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The fund fair

The Inland Revenue is allowing investors in Rathbone&#39s special situations fund to switch without charge to Patrick Evershed&#39s new select oppor- tunities fund at New Star. Considering the number of star manager moves at the moment, would you like to see this type of agreement reached between companies more often?

Mike Owen: Yes, it would facilitate ease of transfer from one fund to another, allowing investors to follow the fund manager without being constrained by capital gains tax considerations.

I was somewhat surprised that the Inland Revenue granted this concession between two different management companies but investors need to consider carefully whether or not they do follow the fund manager, even with the benefit of this special dispensation. It does potentially grant investment flexibility to deal with fund management changes.

Meera Patel: It makes a refreshing change for Rathbone and New Star to come to this agreement and put the interests of their investors first. With an increasing turnover of fund managers in this industry, I think this is an ideal way for investors to continue to benefit from the talents of their chosen manager without incurring a CGT liability.

If the reason for investing is down to a proven and successful manager, then this type of agreement between groups should be encouraged. But in the hard commercial world of fund management, it probably won&#39t.

Jo Roberts: The agreement was obviously an amicable one that suited all parties in the end. The New Star select opportunities fund is virtually a replica of the Rathbone special situations fund, with broadly comparable charges and identical management strategy. The Revenue decision to allow in specie transfers is welcome and I believe it could work for other fund managers moving between companies in similar situations. By allowing it to happen, the handbags at dawn incidents could be kept on a more professional level, leaving investors with increased confidence.

The FSA has pledged to formally investigate investment trusts it believes were guilty of producing marketing material portraying split-caps as low to medium-risk. As a result, it has been suggested that it should have stepped in earlier to force firms to tone down the more exaggerated safety claims that some of them made. Do you think the regulator should have acted sooner?

Mike Owen: Yes, the regulator should have acted sooner, but there are parallels with other debacles such as Equitable Life, in that the damage has already occurred when the FSA gets involved. Ideally, there will be a more proactive approach in future and companies themselves must act responsibly to portray clearly the pros and cons of their products. I am afraid this may be a forlorn hope when you look at the packaging of many income products, displaying the yield clearly, but not always prominently describing the capital risk.

Meera Patel: I think the complexity and the risks associated with the splits sector has been underestimated by the FSA and many IFAs. While stricter guidelines for the marketing of splits could have been in place sooner, it is unfair to point all the blame on the regulator.

Those producing the literature should carry primary responsibility over this troubled sector because surely they are best placed to be aware of the risks on their own products. At least the problem has been identified and is being addressed before further harm could have been done.

Jo Roberts: We always seem to have problems with the FSA investigating after the event when alleged consumer mis information may have been detrimental. They appear generally reactive, not proactive.

The question is difficult because each life office, fund manager, advisory firm and clients have their own definitions of risk. If the consumer is relying on marketing material that states a product is low to medium-risk, the risks need to be clearly explained.

Don&#39t forget that each office issuing product information has a compliance department to approve the financial promotions and that is what the FSA rely on. Acting sooner may have been difficult but they do have a duty of consumer protection. If there is an element of doubt (as there is now), the FSA must be relied on to move immediately. However, the ultimate blame lies with firms that exaggerate safety claims.

Fund manager Dimensional is to become the latest in a long line of US investment houses to enter the UK retail market. Considering how many US firms have failed to make an impact in the past few years, what steps can Dimensional – and other firms looking to make a similar move – take to be successful in an already over-crowded market?

Mike Owen: They are going to find it difficult in a market chasing less money, competing with established houses, cash-rich life companies and other new entrants such as New Star.

They have to bring something new to the table, perhaps in the shape of their investment process, an approach taken by MFS. They could look at niche areas of the marketplace or as we have seen with New Star, spend big money on established names.

Meera Patel: Competition is certainly tough in fund management and, in order to flourish in the UK market, US fund managers really need to prove themselves. Companies with strong research capabilities, a robust team and those that can make an impact on the market with a difference should survive. Impact can only really be achieved through very superior fund performance. Dimensional&#39s risk-averse approach might be effective in a market where investors are risk-conscious. However, to prove their mettle, they need to convince me that they are active managers and have a good eye for stockpicking.

