The AITC is working with Aifa in a bid to ease the plight of IFAs who may be struggling to get professional indemnity insurance. Their concern is that insurers are increasing premiums across the board over fears that IFAs may be subject to legal action from investors who have lost money through the split-cap sector. Is the joint initiative a good idea and do you believe PI providers are prepared to listen?
Hollands: This is a good idea and a commendable move by the AITC. Rising costs of PI cover are a huge burden on IFAs at a time when overall new business levels are dreadful and there is an enormous amount of uncertainty about the future of the industry thanks to FRS17 and Sandler. Unless some of the responsibility is borne by the investment trust companies, then I doubt many PI insurers will listen. It could be the final straw for some small IFAs.
That said, I am deeply pessimistic about the prospects of success. PI cover is rising generally as reinsurers want to shrink their exposure. In some other industries, it is simply impossible to get PI cover now. It is a bad state of affairs for IFAs but I pity the blokes whose business is hiring out bouncy castles for the day.
Yearsley: Any initiative that tries to sort the growing problem of PI insurance cannot harm anything. This is precisely the sort of thing that trade bodies should be doing. Whether it makes any impact is another matter entirely.
Nelson: PI insurance and the increased cost is one of the main reasons why many businesses making commercial decisions are looking to merge, stop trading or consider selling. Costs for PI insurance have more than doubled over the years due to misselling scandals. There is not enough competition to drive down prices.
Again, this one of the main commercial factors that put many off from setting up on their own. Also, excesses have increased so much that firms really no longer benefit from the policies they are paying for as most claims are less than the excess. Aifa and the AITC's combined help can only be welcomed.
HSBC has been hit by the departure of virtually its entire European and UK teams, including Tim Russell and Chris Rice. Do you think it can recover from such a devastating blow and how far does it go to establishing Cazenove as a major player in the core retail areas? Do managers prefer working for smaller companies?
Hollands: Look, clearly this is pretty damaging for HSBC and without doubt a coup for Cazenove. HSBC are going to have to take this on the chin and see what lessons they should be learned in terms of workplace culture and remuneration. That said, do not underestimate the resources available to HSBC. This is not like ABN Amro, where the business was practically reliant on two individuals. It is a global investment house. Our position is that we have suspended our recommendations on the HSBC funds and will make a final decision once we have seen some identifiable records for the new managers and met them.
Cazenove is clearly making a real bid to enter the retail market. It is a shame that they did not decide to do this a decade ago. It was only recently that they decided to pay IFAs commission, ironically at the very time when the FSA seems keen to snuff it out.
They have a blue-chip brand to leverage from and the prospect of an Aim float makes them attractive to potential employees looking for an equity stake. The fact that so many of the Cazenove team are ex-HSBC means you do not have to worry about whether or not personalities will gel.
They now have a good fund team lined up, the next step is to establish distribution credibility by strengthening their sales team and getting their funds on the main supermarket platforms.
Yearsley: The loss of Tim, Chris and the other three fund managers is obviously a big blow to HSBC. It will be a very difficult task to replace them but they are a big organisation with the resources to recruit top fund managers.
What is a blow for HSBC is a coup for Cazenove. This certainly goes a long way to establishing themselves as a major player in the retail fund management world. However, they cannot rest on their laurels. Raising money in this environment is tough. The fund managers need the back-up of marketing spend and other resource to ensure that Cazenove do become a major player.
Nelson: It is clearly a massive blow to HSBC, yet I do not think they should be written off. From an advice-led decision, it is sensible to suspend the funds until further information is available.
It is too early for HSBC to make any major decisions, as this could be a temporary knee-jerk reaction to a difficult situation. As for Cazenove, it is a bold move to make in a market that has been depressed by continued bad news and chan-ges. However, this could be admired for forging forward with their plans of expansion. With the big names now att-ached, it would certainly be an attractive option for investors.
Rothschild shocked the market recently by putting its retail and institutional asset management businesses up for sale. It wants to concentrate on its private banking operation but admits the main reason for the move is the market, which it believes only the biggest firms can survive. Do you think this is the case and can you imagine more fund managers putting themselves up for sale?
Hollands: Yes I do and there are already plenty of names being mentioned. The fund management industry is ripe for consolidation and we are going to see more of this sort of stuff. Costs are still at peak bull market levels but margins have crumbled, with falling asset prices.
There is a only so much that can be achieved by trimming advertising budgets and laying off support staff. Real econ-omies will only come through consolidation. The only uncertainty is whether there are any buyers in the market. Many big institutions are looking to dispose of their subsidiaries and the abortive sale of Jupiter is not encouraging.
We are fast moving to a world of giants and boutiques – the giants will seek to leverage their distribution muscle and brand and the boutiques will offer entrepreneurial freedom and niche products. If Sandler gets even half-implemented, the pace of change towards this new industry landscape is likely to accelerate. Against this backdrop,the outlook for medium-sized fund companies is not at all encouraging.
