters of Jupiter because of the wayJohn Duffield nurtured fund managers, and, as a result, got the best out of them. We believe Edward Bonham-Carteris an excellent leader at Jupiter and will continue to see that Jupiter&#39s funds remain among the top performers.

Fidelity&#39s FundsNetwork has its IFA service up and running and is doubling its number of fund providers this month. Are you ready to start putting your clients&#39 accounts into the supermarket?

MB: We still have several fundamental reservations about Fidelity&#39s FundsNetwork service at present. In particular, we have already had instances of security breaches and until we are completely reassured on this point we would rather avoid Fidelity in favour of competitors such as Skandia, whose facilities are more limited but seem more secure.

Fidelity has a history of launching new services which sound great but do not live up their promise and, having invested heavily and suffered badly as a result of its Fidelity Brokerage debacle a few years ago, I have no wish to be another guinea pig.

BM: I certainly think that the fundmarket concept will be useful but I understand there have been problems for some IFAs connecting to the network and I will feel happier once they have ironed out the teething problems beforeI consider using the system.

DA: Yes. We have already signed an agreement with Fidelity and fully support its aims and objectives. We will certainly start putting our client&#39s accounts into the supermarket shortly.

We will consider other supermarkets as soon as they are available. We believe all fund management groups should become members of the main supermarkets and we will probably use at least two of these and over the years find out from experience which ones provide the best administration and service.

SRCE: Money Marketing

PDAT: 140900

SCTN: Investment Brief

PGNO: 57

RANK:

HDLN: Miller is the value victor

SBHD: The fund manager of the decade takes an individual investment approach

BYLN: by James Daley

TEXT:

To be named fund manager of the year is impressive but to get the accolade of Morningstar fund manager of the decade in a country that has over 8,000 mutual funds is the stuff of legends. The legend became reality for US fund manager Legg Mason&#39s Bill Miller last year.

Miller, who now manages over $23bn for Legg Mason, made his name for the firm through its flagship value trust. Over the past nine years, he has outperformed the S&P500 index every year – a feat matched by no other manager in the US.

After Johnson Fry was acquired by Legg Mason at the end of last year, renaming it LeggMason Investors, it decided it could not waste its new link with America&#39s most successful fund manager. In LMI&#39s new American assets fund, launched at the beginning of this month, it finally managed to find a way to tap the talents of Miller.

The new fund is broken down into three sections. Miller will manage the value section investing in US equities, which will make up 50 per cent of the fund. LMI director of investment trusts Alan Kerr will manage the income section, investing in high-yield investment funds. This will make up another 35 per cent of the fund. While the remaining 15 per cent will be managed by another Legg Mason subsidiary, Western Asset Management. This final section will be invested in high-yield bonds.

The closed-end fund will be registered on both the London and Channel Island Stock Exchanges and is set to deliver an initial annualised flat yield of 8.25 per cent. Dividendsare paid on a quarterly basis. IFA commission stands at3 per cent, with a 0.5 per cent trail. The offer period will end on October 11.

Bringing Miller to the new fund has been a coup for LMI. Head of investment Andrew Whalley says: “UK investors have shunned US investment over the past few years but it has been one of the best performing markets over that period.

“The average UK investor is dramatically underweight in US equities. If you marry that with the fact that we have attracted the best fund manager in the world to take part in this fund, it obviously has a lot of potential for success.”

Miller joined Legg Mason as director of research in 1981, moving onto co-manage the value trust from its creation the following year. Since his graduation from Washington and Lee University back in 1972, where he majored in economics, he has been a believer in true value investment.

Following in the footsteps of Warren Buffett, Miller considered a value stock simply to be a company that was priced at less than its intrinsic value. Through detailed analysis of companies, he would assess whether a firm met his criteria and then invest in it. Once his decision on a company was made, he would stick with it – at least in the short term. If itwent down in price, he would sooner buy more rather than sell.

Because he was looking to hold stocks for several years, he would not be swayed by short-term price fluctuations.

Much attention has been paid to Miller&#39s so called value approach in the US press. Traditionally, value has been seen as smaller companies but Miller has often invested in large-cap companies through his own value approach.

Recently he began to invest heavily in Amazon.com -a move that many critics said could not possibly be called value investing.

But whatever you want to call Miller&#39s approach, the figures have spoken for themselves.

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