There were some powerful challenges for investment markets – a strong oil price and weak dollar – but the background was overwhelmingly one of consensus. Investors quickly came to terms with developments and faced them with a narrow set of expectations. This was a major factor in the collapse of volatility at market and stock level. Exacerbating this trend was hedge fund activity. Pricing anomalies were quickly targeted and neutralised. A number of valuation techniques and indicators of stock mispricing – changes in analysts’ forecasts are a good example – were a poor guide in 2004 but, generally, the decay rate in the value of information has quickened. In the domestic market, value styles beat growth but overall were only a fraction better than the market. Large and small cap breasted the tape almost together although they ran very different races. Fixed interest generally lost out to equities although high-yield junk did better than both. Gilts were beaten by credit but not massively. In corporate debt, lower-grade and longer-dated stocks performed best. Overall, the gap between best and worst was surprisingly narrow. Looking forward, the consensus is that the period of strongest growth for this cycle has passed and world economic expansion will continue more slowly. Interest rate changes will be modest. Market returns against this backcloth should be positive but hard won. For the manager of managers, the main focus has to be on finding those combinations of managers which are able to exploit the opportunities. However, costs become very important for both the manager and client. One of the major costs that can be managed at portfolio level is that of changing managers. Here, the manager of managers approach has a significant advantage over a fund of funds. In a fund of funds structure, leaving a fund manager means selling all the units and reinvesting all the proceeds, suffering cancellation prices on the way out, creation prices on the way in, including stamp duty in the UK, plus the usual heady cocktail of commission, spread and market impact. A manager of managers is spared most of this. Moving a mandate controlled by the fund will generate portfolio changes but only at the margin. Even these costs can be controlled, using a specialist transition manager where the fund manager cannot deliver the sharpest terms. Containing costs in this way will help returns and we should remember that the best way of improving risk-adjusted returns is by cutting costs. If market returns of little more than double figures are what is available, we also need to look at charges. How reasonable is it for an investor to bear total expense ratios of over 2 per cent – and some over 3 per cent – when this represents such a significant proportion of the whole return, particularly when they bear all the market risk? Frankly, the issue must have a bearing on best advice. In markets which lack volatility, how can we justify asking clients to pay such a high premium for expected alpha when most of the return comes from beta positions?