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Room for improvement

Kira Nickerson Investment Matters

So far this year, we have seen record sales of funds, according to the IMA, but just how many groups have benefited from this? The overall sales figures look impressive but perhaps overegg the idea that all is better in the invest-ment world. In fact, much of the industry has lost money this year, with a few big exceptions, and the sales figures make it difficult to get a clear picture of exactly what is happening.

The IMA’s stats last week proclaimed that so far in 2009 there has been a record high in net retail sales of £18.7bn. This is more, the IMA says, than was recorded for all of 2000, which was the biggest-ever sales year before now. But just where is this money coming and what does it mean?

The IMA says its gross sales figures are made up of brand new money to the industry and sales made as a result of a switch from one fund to another. The net sales figures represent the balance of flows in and out of the industry and take into consideration any switches.

Yet this still does not make the figures clear-cut, with a number of issues clouding the picture. For instance, while fund switches may be counted in net retail sales, it likely does not take into account internal reallocations from a big parent group such as a life company. The individual amounts of any such reallocation could fall into the IMA’s retail sales classification, adding to the “new” sales figures.

In addition, a historic problem across the industry has been the merging of institutional and retail sales by some companies when they report figures to the IMA, making all sales appear as retail. Anecdotally, the industry is said not to be much improved in this area.

Another point about the increased sales is profitability. Just because 2009 is apparently shaping up to be a bumper year does not mean it will be a hugely profitable one. Fund groups have higher margins on specialist and equity funds over bond portfolios and it is fixed interest which has attracted the majority of assets this year. In the first quarter of the year, fixed interest took more than £3.5bn in net retail sales compared with just £190m in equity funds. Last quarter, equities gained ground, edging out bonds, but overall this year, £8.8bn in net retail sales went towards bonds compared with £5.2bn in equities, IMA stats show.

Margins on bond funds have always been lower than equity funds because of the perceived lower returns that these portfolios make, a concept that dates back long before the advent of strategic bond funds to when gilt portfolios dominated the industry.

It is also worth noting that of the increased flows towards bonds, only a few companies benefited. M&G and Invesco Perpetual have been high on the sales lists of most of the platforms this year with their bond funds. As of January 16, 2009, M&G’s optimal income had £298m in assets, its corporate bond fund was £1.6bn and its strategic corporate bond fund was £381m in size. As of September 30, the three funds were £1.1bn, £4.3bn and £1.7bn respectively, according to Trustnet figures. Over the same timeframe, Invesco Perpetual’s corporate bond fund moved from £2.8bn in assets to now exceed £5.4bn in size while its monthly income portfolio has increased from £1.7bn to £2.6bn.

These figures obviously include rising market values but the funds have not returned that much. Performance between January 16 and end of September shows that the five funds have gained between 17 and 31 per cent. For example, Invesco Perpetual’s monthly income fund’s under management have grown by 53 per cent between January 16 and Sept-ember 30 while the underlying assets have risen in value by 31 per cent.
Fund groups have had other pressures on margins over the past year, not the least of which has been the impact of the credit crisis.

Cauldron Consulting director Anne McMeehan points out that fund groups are increasingly faced with eroding margins due to rising costs. She says: “The cost of selling has increased due to heightened compliance and larger amounts paid away in commission and platform distribution.”
Another point to consider when looking at where we are this year is what has happened with funds under management. According to the IMA, over the 12 months to the end of September 2009 FUM have grown by 22 per cent, moving from £380.2bn to £463.4bn. Only some of that can be attributed to rising asset values. The mean average return across all the IMA’s sectors shows a gain of around 13 per cent over the 12-month period while the FTSE All Share index is up by 10.85 per cent.

Still, if the FUM management figures are looked at more closely, there are anomalies there as well. For example, the IMA’s FUM table, as ranked by provider, shows an increase of £11bn by one group alone, Capita Financial.

The group, the administrator or ACD for a number of portfolios, including funds from CanLife as well as many private wealth portfolios, had some £10bn in assets as of December 2008 but just nine months later has more than £21bn.

Capita Financial attribute the rise to gains in the underlying assets as well as new funds it has added. Whether the addition of any new funds by Capita would count towards “new” sales this year is ambiguous.

If Capita was reporting X amount in fund sales at the end of every month to the IMA and then added ,say, 10 more funds, then the sales figures from Capita would show a jump. The IMA cannot discuss the figures from individual groups, nor tell explicitly what has happened. It does, however, say it takes into account the number of new funds in the industry.

The IMA stats show there were 114 more funds as of the end of the third quarter than the same time last year. There are also two less firms.
There is no denying that 2009 has seen improvement but it is worth taking enthusiastic figures with a grain of salt and not getting too carried away. There is still far to go before any improvement in fund sales feeds through to all levels and truly shows that investors are back in the market.


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