Yearsley: I do not think only the biggest firms can survive. However, profits have obviously slipped badly at many fund management groups in recent years and times will be a lot tougher going forward. Small fund management groups can survive, they just have to ensure that they are not too bloated. Too many groups have too many mouths to feed. What smaller groups might start doing more of is outsourcing admin, marketing and pretty much everything apart from fund management. This would ensure that costs are kept down and also means that fund managers can spend their time managing money, not companies.
Nelson: I think with the effects of changes in regulation and continued nervousness in stockmarkets, there is a strong case for consolidation within the industry. In difficult times, it is evident that the strong brands continue to grow in terms of volume business compared to lesser-known competitors. There is still a call for the boutique investment houses but those will survive on the basis of reputation, funds and perhaps a diversified business.
The FSA has published a discussion paper asking the industry whether it believes hedge funds should be marketed direct to the public. Do you think there may be misbuying/misselling concerns over such a move as few retail investors understand the products?
Hollands: I am very nervous about the prospect of these products being directly marketed to the public and I am not sure that the hedge fund managers themselves are keen to see it.
Understanding of hedge funds among investors and advisers is generally weak. People either assume they are a one-way ticket to success – which they are not – or their knowledge is limited to the Newsnight stories about the collapse of LTCM or Soros speculating on the ERM. We are told that hedge fund managers are all gleefully making money shorting stocks at the moment but the reality is that most funds make net returns off their long positions and indeed a number of funds have wound up recently.
Hedge fund managers are understandably secretive about their positions and any move to widening availability would probably force a level of regulation on them which would be self-defeating. The mystique surrounding hedge funds is part of their appeal for the experienced investor. Top long-only managers are drawn to hedge funds in part because of the performance fees but also because of the greater investment freedom and the fact that they do not have to be distracted by endless marketing demands.
The bottom line is that hedge funds have limited numbers of partners and therefore it is deeply unappealing for a manager to open their fund to big numbers of modest inv-estors. To significantly widen the number of investors would place admin and marketing pressures on hedge fund managers which could destroy the boutique atmosphere and make them look ever more like the big institutions most of the managers deliberately choose to leave. For the vast majority of private investors, access to this asset class really should be through a fund of fund route rather than direct access to individual funds.
Yearsley: At the moment, hedge funds suffer from generally misinformed articles written about them in the press blaming them for every financial catastrophe. Therefore, investors' perceptions of them are probably somewhat clouded at the moment. I think that regulating hedge funds would ultimately be a good move as it would bring more transparency and openness to them.
IFAs will need educating about the benefits and different types of hedge funds available. In the majority of cases, I am sure that simple long/short funds will be the most popular.
Nelson: There is a need for greater discussion on hedge funds before they are made available to the retail market. It is an interesting concept that offers an absolute returns mandate combined with a priority of preservation of capital. However, like, for example, derivatives-backed investments, there is a call for greater transparency and better controls over the marketing of such products. Until we have controls in place and the opportunity for the professionals to be educated, caution should be exercised.
The backers of Cofunds and FundsNetwork are still locked in negotiations over the terms under which they would be prepared to app-ear on one another's platforms. M&G, Gartmore, Jupiter and Threadneedle are all in separate talks with Fidelity over joining FundsNetwork but are balking over what they believe are harsh terms and conditions. Until they join, Fidelity is believed to be refusing to appear on Cofunds. Is it time they found a way to break the deadlock?
Hollands: I really wish they could just get on with it and come to an agreement but then I am not privy to the terms and conditions between the various supermarkets and their partners. By and large, these are highly confidential and subject to non-disclosure agreements. I have, however, detected from a number of fund companies that appear on both platforms that they are happier to see business routed through Cofunds.
From the IFAs' perspective, the only real issues are range, pricing and admin efficiency. We use both the Cofunds and FundsNetwork platforms, as all of the groups above have funds on our buy list and so we do not think it is right to throw our lot in with one supermarket, as some IFAs have done. The bottom line is that the poor old investor (and their IFA) is stuck in the middle and the sooner co-participation happens, the better.
Yearsley: They are starting to look a bit silly really. How many rattles can be thrown out of the pram is the question that springs to mind. At the end of
the day, it is in the best interests of consumers to have as many different groups as possible on their chosen supermarket. I cannot really believe that the FundsNetwork terms are any harsher than Cofunds – it just sounds like another excuse.
Nelson: At the end of the day, only the fittest will survive in the fund supermarket world, as has been shown in the States. Energy should be res-erved for these businesses moving forward and not used in a continued game of back and forward fighting. Sometimes an element of compromise is required on all sides. Both propositions have strong followings that can only be strengthened by dealing with the ongoing issue and moving on.
Jason Hollands, Deputy managing director,BestInvest
Ben Yearsley,Investment manager,Hargreaves Lansdown
Kerry Nelson, Senior investment adviser,Bates Investment