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Outside edge

As the compensation culture bandwagon rolls on, it has been suggested that fund managers should be more proactive in providing redress to investors if there has been a clear case of mismanagement. While a laudable concept, I feel this would open up a massive can of worms.

Certainly, if mismanagement involved a fund management group not adhering to the trust objectives, then there is a case for redress but if the argument is simply one of poor fund management, it is going to be very difficult to sanction.

The FTSE 100 index is down by about 31 per cent over the last five years, so do we think about providing redress for any UK fund that has fallen by, say, 40 per cent or more in the same period?

Fund managers would be pressurised into slavishly following indices or appropriate benchmarks and not having the incentive to show flair and true active management. I acknowledge that investors have grounds for concern over some very poor fund management performances but the public also have to accept some responsibility for their own decisions. Basically, if you buy an investment, you are taking a risk to get a potentially higher reward and you have to face up to the consequences.

I do accept, though, that there is much hard work to be done by the fund management companies. They have to get the public onside again and that means obtaining their trust but a number of events have occurred to shatter the public&#39s confidence in personal financial products and the industry in general.

The recent report produced by KPMG in association with the independent financial thinktank Create really summarised the problems very well. It accused fund managers of letting down investors and being too concerned about funds under management.

It argued that many firms will have to be sold or forced to make radical changes now that we find ourselves in the fourth year of a bear market but precious few companies seem to be reacting accordingly.

It paints a picture of an industry unable to cope with the transition from a bull to a bear market and criticises the culture of overpaid star fund managers, with an inflated view of their own self-worth, helped by bon-uses linked to funds under management and not to individual team performance.

The conclusion was that new business models and leadership qualities must emerge and too many products have been launched without regard to customer needs and risk controls.

The number of funds launched in our industry has been ludicrous and we now have nearly 2,000 unit trusts and Oeics compared with less than 300 30 years ago. The industry has been transfixed by the thought of new fund launches and has served investors very poorly, considering how many funds are behaving like closet trackers and yet charging exorbitant fees.

In summary, while I have often wondered why we do not have award ceremonies for some amazingly poorperforming funds that have shown incredible consistency, I do not think we can go down the redress route too easily. We must address the issues, though, and already we are seeing consolidation of funds, as shown by Schroders closing eight of its funds and Merrill Lynch following suit.

I would like to see performance fees introduced in a way that investors can understand. The FSA seems to be changing its viewpoint and I welcome the initiative of groups such as Gartmore and Cazenove in rebating part of their ann-ual fee if there is underperformance against the appropriate benchmark.

I would like to hear far less talk of star fund managers when many of the managers referred to as such are overhyped on the back of a period of short-term outperformance. A more transparent industry is the order of the day and then consideration of providing redress to investors will not be an issue.

Michael Owen is joint managing director of Plan Invest Group


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