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The fast show

Quality is suffering in the race to launch yet more funds

It is a sad indictment of the fund industry when the UK’s biggest fund broker is unable to find enough quality funds to fill its so-called Wealth 150 list, as is the case with Hargreaves Lansdown.

It launched its 150 list of recommended funds in 2003 and had 165 funds at one stage. Today, the list only has 120 funds because it cannot find enough quality funds that make the grade. It reckons its in-house quantitative system has weeded out the “lucky managers” who just happened to be in the right place at the right time, rather than by judgement.

“The truth is there are far too many funds and very few really talented fund managers. An analogy with football might be appropriate. How many really talented footballers are there across all the divisions? Answer, very few. Fund management is no different,” head of research Mark Dampier tells me.

But Dampier is not the only one with concerns.

A few weeks ago, Philippa Gee wrote a blog berating the fund management industry for failing to get its priorities right. Fund management groups need to understand they are dealing with money that people have worked extremely hard to save and invest, she wrote. “It is a responsibility that should not be treated lightly. Focus on what you do best,” she added.

But Gee’s calls seem to be falling on deaf ears if the latest FundWatch survey is anything to go by.

The Thames River Multi Capital survey shows a 72 per cent increase in the number of new fund launches in the last quarter of 2011. The funds were spread across IMA sectors, with four launched in both the renamed IMA mixed investment 20-60 per cent and 40-85 per cent shares sectors, with only one fund – Fidelity multi asset allocator defensive – joining the new IMA mixed investment 0-35 per cent shares sector.

I have often wondered why there are in excess of 2,000 funds available to UK investors, when everyone knows the vast majority are failing investors. If you talk to investment professionals about successful fund managers, the same familiar names crop up.

Yet mediocre or downright dismal funds still sell – there must be some very persuasive regional sales managers on the road, that is all I can say.

But the responsibility at the core falls on fund groups. The mechanics of investment groups require them to attract assets and it makes financial sense to launch when there is an appetite for a certain type of fund. It is why many launches are ill-timed. Investors simply will not buy funds that are out-of-fashion, no matter how much you tell them a bubble is about to burst or an opportunity is around the corner. It is not very TCF, it is just commercial reality.

However, greater choice does not serve the mainstream investor well. A vast array of funds is not the answer, although it would seem that we are falling into a similar trap with defined contribution pension schemes.

Platforms, consultants and employers are moving to give employees greater choice, when all workers really require is a first-rate default fund they can rely upon. Unfortunately, default funds are the nemesis of DC schemes and they have let many workers down.

Fund groups need to get back to basics and resist the urge to launch a new fund. They need to ensure their laggards are revamped and retuned before they lodge new fund applications. Anything less is disrespectful to their existing bands of customers.

Paul Farrow is personal finance editor at the Telegraph Media Group

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