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Passive resistance

Do you agree with Liontrust&#39s view that the UK is set to see a proliferation of smaller fund management groups while the bigger houses will struggle to hold on to their stars?

RC: No, I do not agree with Liontrust&#39s view. I personally feel that while investors may become more adventurous in their choices with the advent of the fund supermarket concept, they will vest the bulk of their holdings with substantial investment groups.

These are the firms which demonstrate consistency in terms of performance, administration and, perhaps most important, continuity of fund managers.

MD: Broadly, yes, simply because so many fund managers feel stifled under the discipline of many big groups. Bigger fund management groups need to create a greater atmosphere of independence within their organisations, such as Jupiter and Old Mutual seem to do successfully.

AJ: No, there will always be a place for both small and big fund management groups. Smaller fund management groups can initially achieve superior performance as overweight or underweight individual stock positions can have a greater impact upon smaller funds. Investors may also be tempted by the recruitment of a well known fund manager who is moving to a smaller fund management group.

However, many investors will continue to be reassured by the bigger groups that have proved themselves running both small and large funds across a range of different markets.

Virgin boss Richard Branson is heading to lose his £6,000 bet with Nicola Horlick that SG Asset Management&#39s UK growth fund could not outperform the FTSE All Share index by 2 per cent a year over three years.

Do you think this is evidence that active fund management is better than passive?

RC: Absolutely. We at HCF believe firmly in the concept of active management over straightforward index tracking. There is no doubt that, historically, index tracking works extremely well as the benchmark of many portfolios. However, over recent years, the indices concerned – the FTSE is a classic case in point – have been very difficult to track in an effective manner due to the secular nature of their make-up.

There can be little substitute for an active and capable fund manager, provided they are able to operate to the remit of year in, year out performance of their relative index and have an understanding of the dramatically more complex nature of the main indices.

MD: No, I think the debate is on the wrong plane and should be more about utilising the best of both worlds. Unfortunately, the Branson side has tried to seize the moral high ground, just like Equitable Life did over commission. Perhaps someone should remind Branson that he has one of the most expensive trackers around at present. This may also suggest one of the reasons why he has been quieter of late.

However, I do believe we are entering a period where active fund managers should do better. The market has gone nowhere since July 1998, when it was 600 points higher than now.

AJ: This is not evidence in itself that active fund management is better than passive fund management. Rather, it shows that, in different investment cycles, active fund managers can outperform passive fund managers and vice versa. It is very often the case that in a strong bull market, it can be difficult for active fund managers to outperform passive fund managers. But in quiet or difficult investment conditions, the active fund manager can outperform.

Most investors take the optimistic view that their chosen fund will outperform the index benchmark. This is not to say index-tracking funds do not have a place. They are ideal for investors who do not wish to take the risk of choosing a good or bad fund manager.

Last year saw record sales within the venture capital trust industry, with all funds oversubscribed by the end of the tax year. As a result, this year has seen more launches than ever, with over £400m of subscriptions to fill. Do you believe the industry has overcompensated or that demand will once again meet the supply?

RC: I feel there may be a small degree of over-capacity with the proliferation of recent issues by various houses. However, the VCT concept is undoubtedly becoming more involved in the day-to-day planning exercises of the average high-street IFA.

The tax concessions boded well in last year&#39s environment, where many top-end private clients benefited from trade sale or listing proceeds.

However, with the quashing of dotcom euphoria, it will be interesting to see how many find themselves in the position of requiring instruments to defer liabilities.

MD: I think there is too much supply on offer this tax year. Already, over £200m has been bought this year, with at least £300m left.

Compare that with the last tax year when £270m was bought in total.

VCTs seem to be the fad investment this tax year, with every man and his dog trying to cash in and launch one with little or no experience. Many are of inferior quality and there will be many VCTs left over at the end of the tax year. This will be a potential problem for investors in those funds.

Having said that, demand this year is far greater and I would expect about £350m to £400m sold. But that still leaves almost £150m not

invested in.

