Some fund management groups have increased their advertising spend in anticipation of a better Isa season. Do you expect the 2006 Isa season to be much of an improvement over 2005?
Connolly: Our company philosophy is based upon building long-term relationships with clients. We do not leave Isa investments until the end of the tax year and so do not notice an Isa season, either good or bad. The Isa season predominantly exists where investors make their own investment decisions and have held off making investments in the year either through fear or because they believe that, by waiting, a buying oppor-tunity may arise. As the end of the tax year approaches, they then may decide, or are persuaded, they should use their Isa allowance before it disappears.
Dampier: Given that stockmarkets globally (apart from the US) had a superb year in 2005 this surely bodes well for the 2006 Isa season. Of course, there is always an Isa season anyway because a deadline is a wonderful selling tool. By March, we will, in fact, be in a three-year bull market. Three-year track records on most unit trusts will look extremely impressive. I am optimistic on the markets at least in the short term we need to be careful not to raise expectations that the next three years will see similar gains. McDermott: We too are also increasing our advertising spend this year compared with last and we do expect to see an increase in Isa sales. From 2004-05, we were up by 18 per cent in Isa sales and this season we are anticipating an increase on that figure, hopefully in excess of 20 per cent. A number of groups are expecting a greater rise in Isa figures and I have even heard some suggesting as much as 100 per cent.
What will A-Day mean for the fund management industry?
Connolly: A-Day will mean significantly more to the pension industry and to IFAs than it will to the fund management industry. I am not convinced that A-Day will have a significant impact on the amount of money invested into pensions. Aside from A-Day, if pension products continue to provide a wider choice of external fund links, then that may provide opportunities for some fund managers to form strategic alliances with product providers.
Dampier: The changes in pensions and particularly the introduction of low-cost Sipps will offer the fund management industry huge potential. There are billions of pounds trapped in poorly managed insurance funds. The industry needs to help brokers get the message out that private pensions can be extremely good value, providing you take an interest. The message is simple – get the best brains running your pension fund. Better performance means a better pension. Indeed, better performance may mean that in the end you will not need to pay so much in. The angles and the potential for the industry are immense. The question is whether they will they be able to rise to it.
McDermott: With the inevitable focus on Sipps, we expect the focus after A-Day to switch to the fund management companies. Sipps and pensions will provide them with significant inflows of money as the influence of open architecture investment is felt more keenly.
We hope that the fund management companies are prepared for this. Our concern is that fund capacity could be swallowed up by the flood of new money coming from life and pension companies and that the high-street investor without a Sipp could be turned away from some of the industry’s more popular funds.
What are your hopes and fears for the fund management industry?
Connolly: My fears are for investors rather than the fund management industry itself. With nearly three years of stockmarket gains, there is a danger that an increasing mood of optimism may lead to some investors not learning the lessons of the past and overexposing themselves to the equity markets.
The key to successful investing is a long-term asset allocation strategy where a portfolio of non-correlated asset classes are selected that match the client’s objectives and attitude to risk. Over-hyping the equity markets at the expense of other asset classes may prove a rewarding experience, although it could just as easily be a recipe for disaster.
Dampier: My biggest fear is always a stockmarket crash, something totally unpredictable that hits the global markets. The industry is built on confidence. However, as these are totally unpredictable there is no point in worrying about them. My hope is that markets continue to rise gently and that active fund managers show a clean pair of heels to the passive brigade.
McDermott: Our concerns for the fund management industry centre on the point that I made in the second question about the problems of diminishing capacity onceA-Day has passed. It is, I feel, a real issue that people have not really woken up to.
If Joe Bloggs wants to invest his 7,000 Isa into Framlington UK select opportunities, is he going to be able to if the fund has been forced to brink of soft-closing by the influx of life and pension money?
I would like assurances from the groups that his money will not be affected, but I do not think their responses will be unconditional. A hope I have for this year is that groups look more seriously at performance-related penalties as well as performance-related fees. I think it could be a significant olive branch towards the public. If thegroups are seen to be being penalised for poor performance our interests are aligned. It is something that I feel very strongly about.
