Fidelity is taking a stand against IFAs which rebate trail commission to their clients. Do you agree with the move or should it be up to the individual adviser whether to rebate commission?
AA: Giving up income should be up to the individual adviser but I do think the trail arrangement is a good way for quality advisers to be remunerated for giving ongoing reviews. Given the high levels of annual management charges on some of the contracts available in the industry, rebating is certainly something we will be looking at closely in the years ahead.
AM: I find it a little worrying when a product provider interferes with how others run their companies, regardless of their intent. Those IFAs who rebate trail to clients would seem to be those who simply take orders and need to attract business on price only. Clients of a good advisory firm would understand why trail is paid and retained in the first place. Fidelity should not get involved.
DC: At first sight, Fidelity's move to stop dealing with IFAs who intend to rebate trail commission looks like a restraint of trade. However, I am convinced Fidelity has acted in the best interests of everybody and its move should be applauded. The past couple of years have seen a quite alarming growth in discount brokers which do very little for their clients. Fidelity and other fund managers are increasingly concerned at a lack of what I call client patronage.
We have to wonder where these discount brokers which promise to rebate trail intend to make their money. I know that groups are worried about the overall financial viability of these operators and, if they are to stay in business, then they must have other motives. Fund managers are worried about IFAs' ability to fulfil their promise to rebate renewals and others will follow Fidelity's move in the near future.
Gartmore is launching a range of unit trusts with the annual management charge linked to performance. Do you support the concept?
AA: I feel it is entirely sensible that Gartmore is linking the annual management charge to performance. As an industry, we have always been guilty of earning our income whether the client has received the performance or not and Gartmore has to be commended on this type of approach.
The concept is one that I feel will extend throughout the industry but there have been one or two cases recently where the performance that was required to justify a higher annual management charge was set by the company and was quite modest. As long as the annual management charge is linked to performance in a fair and sensible basis, it is a concept that I strongly agree with.
AM: Broadly, yes. I have long thought that performance fees should be a two-way affair. Good performance in any walk of life should be rewarded. Poor performance should similarly not be tolerated. As long as the end result is that unitholders still achieve superior returns after the annual management charge has been raised, then I cannot see that anyone will be too disappointed in paying slightly more. Presumably, the investor will make their choice before subscribing.
DC: Investors pay low annual management charges on index trackers as they are not paying for a fund manager to try to pick stocks that will outperform the fund's benchmark. So the higher charges on actively managed funds are designed to pay for outperformance. By offering a higher annual management charge for continued outperformance, they are encouraging fund managers to take greater risks with investors' money.
If fund performance is not up to scratch, then investors usually will vote with their feet. The idea of a performance-related annual management charge appears to offer a bonus to managers for doing what they are paid to do.
Perpetual has lost a raft of fund managers during its merger with Invesco. Are you confident the fallout is over or nervous about the immediate future?
AA: The merger with Invesco is certainly one where a number of fund managers will be leaving but I think it is unlikely that the top players at Perpetual and at Invesco will be allowed to leave the company. I am sure the terms will be made suitably attractive so that the best of breed approach will be maintained.
Obviously, we will be monitoring the situation closely to see if there is any drop in the performance of the company but we are quite happy with both institutions as quality fund managers over the medium to long term.
AM: There were bound to be casualties and perhaps there will be more. But I am not overly concerned as I think the Invesco/Perpetual merger was a good fit from the start and the consumer has ample choice within the range.
I think that the biggest threat to more fund managers leaving is the rail journey between Henley on Thames and the City. Perhaps Invesco can arrange for Neil Woodford to travel to meetings by barge.
DC: Mergers are always a rough time, no matter how friendly. So we are seeing with Invesco and Perpetual.
With fund mergers, there are too many chiefs and some have to go, so we are nervous about the immediate future. There may well be a few more dead leaves to be shaken from the tree. The good news is that the top managers from Perpetual and Invesco seem content with the merger and this bodes well for the long term. Fund managers who were previously under fire, like Neil Woodford, have been vindicated in recent months and the new company is aware of his figurehead status.
