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's “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' 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' portfolios than they
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's 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
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's 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's 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
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's 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's 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