Mfs International director Jonathan Willcocks believes there is no longer a distinction between growth and value investment. Do you agree and would you build a portfolio for a client based solely on either growth or value?
Dalby: The focus on style has increased over recent years, partly due to investment houses, such as Schroders, launching specific style funds. But the bear market has sometimes resulted in the lines between growth and value investing being blurred.
For example, many former growth stocks have now fallen so far that value managers are picking them up. For individual investors, we have always advocated a balance of growth and value rather than trying to pick one over the other. Trying to tilt an investor's portfolio actively either way is a recipe for disaster and the most robust approach is one which provides balance at all times.
North: In technical terms, there will always be a difference between growth and value investment. For purposes of clients investing for the longer term, selecting a pure growth or pure value portfolio could lead to underperformance. A style-neutral portfolio is far more likely to reap higher returns and this is reflected in the past five years. Value stocks have outperformed growth in two out of the last five years. The temptation may be to seek growth stocks for a short hold but over the longer term a balance is needed.
Connolly: I disagree with the view. Nothing has dramatically changed in the distinction between growth and value investing. There are investment funds available that claim to be neither growth nor value-orientated but many of these do tend to have a bias one way or the other. There is always likely to be a distinction between growth and value stocks. For example, a biotech stock,with huge debt funding a project that could lead to growth in the future cannot possibly be called a value stock. But there are stocks that already have good business flows and built-up inherent value, which clearly can. A balanced divers- ified portfolio should contain a combination of growth and value-orientated funds.
Economist Roger Bootle believes equities are going nowhere for years as poor performance and scandals such as Enron and WorldCom drive investors away from the stockmarket. How worried are you about the accountancy problems in the US and how soon can you see equities recovering?
Dalby: More skeletons will fall out of the investment cupboard over the next 12 to 24 months. But it is important to keep things in perspective. While bad newsflow from corporate America undoubtedly adds to the negative sentiment, it is still possible to make money in a poor stockmarket. I would not be surprised if some of the major indices, such as the FTSE 100 index, do not post strong returns over the next few years but equally I am convinced that funds which shun the benchmark can make money.
North: I am pleased that in the UK the FSA is looking at auditing arms of accountants being further removed from the consultancy side. The US experience has spread fear through the corporate boardroom with even the mighty GE Capital redoing its books. Has it ended? I think not. Will equities recover? Yes. In the new world of tighter corporate governance, particularly auditing, American confidence to re-enter the markets will return. When will equities recover? The US account deficit is a worry but consumer spending remains high. I am not foolish enough to guess when the upswing in US markets occurs but I hope it is soon – over to the economists.
Connolly: Roger Bootle has never been afraid to express some fairly extreme views although I believe there is certainly some merit in his comments. Within markets, there will be some companies that will perform very well in the next few years and some that will perform very badly, the overall effect being that the stockmarket indices may not do too much.
More than ever, it is the top stockpickers that should perform best in the current environment. The accountancy scandals in the US have destabilised the markets and the situation could get worse if, as expected, more corporate accountancy irregularities are found.
This does cause concern at the moment, especially as we are not yet aware of the scale of the problems.
New Star is believed to have investigated the possibility of buying several discount brokerages over the past few months as it attempts to secure distribution before depolarisation. Although it is believed to have been put off by high asking prices, can you see other fund managers taking a similar path?
Dalby: I am certain that product manufacturers, both life offices and investment houses, will continue to look for opportunities to secure distribution. However, I do not see any further attempts to consolidate the discount market now and probably not until asking prices come down, in which case I expect that New Star might reconsider the opportunity.
North: Following implementation of CP121, distribution will be king. Manufacturers can design the best product available but, without distribution, their efforts may be wasted. Very few IFA firms will be seen as a wonderful investment, they will be bought purely to secure distribution.
But will ownership secure more product placement? I think not. Look at the Australian market. Product providers are now selling back IFA firms they bought years ago. IFA firms are run by individual entrepreneurs while product providers' structures are more rigid. IFAs will be re-capitalised by providers to protect them from the fallout following depolarisation. But show your true colours – be a manufacturer or a distributor. It could prove strategically dangerous if you think you can do both well.