Cofunds has finally unveiled its full proposal and list of fund providers, while FundsNetwork's IFA business appears to be moving from strength to strength. Which of the supermarkets do you believe offers the most attractive proposition for IFAs?
AA: This is an area that we are concerned about as we believe that fund supermarkets, rather than being a major attractive proposition for clients, are geared for certain providers to increase their product sales dramatically.
It really is an element of marketing over substance and seems to forget that the major approach to business should always be the client and the tax planning that is appropriate, rather than making things easy to sell and easy for the IFA to administer.
We are always looking for things to make life easier but the client always has to have precedence and I just wonder where the fund supermarket concept will go in the future.
AM: I suppose Cofunds has slightly more appeal to an IFA than Fidelity, particularly with multi-ties coming in. All that a high-street bank needs to do is tie to Fidelity and they have the whole range of funds at their disposal in one move. I am not sure if they will be able to tie to Cofunds in the same way. I guess the best
thing they can do is to bury their mutual hatchets, join forces and rebrand as CoNetwork.
DC: FundsNetwork is the more attractive at the moment as it is not just paper based and many IFAs and their clients are seeing the internet as a useful investment tool.
In the longer term, though, it will not be the number of fund managers or number of funds available that will differentiate the supermarkets. We believe this will be a marginal call – what will be more critical will be the added services which they offer IFAs.
Around £21bn of Tessa money will mature this year. Where are you advising your Tessa clients to put their money?
AA: For the initial money invested in Tessas at the outset, we have certainly recommended Tessa-only Isas on a number of occasions.
However, one or two of the leading Tessa-only Isas are produced by institutions with a chequered past. Historically, many of these have offered competitive interest rates at the outset only to slash the rate payable once they have collected a fair amount of capital. Furthermore, there are usually penalties for getting out of the schemes.
Certainly, building societies such as Dunfermline and Nationwide have consistently given good returns over five years or so and are worthy of consideration if the client is not willing to move the money on a regular basis.
AM: Those who have maturing Tessas could do worse than roll over into HSBC's follow-on Tessa-only Isa. It seems a shame to miss out on an extension of the £9,000 allowance being offered although any balance over this should in most circumstances be put towards one's maxi Isa allowance if not already used.
With the weather we have been having recently, however, I have got a strong feeling that a lot of this money, free from five years' captivity, will be heading for the Med this summer.
DC: Most equity-based funds have returned more than deposit-based Tessas over the past five years, even given the recent state of world stockmarkets. However, although there will be some movement of Tessa funds into equity Isas and unit trusts, I believe most Tessa savers are very conservative people and a good halfway house is HSBC's Performance Plus.
We seek to educate our clients about the value of investing in equity-based funds in the longer term but we are still promoting the HSBC product.
After several bad years, equity income was one of the best-performing sectors of 2000. Do you believe equity income funds are still attractive or a thing of the past?
AA: The equity income sector is one which, despite a small period of underperformance, I feel has never gone out of fashion. It always has a slightly more defensive style which, as part of an overall portfolio, will always be worthy of consideration. Despite their defensive approach, income funds have stood up against most of the UK growth funds over the last five or 10 years.
Where the real difference comes is through certain individual stock selectors, such as Bill Mott at Credit Suisse. Mott has a great deal of income fund experience and is willing to take a contrary view to the herd mentality. We, as a company, hold him in very high regard.
Even a company such as Jupiter, which has had to make major changes within its income fund after losing star fund manager Bill Littlewood, has managed to appoint a quality new manager to restructure the fund. Going forward, it still looks well placed, despite the fund's size.
AM: Every dog has its day. I cannot see the equity income sector returning to its former glories although ABN Amro, for one, has shown that a little lateral thinking within the sector's parameters can still deliver the goods. As with most sectors, the more gifted managers will continue to get results but I cannot see me rushing to put clients into the sector, especially as it has so recently outperformed.
DC: I have always been a big fan of equity income funds and have supported them throughout the recent technology boom/bust. The fundamental principle behind equity income funds still holds. They are attractive to any investor who is looking for an increasing income coupled to a growing capital base. The funds in the sector which are the performers have been able to take their pick from both value and growth stocks, and I believe a flexible approach is essential.