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Perpetual commotion

Perpetual was finally sold to US fund manager Amvescap recently. Do you believe Invesco and Perpetual should now be merged or kept separate?

BY: It will be difficult merging the two businesses of Per petual and Invesco. They both have large funds and many fund overlaps. For exam ple, Perpetual has the income and high-income funds managed by Neil Wood ford, which combined are worth almost £2.5bn, and Invesco has its income fund run by Graham Kitchen, which has more than £500m invested. These funds are just too big to merge. There are also other problems, most notably in Europe. With two well known brand names I think that a lot of the funds will be kept separate in the long term.

JD: It is difficult to say definitively which option would be best. Although I am sure that the two groups do have some synergies, I do not think they are a perfect fit in terms of mass fund mergers. Despite Perpetual&#39s fall from grace in recent times, it does still have its attractions.

The likes of Stephen Whit taker and Neil Woodford are solid UK managers with good long-term track records. I wonder how or if they would be incorporated into a merged group? On balance, I suspect that Invesco and Perpetual will merge into one and I hope it does not get messy.

DC: They will clearly do a little of both, merging where there is already a natural crossover and retaining natural strengths. Perpetual has been through a couple of years of poor performance that has come from managers doggedly sticking to investment principles, an admirable if flawed decision.

But they are one of our best houses and if Amvescap can turn them around, then the decision
to keep the name alive may prove to be a winner if only in the UK sector. I think fund managers will depart, so keep an eye out. I am in the position of owning a Perpetual Pep and Amvescap shares and I hope this acquisition is good for both.

Norwich Union is cutting the yield on its CGU monthly income plus fund by almost 20 per cent. Do you believe this is the right decision and will you now be advising you clients to switch?

BY: I think that NU has made the right long-term decision for the monthly income plus fund. Mark Gull has had an increasingly difficult time in the last year trying to maintain the capital and income. The 20 per cent cut in the yield will hopefully give him the chance to boost the capital. It is pleasing to see that NU has taken some of the pain itself by cutting its management fee by 20 per cent as well.

JD: The cut in yield was the right decision. Clearly, after looking at CGU&#39s monthly income plus fund following the recent merger, Norwich Union has identified fundamental problems and has taken swift action. This was the sensible thing to do and should put the fund on a firm footing for the medium to long term. It is important to point out that fund manager Mark Gull, who was appointed earlier this year, is not to blame for the current situation.

We have already written to all our CGU monthly inc ome plus clients and advised them to switch to Norwich Union&#39s Cat-standard higherincome-plus fund. This will enable them to maintain their level of monthly income without having to take a lot of extra risk.

Indeed, anyone looking at volatility as a measure of risk would see that, since its launch, the higher-incomeplus has been less risky than monthly income plus.

DC: They were able to offer the yield they did by holding preference shares, believing that they would be bought back throughout 1999. This just did not happen and the strategy has had dire consequences. The fund continued to pay a high yield at the exp ense of the capital base, so the decision to cut the yield is right in the circumstances.

Anyone who needs to keep that level of income should consider a switch out but anyone who does not need the higher income may be wiser to stay.

Schroders has launched eight style funds in a bid to become the first major UK style investment house. Do you think style invest ment will achieve the same degree of success in the UK as it has in the US?

BY: These funds have been launched more for the professional end of the market at the current time. In the short term, I think it would confuse the private investor as Schro ders now has a wide array of funds. However, for the discretionary market I think that it is a welcome move as alth ough many funds claim to be valueor growth-oriented, not many stick rigidly to their aims. However, that said, I am not convinced that many private investors understand the difference and it is for that reason I think these funds will be slow to take off.

JD: I do think that over time style investing will become a significant part of portfolio construction for IFAs. How ever, in the early days, I expect the main users to be private client investment managers. I expect that some larger IFAs will start to take it on board quickly but it is many years away from becoming mainstream. Schroders is positioning itself for what it sees as the future of investing. At some point, I am sure the success that style investing has had in the US will be mirrored in the UK.

DC: Yes and I would like to thank Schroders for my free Ferr agamo tie. The problem is that sometimes growth investing will be most lucrative and sometimes value and clients will need to pick the right one. Will they really know the difference?

Scottish Widows is still boasting the past performance of its European fund, despite the departure of Albert Morillo almost a year ago. Should they be allowed to?

BY: The simple answer to this question is no. The recent report from the FSA basically says past performance bears no relation to future performance (even if the same fund manager is there). To advertise the performance of a fund based on a fund manager who left almost one year ago is at least misleading. It will be interesting to see how Hend erson advertises its global technology fund in the new year after its management team leaves.

JD: Recently, many column inches have been written about past performance. Is it useful? The simple answer is, yes, past performance is useful but not when used in isolation. It is one of the tools used in the fund research process. The danger arises if it is used purely as the basis of fund selection.

It then becomes almost useless. Clearly, any adviser who relies on past performance is not doing their job properly. Past performance advertising can be misleading, which is the situation with Scottish Widows Euro pean. Rather than preventing the advert, I would simply suggest that the manager change is flagged up prominently in the ad.

DC: Yes, Morillo was only one member of a team, a highly influential one but just one nonetheless. Behind the manager will be a team of analysts and specialists who produce reports and lists that the fund manager will base his/her decisions on. So, when a fund manager leaves, it is not necessarily a bad thing for investors. Recent changes have shown that funds can perform as well, if not better, without the old manager. The past performance figures are representing a team effort.

Recent research by HSBC shows that only 46 per cent of Japanese funds have outperformed their benchmark during the last year. Are Japanese funds heading for further troubles, or are we about to see a turn-around in their fortunes?

BY: I think that Japan is probably a buy at the present time. There are a lot of positive signals coming out at the present time, especially from the old economy. Going forward, it will be a mixture of old and new that will drive the market forward. The old economy will only prosper if structural reforms are pushed through. New economy stocks have taken a hammering this year. They look very cheap compared with similar valuations around the globe.

JD: Japan is the world&#39s second-biggest market and is in the process of a fragile recovery. The Bank of Japan raised interest rates in the second week of August and this has been testing the recovery. There is certainly scope for bankruptcies as a result of the interest rate move. The company results season is about to start for the September int erim figures.

It is expected that results will be encouraging but it is sensible to be cautious. The long-term potential of Jap anese funds is very high but so is the risk. Investors should not discount further trouble ahead and should only be in this market for its long-term potential.

DC: Japanese funds are deep in trouble. Any more and they could disappear completely. Seriously, though, there are probably more problems to come. A lot of infrastructural changes are going on and in the longer term this is a good thing. Unfortunately, it will hurt for a while yet.

Japanese funds are highly volatile at the moment. We have seen what was one of the top funds last year become one of the worst this year. This just highlights how the performance will continue to yo-yo in Japan. Widows and orphans avoid, please.


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