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The down side

Our panel of experts consider Anthony Bolton’s warning of a downturn and their next move on Fidelity special sits.

The Panel:

Keith Thompson – director of investment services, Blackadders

Nick Bramford – managing director, Informed Choice

Paul Barnes – associate director, Plan Invest Group

Do you agree with Anthony Bolton’s assertions that the UK market is on the verge of a downturn?

Thompson: The UK market has had strong performance over the last four years, albeit from a perhaps excessively low point. Company profits and dividend growth continue to rise but warning signs such as increasing interest rates may well dampen consumer demand. This may take some time to be reflected in profits being restrained but we expect a slowdown and possibly stagnation setting in over the next 12 months.

However, private equity deals will still push the markets forward for some time yet, unlocking some hidden value, especially in the bigger deals.

Bamford: Perhaps, but no one can accurately and consistently predict this sort of thing. This is simply what stockmarkets do from time to time and we should not be surprised when it happens. Of course, if the UK market is on the verge of a downturn, that may well have an impact on investor confidence. People should invest for the long term and a downturn now will be a little blip on a chart in 20 years. However, if Anthony Bolton is right, then good tactical investment asset allocation would be to reduce exposure to UK shares for new money and existing funds.

Barnes: There is certainly a lot of bearish sentiment around at the moment. However, it is worth noting that Anthony Bolton’s comments related to certain areas of the market and did not necessarily relate to the market as a whole. It would appear extremely difficult to make a case for the mega caps being overvalued at these levels. They offer an interesting defensive play.

Continued on p53Will you be changing your opinion on the UK side of the Fidelity special situations fund following the change of manager? Will you be moving money out of the fund if you are already invested or consider moving money in if you are not?

Thompson: We will continue to keep an eye on the performance of this fund for the time being although it may be prudent for some clients to take some profits as part of a wider rebalancing exercise. The change of fund manager should not directly cause immediate concern, although if there is a marked change in investment styles or processes, we would be reconsidering our position. After all, Fidelity is not going to appoint an incompetent fund manager to run their flagship fund, with Bolton still keeping an eye on the overall fund strategy.

Bamford: A change in manager is a useful time to reconsider exposure to a particular fund, particularly when the fund has been so manager-centric in the past. Those of our clients who do have holdings in this fund will certainly have been aware of the changes that are taking place and some have decided to hold and see what transpires.

We do not think of ourselves as fundpickers in any event so we will continue to review this fund in light of its suitability in matching the investment asset class models that we build for our clients.

Barnes: It may be churlish not to give the new manager the benefit of the doubt, for a little while at least. There is little place for sentiment in the financial world but it would seem far too easy – and a little too obvious – to suggest a switch immediately. Switches guarantee only one thing – a charge to the investor. We would prefer to monitor developments.

Do you think that more needs to be done to increase the transparency of charges on platforms?

Thompson: The principles of treating customers fairly require product providers to have a transparent charging structure to ensure investors and advisers can fully understand the effect of charges on performance. They can then make suitable decisions based on this information.

One major area of concern is the use of mirror funds by some platforms, where the product provider creates its own fund price and hides an additional charge which is not readily identifiable. When you compare the performance of a fund between the various platforms, you discover a variance which can only be due to the differing charging structures. Clients suffer in performance terms and advisers get a lower annual fee or trail commission.

Bamford: I cannot believe that we are still having discussions about transparency or the lack of it in terms of charges. When will the financial services world grow up and realise that what consumers and advisers really really want is clarity. Transparency leads to building trust and any element of opaqueness really does defeat the purpose.

Barnes: We would love to see far more transparency right across the board – not just with regard to platforms. Surely it is time we moved to an industry-standard TER on a common basis.

With the FSA considering whether to allow retail investors access to alternative investments, including funds of hedge funds, are these investments suitable for the average retail investor?

Thompson: Investment choice is important but the FSA has a duty, along with the issuing provider, that investors understand the investment and the associated risk. Direct retail investors have to follow the caveat emptor principle but investors who get advice must understand and accept the risks and benefits of a fund of hedge funds.

It follows therefore that advisers must also understand such funds in order to provide that advice. I would expect this to be a useful product in a limited market. If the FSA does not control this market carefully, there is a great danger that it could become the next misselling scandal for the uninformed.

Bamford: Maybe not for the average retail investor but these funds do have a place in a well diversified portfolio. You only need to look at the US, where some of the biggest endowment funds (Harvard and Yale) have alternative exposure in the region of 20 per cent. If the funds and in particular any risks are well explained, they can be suitable for many investors. What matters is determining the right amount to hold in a portfolio. Holding a small percentage to increase diversification can reduce risk in some instances.

Barnes: We still have reservations about hedge funds and alternative investments in general. The spectacular failure of some well touted total return funds to live up to expectations should serve as a warning to investors. Managers must develop or buy in expertise and not simply rely upon existing managers. There is a real danger that retail investors could end up paying top dollar for extremely poor returns.

If it is successful, is Jupiter’s attempt to buy itself out of ownership from Commerzbank a good move for the asset manager?

Thompson: The Jupiter buyout can only be good for investors and the company itself. By no longer having a master driven by profit alone with a wider shareholder base, the new owners have a more direct responsibility to drive forward the company’s performance.

The fund managers will have a vested interest in improving the performance of their funds as they will be risking their own and investors’ money and they will be tied into the arrangement, thereby ensuring greater fund manager stability. It reduces the chance of investors playing the game of follow the fund manager unless, of course, performance begins to suffer when it becomes open season.

Bamford: No one in their right minds would want to be owned by a bank. If Jupiter becomes an independent firm, again that must be good news for advisers andinvestors.

Barnes: No comment.

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