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Stock questions

Invesco Perpetual and Millfield Group last week defended star fund manager Neil Woodford&#39s decision to inject more than £10m into the loss-making national IFA after Misys member

A week previously, both had lashed out – without explanation – at accusations by Misys member Master Adviser that Woodford&#39s stockpick was a mistake.

The reason they relented and put their reasons for stock selection was the intervention of Hargreaves Lansdown head of research Mark Dampier who, frustrated at their dismissiveness, wrote a letter to Money Marketing urging the firms to explain themselves.

Unable to ignore his request, both obliged, with Invesco Perpetual in particular showing irritation at having to justify the actions of a manager of Woodford&#39s calibre.

Chief executive Mike Webb says: “The merits of an individual stockpick are down to Neil. It could be a turn-round situation. It is difficult to understand why an IFA would remove our funds from their buy list on the basis of one stockpick.”

Although Millfield eventually provided a robust answer – reeling off a list of other major funds which are invested in the company – the move highlighted the tension that can exist between fund groups and their investors.

But should retail fund managers have to justify their decisions in this way? Is the job of an IFA simply to accept the bets made by the managers they have selected, no matter how contentious they may be?

Michael Philips proprietor Michael Both is one of a number of IFAs who believe managers should be judged by their overall performance, not single bets. He says: “To monitor individual stockpicks, you are essentially acting as a shadow fund manager, moving towards becoming a discretionary manager.

“That is not being an IFA. If a fund manager outperforms, even if I do not understand why, then great.”

Both believes IFAs should consider themselves the financial equivalent of GPs, offering general help before pointing clients towards specialists. He says IFAs should regularly monitor the performance of funds but not concern themselves with individual bets, about which they know less than the fund manager in most cases.

David Aaron Partnership senior consultant Jason Bevan says: “How many IFAs have stockbroking exams? Not many. It is a full-time job. The way we work is to look at the ethos of a manager, not at their individual decisions. I would not ignore a fund because of a single bet.”

But there is a minority of fund managers who embrace transparency. London-based stockbroker JM Finn runs the Peligrin fund, a global growth portfolio which displays every stock – with reasons for its inclusion – on a website. Nevertheless, its manager and chief investment officer David Stewart believes that transparency should only go so far.

He says: “People have a right to know what their money is invested in, even though you know many will not care. That is not the point. IFAs always welcome the information because that is their job but they should not try and dictate what is in the portfolio because that is the ultimate responsibility of the fund manager.”

Stewart says he is staggered that no other fund manager displays their portfolio as openly as Finn, suspecting that many fear their funds will be exposed for what they are – closet trackers.

He also believes they do not want to lay bare their investment methodology after spending millions of pounds marketing their supposedly unique processes to an unassuming public.

But not all fund groups are hostile to the notion that IFAs should take umbrage at individual stock bets. The fund of funds houses, for example, believe the question is simply one of time and resources, which IFAs generally lack.

Jupiter director and fund of funds manager Algy Smith-Maxwell says: “We like to look at every stock in a portfolio to get some independent feel for how the manager is exposed. For instance, if the fund manager owns a stock with a very high p/e and poor liquidity, we have to decide whether we want to be exposed to that. In terms of managing that risk, IFAs cannot compete with us.”

Smith-Maxwell suggests that IFAs should identify the best managers within each investment style and give exposure to clients at the appropriate time. It is unwise for IFAs to go further than that, he believes, because in many areas, such as Japan, they would not have the first idea what represented a good or bad stock.

Dampier says, in the areas where IFAs do have knowledge, such as in the UK, there is nothing to prevent them voicing their opinion. He says: “I do not see any reason why they should not. We often ask managers to illustrate their process by using individual stocks as an example. I think IFAs can add value by asking questions. In fact, many managers I have met like to be challenged.”

Dampier believes IFAs are often scared of asking what they think may be dismissed as a stupid question – a view not disproved by the initial reactions of Invesco and Millfield. But if there is an area in which they have knowledge, IFAs should ask for a justification. After all, if a fund fails to perform, clients are unlikely to be shy in demanding an explanation from them.


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