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Strategy street

Skandia has turned up the heat in the fund supermarket war offering up to 5 per cent initial commission until the end of the tax year. Do you think IFAs will be tempted by the offer?

Craven: I often find it interesting that it tends to be largely life offices with an investment leaning, as opposed to investment companies, which still believe the way to procure business in the IFA sector is commission-driven. I feel that this is a somewhat antiquated view and in direct contrast the spirit of much of the way in which our industry is moving.

Commission is, in my view, becoming less of an issue. Functionality, willingness to work with IFAs who develop systems, service and, of course, charges are the primary issues. I do hope that not too many of our colleagues will be tempted by what is a fairly shallow measure in my view.

Hollands: I really doubt it and, if they are, investors certainly won&#39t be. Fund supermarkets are helping produce downward pressure on charges and online investors are in a particularly strong position to shop around easily and compare prices.

Most fund supermarkets have been competing by reducing charges and widening fund ranges so Skandia&#39s move to raise commission goes against the grain. It may persuade some small, commission-hungry IFAs to use the product but anyone at the bulk end of the market is already discounting all front-end commission so, to them, the move is frankly irrelevant.

I cannot imagine that anyone sticking a fund supermarket on their website with thumping initial charges will lure many investors and I certainly feel sorry for any who do fall prey.

Merricks: IFAs are certain to be tempted by higher commission, as they have been for years by with-profits bonds and the umpteen other enticements that have led to the current consultation on depolarisation. It will be interesting to see how many “independent” financial advisers continue to recommend Skandia once they go on to a fee-only basis.

Commerzbank is conducting a strategic review of its fund management businesses, with Jupiter expected to be put up for sale. How do you believe that a change in ownership will affect Jupiter?

Craven: Uncertainty is, of course, always an issue and this, combined with the ongoing speculation relating to fund managers, cannot help their cause. I think, without doubt, that Jupiter will be fighting hard to get across a positive image and their past performance speaks for itself. If they are able to maintain this enviable investment position, I see no reason why they should not continue to prosper, depending, of course, on who any new owner may be if Commerzbank decide to sell. I understand that a certain Mr Duffield is on the acquisition trail.

Hollands: It is a difficult question to answer until it is clear whether or not the company actually is up for sale and who is the purchaser. Assuming that Jupiter is bought by another institution, then I would be concerned if it were one with an existing UK presence. I was quite open about my dislike of the merger of Invesco and Perpetual on the grounds of likely fund mergers, different cultures and the prospect for increased manager turnover.

Sure enough, several key Perpetual managers have since gone. I would have the same concern if Jupiter were absorbed into another group who are already operating in the UK if they had heavily overlapping fund ranges.

Outside of an MBO, the best solution for Jupiter would be the purchase by a US institution with no existing presence in the UK market, who would allow the company to get on at doing what it is good at. This could be a real positive by adding financial strength and opening up distribution into the US market.

Merricks: I feel sorry for Jupiter. Having bounced back admirably since the Duffield saga and having redefined themselves as serious players in the unit trust and investment trust arenas, they now have further uncertainty hanging over them.

I think that intermediaries will get fed up with recommending a company that has had more owners than my car and the better fund managers at Jupiter must surely consider life on a new planet.

The soap opera will take on Dallas proportions if New Star tender a bid. You couldn&#39t make it up.

Three venture capital trusts have already been pulled from the market this season. Why do you think the VCT industry is having such a bad year?

Craven: Very simply, because there is far less money in circulation by ways of substantial bonus payments, MBOs and floats. Shrinkage in the top end of the market inevitably has an impact on the sector&#39s more popular product base first.

VCTs were one of the early casualties in fund shrinkage. They do still represent an extremely useful tool for the financial adviser and, as the economic climate starts to improve, I have no doubt that a rash of new issues will be forthcoming. It is quite simply a case of supply and demand, with plenty of supply and, at the moment, no demand.

Hollands: A year ago, some wide-eyed VCT sponsors and IFAs started declaring that they were going to become a “mainstream investment” just like an Isa. This was nonsense. They are specialist investments that are highly attractive for some investors but certainly not suitable for most.

The core VCT market is people with CGT liabilities to defer and it is a simple fact of life is that over the last couple of years most of us mortals have made capital losses on our investments, not capital gains.

At the moment, investors have little stomach for schemes perceived to be “higher risk” – although those of us who understand VCTs realise they are not speculative.

All this comes at a time when the market has severe over-capacity. I suspect that some VCTs were planned long ago in the hope the market would have recovered by now. Others were probably launched on the basis that great stock opportunities are genuinely available or the fund teams believed the hype about VCTs going mainstream.

