It emerged last month that the FSA had been urged to launch a review of structured products and the way they were marketed as early as October 2001. Considering subsequent events, do you think the regulator has done as much as it could have done?
Whitbread: Guidance note 7 – the factsheet on high-income products – was issued very late and irrelevant bits such as corporate bonds were included so as to dilute the message as well. Altogether this doesn't appear to have been very effective. Monitoring is increasing now but, with so many bonds redeeming, this must be expected.
It is hard to see what else the FSA really could have done at the time. There are lots of reviews going on -pension transfers, free-standing AVCs, endowments, splits, etc – which have stretched their resources.
Haynes: No, I think the FSA could have provided more guidance and direction in the way that these plans were constructed and marketed and on the quality of product literature. The regulator needs to be much more proactive in addressing potential future misselling problems as opposed to providing retrospective guidance based on hindsight.
I believe they are piloting a scheme to develop a product risk framework that will match financial promotion requirements to the inherent risk of a product and this is a welcome move.
Dalby: Distributors decide what products they should be promoting to clients and, particularly in the case of IFA distributors, it seems reasonable to me that the regulator and consumers should expect IFAs to pay due regard to consumers' interests. In one sense, an after-the-event audit is useful, in that in identifies which distributors can be trusted to be let off the leash and which need intensive oversight.
Make no mistake, distributors can choose what they distribute and, on the whole, they should be trusted to exercise this choice. It is a shame that some distributors threw caution to the wind.
The FSA has finalised its rules for past performance, preventing firms from cherrypicking favourable time periods when displaying performance data. What do you think could be the impact for fund managers, many of which have based their marketing – and brands – on past performance?
Whitbread: Using past performance as a marketing tool can be very misleading at the best of times as it has such a strong influence on investors.
If you believe the FSA, then past performance is not a reliable guide to the future but clients think it is the only indicator they have. The answer, I believe, lies somewhere in the middle. It can demonstrate whether a management team have been able to outperform their benchmark index over a longer period of time and such a relative measure is certainly a helpful indicator to new investors.
Haynes: It will certainly have an impact upon those groups which use salacious advertising of short-term performance to market their funds. These rules are to be welcomed and will hopefully encourage investors and advisers to dig deeper than compelling past returns in making their fund selection.
I have been amazed that the recent stockmarket rally has led to groups focusing on one-year returns produced by funds with long track records. Indeed, I saw one group highlight their US fund's 19 per cent performance over one year. The fact that it had only produced 2 per cent in five years was hidden in the small print.
Dalby: The impact could be very positive, in that it promotes the idea of consistency of performance over a long period. This has to be in the best interests of all concerned. But, no doubt, fund group marketers will find that it hampers their attempts to promote a flavour of the month fund whose performance may have come over a very short isolated period.
ABN Amro is launching its European direct access notes into the UK in a move that it says will allow IFAs to buy companies' original issue bonds for the first time. Do you think there is a market for the notes or will the inherent risks associated with individual bonds deter both IFAs and investors?
Whitbread: As most IFAs are remunerated by commission, it would be vital before assessing the market to find out what commission payments, if any, were attached. If there is none, then it would only be fee-based IFAs or those who manage discretionary monies that would be interested and these are in the minority.
If commission is generated, that would raise a different problem altogether as perhaps they would be sold regardless of whether the adviser understood the product or not. My opinion is that to assess credit fully you need considerable relevant experience and training, the sort of which most IFAs do not have. The minority may be able to incorporate these products successfully into their sales processes but others will struggle.
Haynes: I believe that these innovative products, which for the first time provide a truly direct fixed-income product to individual investors in Europe, will prove to be a very specialist market.
I do not believe they will be widely utilised by IFAs and private investors, who do not have the research capabilities to assess the merits and risks of the products. The majority of investors and advisers, will continue to seek the managed route to fixed income through collective funds and this is certainly the route I will continue to favour.