AJ: We believe the merits of VCTs have generally been understated since they were first introduced. They have a wider appeal than just those investors who are seeking to defer capital gains tax and benefit from income tax relief. It is possible that the demand may not meet the total supply this year but this may be due partly to the general difficult investment environment that currently prevails.

Katherine Garrett-Cox has been appointed as Aberdeen&#39s chief investment officer and is also expecting a baby this summer. Are you confident she will be able to maintain consistent management of her funds alongside her new responsibilities?

RC: I find it curious that, even in these “enlightened times”, the question of children can still enter into our minds as a matter for consideration when an appointment is made even at this extraordinary high level.

If Nicola Horlick can handle the massive tribulations that she has endured in her personal life and steer SocGen to where it is today, I can see no reason why Katherine Garrett-Cox cannot continue to develop her role to the exemplary standards that we are all used to.

MD: I have not spoken to Aberdeen on this yet but I do have reservations that too much responsibility has been put on her shoulders. I note the Global Champions fund is propping up the bottom of the tables at the moment and, frankly, would rather see resources being given to existing funds than constantly launching new trendy funds.

AJ: Unlike Nicola Horlick, Katherine Garrett-Cox does have a very proven track record of fund management. No doubt, her success as Aberdeen&#39s chief investment officer will depend largely upon the team that supports her. But in this respect we feel that she is well supported and her additional responsibilities need not adversely affect her new responsibilities, albeit they are moving away from day-to-day stock selection.

Several major investment houses are launching new hedge fund products targeted at the retail market. Are you excited by the prospect or keen to keep your clients away from the risks of the hedge fund arena?

RC: We certainly view this as the next major retail drive of investment houses and, given the huge range of hedge funds that exist and the various hedging strategies and range of risk-reward contracts that exist in more developed hedged markets, I feel this would be the definitive way forward over the next five years for the retail client.

I think it may be an issue for some advisers and clients to get away from the historic ethos under which most of us have operated, wherein we measure funds&#39 relative performance against the index and err towards the hedged fund ethos of expectation of delivery of absolute returns irrespective of index movement.

MD: I believe this is an exciting new area for private clients, offering returns not correlated directly with other stockmarket investments. On the question of risk, much misinformation is available. However, many hedge funds have risk profiles that are lower than most unit trusts.

The first stepping stone is a fund-of-funds concept but considerable resource needs to be put into place to run one. My concern is that some of the entrants do not have this. We are presently promoting the Deutsche product, Xavex, where we believe significant commitment has been made by the company.

AJ: We would rather see this area of the market develop prior to recommending it to clients. Hedge funds are a very complex area of investment which can easily be misunderstood by the retail investor.

While hedge funds are undoubtedly a welcome new asset class for institutional investors, retail investors need to be clear of the risks involved and the fact that they are not the answer to all their prayers.

Investors may have to scrutinise the objectives and strategies of each hedge fund carefully prior to making investments.

ABN Amro&#39s Nigel Thomas has resigned the contract on the Solus special situations fund to launch a new fund in house. Will you be advising a switch on the Solus fund or waiting to see how the new manager, Nick Greenwood, fares?

RC: In this instance, I feel ABN&#39s overall fund management homework is extremely strong and my inclination would not be to immediately follow a known name on the assumption that he had overriding and total control over his previous funds.

Nick Greenwood will, I am sure, operate to a similar ethos as Nigel Thomas and a period of, say, six months to make sure there are no dramatic variations on the investment theme may perhaps be prudent.

MD: I have a meeting pencilled in to see Nick Greenwood in the next couple of weeks. However, while not doubting his ability, the fund was a vehicle for Nigel Thomas&#39s talent and clients bought the fund because of him. As he will be running a similar new fund for ABN in March, my inclination would be to follow the fund manager in this case.

AJ: Nigel Thomas is undoubtedly a very highly regarded fund manager and his loss would have been a great blow to Solus. We would certainly not recommend new investments into the Solus special situations fund until the new fund manager has bedded in but, for the same reason, we would probably not advocate switching out of the fund at this early stage.

Richard Craven,


HCF Partnership

Andrew Jones,

Investment director

David Aaron Partnership

Mark Dampier,

Head of research,

Hargreaves Lansdown


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