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The &#39its&#39 obits

Gartmore recently became the third major fund manager this year to launch

a fund of zeros. How do you think the launches will be received by the IFA


Aaron: The zero unit trust market is becoming crowded. The oldest

established one in the sector, Exeter Zero Preference, has an excellent

record over a 10-year period, returning 9.9 per cent a year. With interest

rates falling, returns are likely to be a bit less but this fund has a

proven record and is very well managed.

The Gartmore fund has a lower initial charge than the others in the

sector, at effectively 1.59 per cent of assets, but the annual charge is

higher at 1.5 per cent. As these trusts should be held for some years, we

believe it is sensible to stick with those with lower charges. However,

Richard Prvulovich, who manages the fund, has a lot of experience in this


Bowes: The popularity of zeros has escalated very quickly recently, mainly

due to the volatility of stockmarkets and therefore the reluctance of

investors to take the risk.

For many retail investors,a fund of zeros will be an accessible route

into these more secure investments and remove the worry of buying the

correct one. There is certainly a market for these funds and I believe the

launches will, on the whole, be welcomed by IFAs. However, it is important

that the launches are made by companies that have experience in the

investment trust market, otherwise we would want to be happy that they are

not just jumping on the bandwagon.

Craven: I think Gartmore will have to work hard, as have Aberdeen and

Investec, to get the message across to the IFA community as zeros make up

what is possibly one of the most under-utilised resources available. I am

sure the combined might of these three major players will drive home

further the virtues of these share classes and hopefully they will begin to

form a far greater part of retail portfolios rather than being the preserve

of the stockbroker.

The AITC&#39s “its” campaign has finally come to a close. Do you believe the

campaign was a success in raising awareness of investment trusts, or a

waste of the boards&#39 money?

Aaron: The campaign was a success and made both the consumer and IFAs much

more aware of investment trusts. As a proof of its success, the Isa sales

for investment trusts for the last tax year were up by 35 per cent at a

time when unit trust Isa sales were falling by 7 per cent. Furthermore,

discounts over the last 15 months fell by nearly half and added over

£5m to shareholder value.

The AITC is now concentrating on promoting investment trusts among the IFA

community and the boards of investment trusts have doubled their annual

subscription from £3m a year to £6m a year. Investment trusts

should form a much greater part of retail investors&#39 portfolios than they

do now.

Bowes: The press seem to have written off the “its” campaign as a

disaster. This publicity in its own right will certainly have done

something to raise the profile of investment trusts. It is unlikely to have

been the best money ever spent. But there does appear to be a more positive

outlook towards investment trusts. Perhaps the campaign was more successful

than we think.

Craven: I do not think it is fair to condemn the campaign. However, I do

feel it has been unsuccessful in its aims to raise public awareness of

investment trusts. Name-awareness of the contract type may well have

increased although it is undoubtedly the case that the vast majority of the

general public will still have no understanding as to the nature of the

trusts in general. I agree with the AITC&#39s revised strategy of targeting

IFAs in this arena.

UK fund managers are the best paid in the world, with a median salary of

£141,000, according to a survey from the Association for Investment

Management Research. Do you believe they deserve such high remuneration?

Aaron: The answer is that good managers deserve to be paid large amounts

of money, far more than the average of £140,000 a year. On the other

hand, managers whose funds are in the fourth quartile over a three to

five-year period are not worth the money. Most groups are taking a hard

look at the performance of fund managers and are firing the poor

performers. Star managers, like Anthony Bolton of Fidelity, Nigel Thomas of

ABN Amro and Bill Mott of Credit Suisse First Boston fully deserve to be

paid huge amounts. We believe fund managers should be incentivised in the

same way as John Duffield has incentivised his excellent fund managers at

New Star.

Bowes: There is certainly no reason why UK fund managers on the whole

should be the best paid in the world, especially those who are just

expected to beat an index. It seems that any fund manager should be able to

do this, otherwise we would all be investing in trackers. In reality, this

does not always happen, so what are they receiving these huge salaries for?

On the other hand, there are a number of truly gifted individuals that

make a difference to people&#39s investments and they deserve a good reward.

Craven: In the vast majority of cases, I do not think the salary and

benefit packages are warranted. There is one reason for a fund manager

being engaged and that is to aim to consistently outperform their

benchmark. The vast bulk of fund managers in the UK fail miserably to

outperform consistently. The idea of higher charges for consistent

outperformance should be reflected directly in the fund manager&#39s package

– overperform = overpaid, underperform = realistically paid.

Last month, Nicola Horlick denounced the star fund manager culture, saying

a fund can never simply be the work of an individual. Do you agree with her?

Aaron: The answer is 95 per cent no. We are great believers in following

fund managers with outstanding performance. For example, we shall support

funds managed by star fund managers Alan Miller and Richard Pease of New

Star, who have recently moved from Jupiter. If a good fund manager leaves,

then we recommend selling unless they are immediately replaced with a top

fund manager.

Bowes: I agree it is impossible for an individual to do all the work on

any fund. In any case, the culture appears to be changing and the strength

of a fund is often looked upon more favourably if there is a strong team.

Investors will be more confident to know that if their star fund manager

leaves they can depend on the team to continue the good work. However,

ultimately, it is necessary for an individual to make final decisions,

based on the work of the team.

Craven: Categorically not. There can be no question that there is an elite

band of fund managers whose performance consistently outperforms their

peers. I find it a particularly interesting comment from Nicola Horlick,

given her own status and penchant for large photographs of her fund


The FSA&#39s comparative tables look set to contain no more than details of

charges. Do you believe they will be helpful to consumers and IFAs or

mislead investors into believing that cheap is good?

Aaron: We are glad to say that comparative tables are now set to reveal no

more than details of charges. This will lead to fund groups becoming more

competitive . The tables will be helpful to IFAs because they will be able

to evaluate performance in relation to charges more easily. It is obviously

better to invest in a fund with high charges where the calibre of the

manager is outstanding than in a low-charge fund with a mediocre manager.

We think the tables will mislead some investors into believing cheap is

good but it is up to IFAs to persuade investors that value for money is far

more important than cheap charges.

Bowes: The FSA condemns investment decisions based just on past

performance but this method is no more dangerous than basing it just on the

cost. These tables will be confusing and will lead less experienced

investors to funds that are cheap. In the same way that past performance is

no guarantee to the future, neither is a cheap fund necessarily expected to

be a better performer. There are so many considerations to be taken into

account when choosing an investment and this should be made very clear when

these tables are published.

Craven: I wait with bated breath for when private investors try to seek

some redress for a table which will clearly attempt to demonstrate virtue

of funds by ways of its costs alone. This is hugely dangerous, as is, of

course, solely describing a fund&#39s merits by past performance. The whole

question of charges and commission has been ratified repeatedly over recent

years and I see very little point in producing what will essentially be the

mother of all key features documents, giving no details of fund volatility,

consistency of fund management team, research ratings or any other such

valuable information. Charges, while not irrelevant, are certainly in my

view a secondary consideration.

Stephen Aaron, marketing director, David Aaron Partnership

Anna Bowes,savings and investment manager, Chase de Vere

Richard Craven, partner,HCF Partnership


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