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Multi-manager View: Bulk versus boutique

The polarisation of the fund management industry continues unabated. The middle ground is fast being vacated, as houses decide whether to opt for bulk and enjoy the benefits of greater distribution or alternatively follow the boutique route.

The downside of going for greater bulk is that it becomes difficult to add value at the portfolio management level, as the poor fund manager has to attempt to buy and sell their positions, which are far greater than the market is prepared to accept. Inevitably, the funds have to be positioned closer to benchmark and often the outcome is that the organisation becomes a closet tracker.

We are always on the lookout for managers who have successfully run money within a big organisation which is now running smaller amounts of cash at a boutique. They now have the flex-ibility and freedom to get all their ideas into their portfolios, as the amount they need to invest can more easily be dealt in the market.

In recent months, Foreign & Colonial, Framlington and Deutsche Asset Management have all been subsumed into bigger organisations. These transactions represent a banana skin for multi-managers. Financial engineering drives most mergers on a top-down basis. This causes severe disruption at the sharp-end where portfolio managers are distracted by uncertainty over whether they are staying or going. It is not surprising that, in these circumstances, the team often take their eyes off the ball. When selecting a fund, it is increasingly important to make an assessment of the risk that corporate upheaval will undermine the investment.

The iimia multi-manager portfolios own ISIS UK Select Investment Trust, Deutsche Equity Income Trust and Framlington Japan. All of these are under- going a period of transition following mergers. While it has been confirmed that Derek Mitchell remains in charge of the Isis fund, the future management arrangements of the other two funds are yet to be confirmed.

The board of Deutsche Equity Income will probably be guided by Graham Ashby, the current manager, as to where to award the management contract. The remnants of Deutsche’s investment trust business were not included in the sale to Aberdeen.

In the case of Framlington Japan, this trust has, during the last month, been the best performing investment within our growth mandates across all sectors – not just Japan.

We built this holding once the reconstruction of the fund was completed in the aftermath of David Mitchinson’s defection to JP Morgan Fleming. Anja Balfour, the new manager, enjoyed a period of top quartile performance, which lasted for the best part of a decade while she was at Stewart Ivory.

The portfolio is fairly punchy with about 40 stocks. This seems to suit Balfour, who was rather lost at Baillie Gifford, and represents a return to how Stewart Ivory Japan was managed.

Following Axa’s purchase of Framlington, the combined operation offers two Japanese retail funds. Axa’s Japanese offering is quant driven and has a value bias. Its track record is perfectly respectable, however, given the substant-ial difference in style there seems every chance that one set of unitholders will be disappointed.

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