Non-traditional asset managers are set to pose a challenge to the major fund groups as they begin to launch their own direct equity funds.
Big groups such as Hargreaves Lansdown and AJ Bell, as well as some networks, have been launching their own funds which go beyond plain model portfolios. In some cases, the companies involved are also factoring in large, in-house distribution channels.
It is argued this trend is a result of stalling innovation from more established asset managers as well as a consequence of the recent regulatory scrutiny of model portfolios.
So are brokers and advice firms trying to improve margins by launching funds? Or do they believe they simply have better capabilities to run them than pure asset management firms?
Last month, Hargreaves launched its Select UK Income fund, following the launch of its HL Select UK Shares fund in December. To date, the latter has attracted £235m from investors.
Nucleus business development director Barry Neilson says brokers are venturing into direct funds as a result of a lack of innovation in fund management.
He says: “In the old days every fund group had their range of 20 funds, then platforms came along and became a method of distribution.
“Now traditional asset managers don’t understand their client data and the role these funds are playing in model portfolios. So the same people are doing the same things at the same price, even though there is a different environment.”
Platforms offer firms the ability to mine client data and use this to inform the kind of funds they should launch. Data can be used to build cheaper products with more targeted outcomes.
Hargreaves chartered financial planner Danny Cox says: “Hargreaves has been successfully managing investment funds for well over 15 years. The HL multi-manager fund range is built using the same research expertise used for our Wealth 150 and Wealth 150+ selections.
“Our aim is to offer investors using the HL Vantage service the best choice and we have over 13,500 investment options available to them, including the new HL Select range.”
Neilson says brokers and large- scale advice firms are destined to become competitors of the more established asset management firms.
He says: “In the same period where the FCA launched its interim report into the asset management industry, Hargreaves launched its own fund.
“It used to be, and is, a huge distributor for fund groups but what it is now becoming is a competitor to the fund groups. That totally changes the dynamic.”
Gbi2 managing director Graham Bentley says big firms have the advantage of a large asset base to launch funds, and will continue to do so.
He says: “In order for the total expense ratio to look reasonably affordable you need to have a fair amount of money in the fund.
“If you are an organisation like AJ Bell or Hargreaves and you have control of sufficient assets, then you can still sell your ability to run money, but rather than on a discretionary basis you can do it on a fund basis. They will become asset managers.”
AJ Bell will soon launch its own fund range with five risk-targeted passive funds. The AJ Bell Indexx funds follow the launch of a model portfolio in August, the first fund of funds offering from the firm.
Head of fund selection Ryan Hughes says: “We launched our model portfolio solution after talking to advisers and with the feedback we had we knew they also wanted funds to go along with that.
“We have a platform solution to deliver models but also the infrastructure and the experience of launching funds for firms. Traditionally, people buy funds while model portfolios are relatively younger. But when it comes down to what advisers want there is space in the market for both.”
Bentley says brokers are changing business focus by playing on their visibility in the market.
He says: “What people like AJ Bell or others are doing is focusing on a non-core business for them which is running money. They are trying to develop into a more important business and if you are getting visibility for your portfolio, having your funds listed on platforms means it is more accessible.”
Lighthouse recently launched its investment arm, Luceo Asset Management, and plans to expand its fund range this year. It will add active, passive and income-focused products to its existing three-fund range. To date, Luceo has £8m of invested assets. The firm declined to comment on details of the upcoming launches.
Tilney Group managing director Jason Hollands says advice firms launching funds is “a natural extension” of their business. He adds their success will largely depend on the credibility of the investment teams.
Model portfolio woes
Experts argue the launch of direct funds from non-traditional asset management firms, including advice firms, is a signal of the potential failure of model portfolios.
In its asset management interim study, published in November, the FCA said model portfolios could increase efficiency and give investors a suitable investment service, but it stressed comparability, choice of asset managers and value for money are also key risk areas.
Bentley argues “the writing is on the wall” for model portfolios as firms continue to launch their own funds and boost their own credibility. He says: “A lot of these model portfolios, which anybody can set up, are just put together using someone else’s asset allocation. That is not really investment management.
“Running a fund means you have to walk the walk instead of just talking the talk. A business is stickier with funds and if you are an adviser who is running a model portfolio and you have sufficient money to launch a fund it makes your business more saleable. What these companies are doing is having funds rather than portfolios. They are effectively starting an asset management business as opposed to a platform or distribution business. And, of course, if you have distribution and asset management it’s easier to sell funds and your customers can more easily compare performance than they can with model portfolios.”
But FundCalibre managing director Darius McDermott argues some wealth managers will continue to outsource investments and will only venture into fund management if they have a large distribution arm.
He says: “Most firms, such as St James’s Place, are also asset managers but they outsource the actual management of funds. Asset management is in the day-to-day of picking stocks. There are probably 30 to 40 London-based boutiques that are running assets that I’ve never heard of. Hargreaves’s fund of funds business is growing as it is using its distribution chain. If you are going to launch funds, you need to have distribution.”
Hollands says Tilney will continue to offer discretionary services, but will not go into manufacturing its own funds.
He says: “Our funds are a natural part of what we do in terms of discretionary investment management. Our multi-asset funds are funds of funds and they are just a way to provide our asset management expertise to a wider client audience.”