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The Lynch pin of retail sales

Leading investment advisers hope that new sales figures will persuade fund managers that they need to pay more attention to retail sales.

They believe the good performance of fund companies such as Merrill Lynch Investment Managers in the third quarter of 2004 shows that a focus on retail sales can pay off.

According to data in the Pridham report, Merrill Lynch finished 10th for total net sales of £144.2m – its first appearance in the top 10 for some time. Much of this has to be down to the excellent reputation and performance of managers Richard Plackett and Mark Lyttleton, who oversee the UK dynamic fund and UK smaller companies fund respectively.

Lyttleton’s £407.1m fund is up by 16 per cent since launch in 2000 against a rise in the FTSE All-Share index of 15.6 per cent. Plackett’s £74.3m fund is up by 21.2 per cent over five years and 19 per cent since launch in 1987 compared with a rise of 18.3 per cent in the index.

But Hargreaves Lansdown head of research Mark Dampier believes one of the main reasons why Merrill Lynch has taken more money in the third quarter of 2004 is that it has become more approachable to IFAs. He says: “There is no doubt that performance of these funds has helped but it takes more than one star fund to make a fund management company perform well.

“In the past, I do not think that Merrill Lynch focused its business on the retail side. If IFAs feel that they are going to be ignored or if they think that the fund manager does not have their interests at heart, then I do not think that they will get any money.

“This attitude looks like it has changed at Merrill Lynch and people are confident investing money with it. It is a lesson that a lot of other fund companies could do with learning.”

One fund management company that Dampier considers could improve its retail focus is Newton. The firm has an extremely successful higher income fund which has had a range of established managers over the years including Toby Thompson and Clive Beagles, who last week launched a new fund with JO Hambro.

Currently run by Tineke Frikkee, the £1.7bn fund and the £970m income fund have both had substantial inflows in the last quarter. But Dampier reckons that an increased emphasis on the retail market would serve Newton well.

However, with much of its money coming in from institutional and wholesale investors, it seems that Newton does not have much to worry about, particularly as its team approach to investing has stood it in good stead, with few investors leaving its top funds even when there is a high turnover of managers.

According to the Pridham report, among other fund groups that are enjoying a revival is Invesco Perpetual. But yet again this is a group buoyed by the performance of one fund, Neil Woodford’s equity income fund, which accounted for a quarter of the group’s gross sales.

Skandia Investment Management has been helped by heavy marketing and boosts from its life insurance parent company. Some of the praise for this has gone to marketing director Spike Hughes, who has strong ties to the IFA marketplace.

SIM’s multi-manager proposition has proved particularly popular, taking in £219.16m in the third quarter, some three times more than its nearest rival Scottish Widows and four times more than MLC, Jupiter and HSBC in third, fourth and fifth place respectively.

However, the Pridham report reveals that net retail fund sales in the third quarter of 2004 fell to their lowest level since 1996. New business inflows of £418.2m in the third quarter were less than a tenth of their level during the first quarter of 2000 when they peaked at £5.4bn. Around 40 per cent of groups saw net retail outflows.

Much of this was a result of the poor performance of equity markets and weak sales of Isas, which saw their first ever net outflow in September. The top-selling Isa fund was the Halifax corporate bond fund, with the Legal & General UK index, Fidelity special situations and CIS UK growth funds trailing closely behind it.

New Star finished fourth in terms of net retail sales for the quarter. A positive factor from its performance was that eight of its funds this year have taken more than £50m.

Marketing director Rob Page says: “Building a fund management company around just one or two funds is a very dangerous game to play. The IFA can tolerate a short period of underperformance but it can be very fickle. This is why you do not want to just have one fund doing well. Anything can happen – a manager can leave, performance can suddenly fall away and then where does that leave you? Historically, all the big fund companies have been built around four or five performing funds.”

With cash still priced high, equity markets travelling sideways and asset managers only just realising that what investors want is absolute returns, it seems that next year will pose significant challenges.

Fidelity is thought to be planning an all-out assault on next year’s Isa season – the last full year before mini cash allowances are cut from £3,000 to £1,000 in April 2006.

Much of the retail fund inflows for the next year will depend on how firms prepare for this and how they cope with the challenge of getting consumers confident in equity markets again.

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