Dalby: I cannot imagine IFAs will register much more than a vague interest in European direct access notes. There are a number of reasons for this, including the lack of diversification, the plethora of corporate bond funds already available and the relative inexperience of IFAs as credit analysts. However, the notes may have a place in discretionary portfolios.
According to research by Hargreaves Lansdown, investors making monthly contributions have fared significantly better over the past three years than those who have invested a lump sum. Despite this, most fund managers say lump sum investors continue to constitute the bulk of their client bases. Do you see this changing? Do you think the public generally remains under the impression that investing is the sole preserve of wealthy?
Whitbread: During bear market phases, pound-cost averaging works best. It is there-fore no surprise that the last few years have been good for regular savers. There are, however, a few snags. Private investors like to buy when markets are rising.
When markets are falling, we get lots of calls from clients asking if they should stop their regular savings at just the time that they should be continuing with them. Many clients do not call us, they just stop the direct debit and lose the benefit of buying through the trough.
As for the preserve of the wealthy, I am not so sure about this. Most clients know there are flexible low-cost products out there to allow them to invest on a monthly basis and using relatively small amounts of money.
With levels of debt so high, many clients are reluctant to save until they have cleared their debts. Couple this with them wanting to invest on the back of good performance and it is not a surprise that few have taken up the regular saving habit in recent years – at the time that they really should have been doing so for best long-term effect.
I believe that far greater education is needed to change things fundamentally. Most people do not have a clue about personal finance.
Haynes: I would not place much emphasis on the significance of this research due to the selective time period used. The results are hardly surprising at a time when the first two years of the market were falling. However, I agree that regular savings have a valuable part to play in investment planning due to the benefits of pound-cost averaging.
That said, I feel that lump sum investing will continue to make up the majority of investments as the private investors nature is to invest a lump as and when they have funds available. Compared to the US, I believe that the UK public's perception is that investing is the sole preserve of the wealthy and the stockmarket falls since 2000 have done little to encourage a wider investment base.
Dalby: Market movements over recent years have benefited regular savers over lump sum investors and this had been one of the positive impacts of the bear market. It provides a positive platform for driving the regular savings message and I think people are becoming interested.
Over time, I do see the number of regular savers relative to lump sum investors increasing. There is a growing recognition of the need to save more, and, for most in their early years through to middle age, this means salting some money away each month.
After a 2003 dominated by sales of equity income and corporate bond funds, do you think other sectors will come to the fore during 2004? If so, which do you think could topple the above off their perch? Are investors – and in some cases IFAs – still too slow to consider less popular sectors?
Whitbread: I believe that private investors are driven by past performance. This accounts for their demand for equity income, corporate bond and property funds in recent years. It will be interesting to see what the impact of the good one-year figures for the more aggressive funds will be in 2004.
We have already noticed a lot of clients interested in getting exposure to China but they are not investing large sums generally. Until other sectors start to top the charts, the equity income and corporate bond areas will remain very popular.
Haynes: As a number of leading providers are pushing distribution funds, we will see the cautious managed sector do well this year. However, I think equity income will remain a very popular area for 2004. In a low-inflation, low-growth environment, dividends have an important part to play and this area of the equity market is provides a good core exposure for income and growth investors.
I imagine that the recovery of equities and a rising interest rate cycle will lead to corporate bonds proving much less popular than last year and I would expect to see a renewed appetite to risk lead to more growth related sectors returning to favour.
Dalby: Equity income and corporate bond funds will continue to be among the top-selling sectors but I expect the managed sectors to be popular this year because they are typically where distribution and multi-manager funds are located, both of which seem to have gained a reasonable foothold.
I think that some lessons have been learnt by the rise and subsequent fall of technology fund values and investors are looking for more reliable, if unexciting, returns.
Sue Whitbread, director, Chartwell Investment
Gavin Haynes, investment director, Whitechurch Securities,
James Dalby, head of investment strategy, Bates Investment