Cofunds is set to unwind its exclusivity pact this year, allowing its four founders to join FundsNetwork and Fidelity to join Cofunds. With all the providers finally on all the platforms, which supermarket will you favour?
Both: Based on my experience over the last year, Transact is my preferred route because not only does it offer the widest range of funds – basically unlimited – but it can act as a “hypermarket” for clients to consolidate other investments such as pensions (including self-invested personal pensions and drawdown). In terms of “front end”, it is not as jazzy as Fidelity or Skandia but, in fact, is quite basic, which I personally see as a virtue. IFA clients come to us because they want to delegate the responsibility for research and do not want the bewildering sites that most of Transact's competitors offer. It is principally an excellent, reliable, fast back office. That is all I want from the supermarket.
McDermott: We are likely to favour Cofunds but we will still be offering access to all three major fund supermarkets which include FundsNetwork and Skandia. The fact that Cofunds is independent is important to us. We have been asking that supermarket exclusivity be dropped for a while now as it is in the interest of all our clients. At the moment, clients wanting to invest in, say, Fidelity and Jupiter funds via Cofunds, are unable to do so, yet they are able to via Skandia – this does not make sense. It is definitely a step in the right direction.
Yearsley: The supermarket that you should use is one that has the widest choice of funds, best pricing policy and has the most flexibility.
After an unsettling 2001, which saw the departure of several directors and fund managers, Newton is now getting back on its feet, recently recruiting Credit Suisse Asset Manage-ment's Raj Shant as its new head of European equities. Will you be putting any money with the group in 2002?
Both: Yes. The last two years were tough for all fund management groups as the bull market ended and Newton's loss of staff was about par for the course. Their long-term experience and takeover by Mellon are both comfort factors for clients. Like most IFAs, we have admired the quality of their income fund teams and, given the outlook for 2002, we expect that this will continue to play an important role in our recommended portfolios. With 25 per cent of managers playing musical chairs last year, there is a real risk of switching funds only to end up with the same director, having paid a high switch cost.
McDermott: Newton has had a tough year with the departure of so many key figures but they do appear to be keeping the boat buoyant. Since the departure of Toby Thompson to New Star, the highly successful higher-income fund was in need of a worthy successor. This may have come in the shape of Clive Beagles, who, despite a turbulent six months, has kept the fund top-quartile. It has also outperformed the sector average by more than double in the last three months. Raj Shant will not be joining Newton until March but he will no doubt be a useful addition to the team.
Yearsley: 2001 was a bad year for Newton with several managers leaving. However, replacements have been appointed, both from internal and external sources. I think the worst is over for them in that it is unlikely that any further money will be leaving Newton. However, a period of stability is needed before new money is committed.
The first theme to emerge in the 2002 Isa season has been income, with several fund managers – such as Gartmore, Jupiter and New Star – launching income-focused funds to capture the market's attention. Which of the new offers do you most like the look of?
Both: Having seen the cavalier attitude that the fund management industry has to the retail investor, launching new funds based on short-term market swings just before a major correction, one cannot help being immensely sceptical at anyone adding a fifth or sixth wheel to the latest bandwagon. I am a great believer in recommending funds managed by a team with a proven track record. On that basis,I am none too sure about any of them.
McDermott: Of them all, we like the New Star fund the most. New Star has acquired an excellent team of fund managers and Toby Thompson, formerly at Newton, is no exception. His track record with the Newton higher-income fund was excellent. The fund has been top-decile over the last 10 years.
We also favour the new Gartmore monthly income fund. It primarily invests in a wide spread of securities and bonds, to secure a high yield. The Investec monthly income and European high-yield bond also appeal, even though bond default rates have received much adverse publicity of late. A report released by Merrill Lynch recently showed that there was a strong correlation between high default rates and high returns. They found that as default rates peak, so do returns on bonds in the following 12 to 24 months.
Yearsley: All three new funds offer different characteristics. New Star is a pure equity income fund, Jupiter is a mix of corporate bond and equity and Gartmore is almost a pure high-yield bond fund. I do not think it is fair to compare these funds as they are completely different. They are all compelling for different reasons.
Toby Thompson is a proven equity income fund manager and you have the ability to get into a small nimble fund. Tony Nutt and John Hamilton managing the Jupiter distribution fund are both quality managers in their respective fields (equity income and fixed interest), as is the manager of the Gartmore fund. All three funds have the potential to be top-quartile funds in their respective sectors.
Charles River Associates has compiled a summary of past performance research for Autif, concluding that while performance figures are not reliable for picking future winners, they are useful for eliminating poor performers. What importance do you give to performance figures in fund selection?
Both: As a qualified technical analyst, I give immense importance to past performance but the key is in the interpretation of the data. Anyone believing that because technology shares gave spectacular returns over a one-year period it would be repeated annually thereafter is a fool.
The two safe and useful conclusions were that high volatility would probably be repeated and that some managers were better or luckier than others.
The real analysis is on the second statement, and one needs to see how concentrated the manager's portfolios were, how sensitive to the market conditions (beta analysis) and how much the manager added (or took) from the market performance (Sharpe ratio). Don't believe me? Ask Merrill Lynch.
McDermott: Past performance figures should never be used as crystal balls. They are more useful in forming a general picture of a fund manager's or fund team's success which is helpful when choosing or tipping a particular fund. They do more usefully expose the funds that have performed consistently badly over time but similarly offer no reliable guide to future performance. When making future predictions, it is essential to use all information at your disposal. We research the fund manager, his investment style, his team, the process of the fund, the sectoral and geographical breakdown of the fund and past performance figures.
Yearsley: Past performance is a useful indicator but only in association with other qualitative factors. It is an interesting point to use it to weed out the poor performers. A big chunk of funds in the UK All Companies sector do not actually beat tracker funds but there are very few fund managers that consistently beat the index. If you cannot use quantitative figures because they are all based on past performance then all you can use is qualitative assessment.
A fund might have underperformed for a specific reason, such as a value fund during the growth spurt of 1999 or a growth fund since then. Past performance will only show the numbers, not the reason. You need to know what a fund does and how it is run before being able to use past performance data.
Govett Investments is the latest fund manager being pursued by New Star. Do you believe a merger between the two groups would be a good fit in the case of an acquisition?
Both: In some ways, Govett's portfolio of small specialist funds is a far more logical fit for New Star than the incomprehensible pursuit of Artemis, which did nothing to impress me. One must ask if they want Govett for the right reasons or is it merely a deal for the major shareholder when comparing egos? A significant proportion of Govett's funds are highly technical and index-related, depending upon program trades. This is the exact opposite of New Star's stated philosophy so I hope it also falls through. Third time lucky?
McDermott: If a merger went ahead, there would be positives and negatives to the union. Govett is strong in the US sector, and New Star does not have a US fund. Both are strong in Europe but in the UK sector, New Star is stronger. The two companies would make a reasonable fit, but there would be some overlaps if the merger did go ahead. New Star, however, should certainly put a priority on making sure Gil Knight, manager of the Govett US opportunities fund, would be happy managing money for them. His track record with the fund speaks for itself.
Yearsley: Govett Investments has had a poor couple of years. Some of their star funds have certainly come off the boil. Govett has a very good US fund and a good Asian fund, both of which New Star do not have. New Star's strengths lie in UK and Europe, Govett are not known for their UK presence although they do have a good European manager in Peter Kysel. All in all, a good fit,even more so because Govett is a rather directionless ship at the current time.
Ben Yearsley, investment manager, Hargreaves Lansdown
Michael Both, partner, Michael Phillips
Darius McDermott,managing director, Chelsea Financial Services