Which funds at Axa Framlington do you anticipate being consolidated as a result of the review at the firm?
Connolly: It makes very little difference to us or our clients which funds Axa Framlington may or may not decide to consolidate. This is because we do not currently hold any of their funds in our client portfolios. We will continue to watch what they do with interest and remain vigilant of any funds that we feel may add value to our client portfolios in the future.
Dampier: To be frank, I have no idea. I cannot see the point of speculating. I like to deal with hard facts.
McDermott: The acquisition of Framlington by Axa has left a number of consolidation possibilities within the fund range. I do not anticipate the equity income funds being merged, simply because the Axa fund has 703m under management which is not the kind of investment that George Luckraft will take kindly to running. However, I do see symmetries in the UK opportunities funds. The Axa fund is only 51m and it would not be inconceivable to see that merged into Nigel Thomas’s UK select opportunities fund. I also think the UK growth funds could be addressed. Chris Murphy’s Framlington fund is only 57m but the Axa fund is 313m and I could see Murphy moving acros to run the Axa money and possibly taking his funds under management with him.
Do you think the Norwich Union growth and value fund represents the best choice for advisers looking to time market cycles?
Connolly: This is an interesting fund launch, although not one that we would be likely to use in our client portfolios. We select individual funds that fill specific roles so we can blend funds together within client portfolios. This helps us to manage the level of risk that we take.
But this new fund launch may have a place as a core holding for advisers that do not have a full investment management capability or for investors that want to buy a fund which they can hopefully hold in the long term and will not provide them with too many sleepless nights.
Dampier:The new Norwich Union growth and value fund managed by JPM offers an ideal core holding for brokers and clients not wishing to look at growth and value cycles.
The truth of the matter is few people get these cycles right and few brokers and clients even understand it. It seems an excellent idea to buy into funds and into quality fund managers who understand this far better.
McDermott: No, we certainly do not think the new Norwich Union fund is the best fund for advisers trying to time markets. This fund combines growth and value elements and it is looking to outperform gently in all market conditions. We think it is more likely to be a core fund for advisers’ clients who do not want to worry about market cycles at all.
Who do you think is going to buy Gartmore?
Connolly: I do not have any idea.
Dampier: I have no idea who is going to buy Gartmore.Once again, I think speculation is pointless. Let us wait and deal with facts.
McDermott: This will be of great interest to Gartmore’s clients but I do not suppose we will know until there is an announcement. These things are always done with the utmost secrecy but we understand that Henderson, Schroders and Aberdeen have all been linked with a possible move.
As with all mergers. one key thing to a successful acquisition is retention of the key fund managers, as Axa and Framlington showed recently. For me, whoever buys Gartmore, that has to be the number one priority, keep the top-performing managers.
Will you be buying John Chatfeild-Roberts book Fundology? Do you think that fund managers should be giving away their secrets so publicly?
Connolly: John Chatfield-Roberts is recognised as one of the better fund of fund managers in the industry and his book could prove quite an interesting read. But we have little need to learn his “secrets” as we already offer the most comprehensive fund of fund service in the industry to our own clients.
We have one of the most experienced investment management teams, typically invest into 14 different asset classes and utilise sophisti-cated asset allocation technology so that port- folios can be tailored to the needs and risk profile of individual clients.
Dampier: I will definitely be reading John’s new book but, being an extremely mean Hargreaves Lansdown director, I am hoping I might get a free signed copy from him. John, I hope that you are reading this.
McDermott: One of my roles here at Chelsea Financial Services is assisting our research department with fund selection. I would be stupid not to have an interest in how somebody as eminent and consistently good as JCR and his team make fund selections. You are never too old to learn, especially from people who are proven to be some of the best in their fields. As for whether he should be presenting his process so openly, perhaps that is not the best idea he and his team have come up with recently.