Jo Roberts: Due to previous association with Schroder and that the fund manager purports to be a low-risk manager, general interest and curiosity is likely to be widespread among investors and advisers, especially in today&#39s market conditions. As with any new launch, brand and marketing are key.

To ensure widespread awareness, managers need to balance marketing between the public and professionals. Advisers aware of the product and how it stacks up in sector are more likely to include it as a portfolio option. As always, if the product is competitive and the brand is strong, high profile awareness marketing (such as Axa with the FA Cup) should bring results.

ABN Amro and Framlington have become embroiled in a legal dispute over the departure of George Luckraft and Nigel Thomas. It is only the latest twist in a round of fund manager moves that Edinburgh Fund Managers managing director Harry Morgan bel-ieves is bringing the industry into disrepute. Do you agree with him?

Mike Owen: At a time when most retail funds are losing money and companies are struggling for new business, these fund manager moves are becoming tiresome and potentially an own goal for our industry. It makes fund comparisons difficult and the public do not take kindly to stories of managers moving for fantastic packages. It is making a mockery of fund performance tables when IFAs are having to ask “How long are you going to stay and when do your options expire?” Meera Patel: I can sympathise with Morgan&#39s feelings completely. There is nothing wrong with a fund manager moving for career reasons or because they are unhappy with their current position. What is really frustrating is the greed factor. Top-quality managers are in short supply, which means they are in a position to influence their own remuneration package.

Investors&#39 interests are not being kept at heart in this fund manager merry-go-round. It is becoming an expensive habit for investors to follow star managers due to switching costs, incurring bid/offer spreads and potential CGT liability (of course with the exception of Rathbone spec sits investors).

Jo Roberts: I don&#39t think that bringing the industry into disrepute is the worry here. What about the investors caught in the middle? The only people in the know are ABN Amro, Framlington, Luckraft and Thomas. It would be wrong to speculate about ABN Amro breaching contracts and whether or not actions of Luckraft and Thomas had anything to do with it. However, as with all resigning staff, once you have resigned you want to go. I am sure this is the case with Luckraft and Thomas and the vision of another 10 months being somewhere you do not want to be could be daunting.

Playing devil&#39s advocate though, they knew what their notice period would be when they joined ABN Amro. I am sure they cannot wait for the greener grass but will it be just as hard to mow?

Research compiled from Standard & Poor&#39s figures by Skandia has shown that funds with the highest annual management charges produce better returns than those with the lowest AMCs. However, it found that investors paying annual charges of between 0.49 per cent and 1.49 per cent could often be better off paying a lower AMC. Does this surprise you?

Mike Owen: These figures highlight the poor performance of trackers over the last two years or so. It has been a stockpicking environment, so some funds with higher AMCs are producing better returns than lower-charging trackers.

The finding that investors could benefit from lower AMCs is self-explanatory. In markets moving sideways, at best, the AMC is a crucial part of the overall fund return.

Meera Patel: I usually take these surveys with a pinch of salt as there is far more to a fund than just charges or past performance. However, it surprises me that investors would be better off paying a charge of less than 0.49 per cent, based on the findings that there is not much difference in returns on funds charging between 0.49 per cent and 1.49 per cent.

I usually try to identify how the AMC justifies the quality of management and how value is added to a fund. It would be ideal if all funds charged less than 0.5 per cent, had superb management and the ability to deliver superior returns.

Jo Roberts: No, it does not surprise me. The majority of mainstream funds charge between 0.49 per cent and 1.49 per cent and the gap between best and worst performers is sometimes sizeable. Fund managers that deliberately take a more active role in stock selection are being open about additional expenses as a result.

Some companies operating market-standard AMCs of between 0.49 per cent and 1.49 per cent may be disguising the fact that they are less active in stock selection and using the AMC margin as a profit centre.

Suggesting that people go for lower management charges in this sector is not surprising. The obvious gulf between the better and poorer performers is no doubt due to how active the fund managers actually are and the amounts of money that need moving.

Mike Owen,joint managing director,Plan Invest

Meera Patel, senior analyst,Hargreaves Lansdown

Jo Roberts,director,Roberts Clark


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