Connolly: There are product providers that have already taken stakes in financial advisers and discount brokers, and many others that are exploring the possibility. This looks like a trend that will continue as product providers want to secure channels of distribution prior to the implementation of CP121.
Personally, I find it difficult to see the merits in these acquisitions while the better than best rules remain unless these companies are hoping that the rules will be radically altered. Even then though, how much confidence can an investor have if a financial adviser that advises them that the most suitable product for them is one offered by its parent?
Fidelity secured almost a quarter of all IFA fund recommendations in May, up from 14 per cent at the same time last year and well ahead of second-placed Credit Suisse, which had 9 per cent of recommendations. How do you think Fidelity has stretched its lead so far and can Credit Suisse sustain or improve on its current position after being the 28th most recommended company last May?
Dalby: Fidelity continues to be seen as a safe pair of hands in all the key areas that IFAs are interested in. They are also very good at communicating their views on markets, and with so much uncertainty I think a lot of IFAs turn to them for their opinions.
But I also think that Funds-Network is much more widely used by IFAs than it was in May last year and I think it is fair to assume that Fidelity's funds have been a beneficiary of this.
I think Credit Suisse has benefited from the thirst for solid equity income funds but its multi-manager offering has also attracted a lot of interest, and I feel it has the product range to sustain its position.
North: Pretty Financial has just completed research with a handful of knowledgeable IFAs and consultants who know the wider issues around the fund management industry. Fidelity are seen as “slightly arrogant” but why not? They score highest across all the areas IFAs need – fund supermarket, consistent fund performance across the whole range,e-enabled support and provision of information to IFAs. Fidelityland is a complimen-tary tag that we have adopted, denoting its size and strength, and all this in 30 years.
Connolly: Fidelity have achieved this position largely by having two funds that have been head and shoulders above the competition, the American and special situations funds. The majority of IFAs have recommended one or both of these funds. Fidelity is also clearly helped by the vast sums of money it spends promoting its products. It is likely that this number of recommendations will now reduce. The highly rated American fund manager has now left and there can only be so long that Anthony Bolton will remain on board. When Anthony Bolton does retire, Fidelity will struggle to find a replacement to manage such a large fund in his manner.
Credit Suisse owes the vast majority of its success to Bill Mott. His funds cannot really become any more popular than they currently are, so to maintain their position they also require other funds to be recommended. The transatlantic fund may gain support, bearing in mind the changes at Fidelity, although overall Credit Suisse have done well to finish second and may struggle to maintain that.
Do you agree with Hargreaves Lansdown's decision to put with-profits products on hold for the next few years?
Dalby: I understand the reasons behind HL's decision, and I do think it is healthy that the industry continually reassesses the validity of the with-profits concept. We have not taken a decision to stop recommending with-profits bond but we are very vigilant in respect of the companies we use.
Revised with-profits models are already being rolled out, such as that from Scottish Widows, and I would I expect there to be many more offices looking to create ringfenced funds which do not carry business risk and where actuaries do not have the same latitude in respect of determining asset shares.
North: I agree with the technical reasons that HL has used to avoid with-profits. Gaps in poor performance over the last few years need filling, a possible move to gilts to protect the fund and free-asset ratios falling to nil. However, where oh where, does a cautious investor invest over the medium term? Cash at 4 per cent too low, protected products too expensive, cautiously managed funds struggling in a five-year-low mar- ket? Zeros have had a hard time and hedge funds are too complicated for the average, unadvised investor. Properly researched with-profits funds provided by the strongest companies still have a place in the overcrowded UK investment marketplace.
Connolly: No, their view is one that I vehemently disagree with. They have arg-ued that if stockmarkets rise, life insurance companies will use profits to boost their financial strength rather than pay all of these profits to policyholders.
With this view, Hargreaves Lansdown should never have been recommending with-profits in the first place because this is simply how with-profits is supposed to work. While we are still recommending with-profits, we would only select the strongest companies, the likes of Prudential, Standard Life and Norwich Union.
James Dalby, head of research, Bates Investments
Kim North,director,Pretty Financial
Patrick Connolly, associate director, Chartwell Investment