Merricks: I think the question would be better put as why on earth did the three VCTs even try to come to market in this climate? It does not take a genius to see that the public does not have much appetite for the stockmarket at present.

It is probably easier to sell a Bic razor to Osama Bin Laden than it is to convince Mr Smith to extend his tax-free losses of the past three years by investing in comp-anies that are not even on the market yet.

The marketing departments may get carried away by tax breaks. The retail investor simply tends to look at his half-year statement.

Cazenove Fund Manage-ment is introducing commission to its funds in a bid to break into the IFA market. How do you think it will fare?

Craven: I am sure that Cazenove will certainly make a niche in the IFA market and commission is required for the vast bulk of IFAs to distribute investment products.

It is another high-pedigree investment house entering the potentially lucrative retail arena, arguably at exactly the wrong time. However, this could give them the ideal market conditions to extol the benefits of specialised investment houses.

Hollands: I don&#39t know. They have been dragged in to the world of commission at the very point when the FSA would rather like to end it.

Like most groups, they have a couple of funds that are worth further investigation and some will be persuaded by such a blue-blooded brand. However, to be a volume player involves taking a stroll down Grub Street.

The experience of other “top-drawer” institutions of breaking into the retail market is not that encouraging – Barings had to withdraw from the Pep market and it is only in recent years that Schroders have got off their high horse and are now deadly serious about retail distribution.

If Cazenove really want to be in the retail market then they will be not be cracking open the champagne bottle just because they are paying commission. There is much more to be done, such as applying to be in key supermarkets such as Cofunds and Funds-Network.

Merricks: They say that timing is everything. I am intri-gued by Cazenove&#39s decision to introduce commission in a bid to woo IFAs in the same week as the FSA announces that IFAs will not be allowed to receive commission from Cazenove or anyone else within a few weeks if they wish to remain independent.

One hopes that their research department fares a little better with its stock selection than it does with its strategic decisions.

IFAs, or whatever we will be called, tend to have long memories when it comes to those providers who have supported them in the past. Cazenove has a lot of ground to make up.

The FSA comparative tables website discourages investors from considering investment strategy when selecting a fund. How important do you regard investment strategy and process when recommending an investment?

Craven: I look forward to the day when the FSA is held accountable for the overly simplistic decision process which they are trying to employ to guide the consumer through the choice process. It is absolutely fundamental when considering a managed fund to take account of the fund&#39s investment strategy and process.

As we all know, the differences in style and performance between different individual fund managers, many of whom operate completely autonomous processes, is enormous.

I believe it is patronising in the extreme to attempt to sell funds as a “one size suits all” format where the only consideration for the investor from a static comparative table is what is the cost. This, in my view, is very nearly irrelevant. Far more important is what is the risk rating, management style, and continuity of management.

I feel sure that if this method of fund selection was developed by an IFA, a regulator would have prevented it being utilised years ago.

Hollands: Of course, this is vital, not least from a risk management perspective. The whole Isa selection process needs to step back even further. Before an investor should get into picking a fund – whether on charges, past return or the colour of the brochure – there are much more important issues to consider, namely a sensible asset allocation strategy.

Asset allocation accounts for the vast majority of portfolio return as well as the risk profile of a portfolio so picking a fund on any criteria without first considering which asset classes, sectors and markets is jumping the gun. Only then should an investor start considering an individual fund on the basis of its process, manager judgment, style, strategy, resources and costs.

In our opinion, the whole league table project is of extremely limited value to the investing public and would remain so even if past data was added. The approach is too simplistic to what are complicated decisions. I wish the world of investment were simple and we could all sit on the beach collecting cheques but sadly it isn&#39t.

Merricks: I get more and more like Jim Royle by the day, shaking my head in disbelief at what is going on around me. In this case, it is the FSA muttering “investment processes, my arse.”

I simply cannot believe that we are told that investors are to be discouraged from considering investment strategy when selecting a fund. Investment strategy is the fund performance. Much is made about trackers outperforming 70 to 80 per cent of actively managed funds. It is the 20 per cent or so that are not slaves to the benchmark that are the very funds that good investment advisers will be seeking out for their clients.

How a fund is run and what it is allowed to invest in is absolutely crucial to its performance. If funds were recommended on charges alone, why didn&#39t the superannuated salatariat who make the rules have their pension funds with Equitable Life? Oh, I forgot. They did, didn&#39t they? At least they seem to have learned from that then.


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