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Sizing up fund managers

Over recent years, we have seen increasing waves of consolidation in the

fund management industry, with a number of both traditional fund managers

and life companies merging or being taken over.

In tandem with the creation of these ever bigger companies, there has been

similarly feverish activity at the other end of the market, with a steady

stream of new start-ups frequently staffed by managers frustrated with life

in a big company environment. But does size of company really matter?

The choice of which company to use will be driven by a number of factors

whose importance will vary by client as well as adviser. I would suggest

that there are probably four worth looking at:

Safety of investment. It is worth saying that the UK unit trust industry

has an excellent record which it has been rather reticent about promoting.

The regulatory environment which governs UK unit trusts and Oeics can be

considered as a very safe one for client investments.

Clearly, client money is exposed to market movements which can be extreme

dependent on markets chosen but this is a separate issue. The rules that

govern the operation of unit trusts give these products fundamental safety

features. Key among these are the requirement for an independent custodian

and trustee.

This requirement protects investors in the event of the manager of their

fund finding themselves in financial difficulties. It is this division of

responsibilities that has helped create the enviable record that no

investor in unit trusts or Oeics has ever lost money because of the fraud

or insolvency of a manager despite the occasional close shave.

Other regulations important for investor protection include rules on

borrowing money to invest, fund diversification and the expenses that may

be charged. At a basic level, therefore, the regulatory environment has

helped create a very safe and level playing field for all companies

operating unit trusts.

Brand. Having said that the regulatory environment for units trusts is a

very safe one, the issue of safety does not end there. Bigger companies

generally spend a lot of time and money building and nurturing a brand.

This makes them very protective of their brand and should have a bearing on

how these companies are managed and how their products are promoted. A

reputation once lost is hard to regain. This does not mean that they will

not offer riskier products. Simply that they will be very interested in

advisers and clients understanding what they are buying to minimise the

risk of future disappointment. The key thing to remember is that a company

with a quality brand has much more to lose than a company with no brand.

Investment philosophy. This is perhaps the thorniest issue to consider.

Broad generalisations about how big companies manage money against small

managers are easy to make but are not always substantiated in practice.

A typical view would be that smaller fund managers run portfolios in a

more unconstrained way, relying on one or two individuals&#39 stockpicking

skills. Bigger managers are seen as having the benefit of a big research

team but are constrained by in-house risk dep-artments. This view is

misleading – different houses will manage money in a multitude of different

ways. The important thing for an investor to remember is that a balance of

flair and control is required to manage a fund successfully.

When considering how a fund has performed, it is important to consider

what level of risk it is running. Two funds could have identical

performance figures but could have achieved that performance taking

measurably different levels of risk. When performance is going well, this

might not be perceived as a problem but in times of a downturn this could

lead to nasty surprises.

An important way for advisers to add value is to select those funds that

are delivering performance with an acceptable level of risk. Why pick a

fund which is taking above average risk to deliver average performance?

Client service. Clearly, client service is absolutely critical to the

success of the business. We can all probably cite examples of both small

and big companies which have good or bad service. The trick is to deploy

the resources of a big company without losing the personal touch of a small


So, does size matter? Big companies can offer some very real advantages to

investors but that it is wrong to make sweeping generalisations. It is how

effectively you use your res-ources that really matters. Advisers have a

key role to play in advising investors on which companies are delivering,

irrespective of their size.


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