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Rathbone of contention as Revenue waives CGT

The Inland Revenue&#39s decision to allow Rathbone investors to follow fund manager Patrick Evershed to New Star without being hit by capital gains tax charges has put a new slant on fund manager moves.

After a spate of high-profile departures, the move looks set to provide a boost to investors who fear the manager of their fund may decamp to a rival firm.

Hargreaves Lansdown head of research Mark Dampier says: “So many clients are browned off with the number of managers who are leaving, it is good to see unitholders being taken into consideration and not treated in the usual bad way. It is a really good move for the industry.”

Certainly, the investors in Rathbone&#39s special situations fund, who are currently mulling over their options after receiving news of the agreement by letter two weeks ago, are in an ideal position. They can follow Evershed or opt to stay in the fund – the third best performer in its sector in April – under the stewardship of Carl Stick.

However, while the decision may take the sting out of Evershed&#39s departure for Rathbone investors, it remains to be seen whether it could set a precedent across the industry.

The Revenue, fearing it may breach its confidentiality code, it says it cannot comment on the agreement other than to declare that it will take each case as it comes. However, the two fund management companies involved in the case are more forthcoming in offering their opinions after securing what they admit is an unusual deal.

New Star sales and marketing director Mark Skinner says there is no way of telling whether it could spark a raft of similar deals but believes the circumstances surrounding it are unlikely to be replicated again. He says: “For one thing, any deal would have to have the agreement of both investment houses involved and there are bound to be commercial obstacles in the way. Second, the Revenue has got to agree to it.”

Rathbone chief executive Peter Pearson Lund points out that the two funds involved are very similar and that Evershed has a hardcore following which is liable to trail him wherever he goes. Pearson Lund believes it is only fair that investors should be allowed to move without paying capital gains tax for surrendering their holding in the Rathbone fund.

But for many IFAs, this argument does not wash. Chelsea Financial Services managing director Darius McDermott says: “I find it very strange. You can be honourable about losing star managers – ABN Amro is a good example – but why help the money go out the door? It just does not add up. I cannot imagine too many other companies agreeing to a similar arrangement.”

McDermott&#39s argument is well supported by Rathbone&#39s rival fund managers, which, while reluctant to speak publicly, will privately say they do not understand how the deal came into being. One says: “I cannot imagine a situation where we would go out of our way to help a competitor take our money – as well as a manager – away from us. In a scenario like this, we would be happy to be New Star but definitely not Rathbone. It does not make sense.”

The sense of disbelief is so prevailing that some IFAs claim there has to be a more fundamental reason for Rathbone agreeing to New Star&#39s suggestion that they jointly approach the Revenue. Why did Rathbone agree to such a deal when no other firm facing the defection of a fund manager has considered encouraging the fund&#39s investors to up and leave?

IFA Michael Philips proprietor Michael Both says: “It is hard to see what is in it for Rathbone unless there are some negotiations going on behind the scenes. Remember, New Star has been involved in a fair number of failed mergers and acquisitions and is still on the lookout to do a deal. There has to be a commercial reason.”

Whatever the motivation behind the move, Rathbone admits it is hoping that a sizable number of investors will not take the financial carrot it helped dangle in front of them. Pearson Lund says he has no idea how many will leave – though a number are thought to have departed already – and believes the outcome will come down to the fund&#39s performance record.

With most of the unitholders being IFA clients, Pearson Lund says another major factor will be the advice the investors receive over the coming weeks. This will be crucial. Many IFAs have stated their belief that investors should bide their time and see how the fund performs but there are a significant number who are in no doubt of the value of star names.

Both says: “I am of the view that everything comes down to the managers. If they move and have a record of proven performance, then I would say to clients to follow them wherever they have gone. In this case, Evershed has gone to New Star and that is a company which seems to be delivering on the all the promises it has made.”

Rathbone certainly deserves to be applauded for delivering a fair deal for its investors but whether this act costs it dear remains to be seen.

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