IT HASN’T been a great Isa season for the big fund managers. They did as they usually do in the first three months of the year: they rushed to offer tempting discounts on their upfront fees and put up ads everywhere they could find an empty bit of wall to alternately beg and bully us into buying their funds. But so far the evidence suggests it hasn’t done them much good.
The numbers for January and February were awful, with less than half the amount of cash flowing into equity Isas as last year. While the numbers for March aren’t out yet, it looks like they will be just as bad. So what’s going on? We keep hearing that the savings ratio in the UK is on the up, so why isn’t that being reflected in the Isa numbers?
I suspect it is the rising cost of living: if you think your mortgage payments, utility bills, council taxes and grocery bills are likely to keep rising (as they are) you are keen to increase the amount you have in your emergency deposit account, but perhaps not so keen to lock more money than you have to in long-term saving vehicles.
Why investors are disillusioned with the big-name funds
However, it may also have something to do with a higher level of disillusionment than usual when it comes to the performance of Isa funds.
Despite the fact that there are thousands of options, most of the money invested tends to go into big funds run by the heavily branded management companies and high-street banks. These often disappoint: I’ve been looking at the fund rankings from Moneyspider.com for 2006 and the results don’t make happy reading for some of the biggest names in the business.
Moneyspider’s system ranks 2000 UK funds from A (very good) to E (distinctly poor), with the grades taking into account each fund’s performance against its sector, all other funds, the FTSE 100 and cash over one, three and five years. It also ranks fund-management groups as a whole. Fidelity ended 2006 41st out of the 54 groups monitored, and the big high-street names — HSBC, Abbey, Halifax and Nat-West — came out even worse. Halifax was ranked 52nd and Abbey 53rd.
If you bought a fund for your Isa through any of them last year, just because you trusted in the power of their brands, should it be any wonder to the financial-services industry that this year you fancy a nice safe savings account instead?
Boutique funds are best performers
Now to the best performers in the league table. These are mainly boutique firms with fewer than 20 funds under management — the likes of Rathbone, St James’s Place and Neptune.
This would make sense to Jonathan Compton of Bedlam Asset Management (which doesn’t appear in the Moneyspider league table because it has fewer than 10 funds on the go).
When he set up Bedlam in 2002, Compton did so with the intention of keeping the company small and keeping his fund managers focused on stockpicking. He had worked out that the average fund manager at the big brand firms had about one hour a day spare to actually look at the fundamentals of specific stocks (in other words doing the bit we think we pay him for). Given that most of them have 100-odd stocks in their portfolios, it simply isn’t enough.
Compton believes the big firms also have so many managers they have no real stockpicking system or discipline left. He counted 100 different methods of choosing stocks at one of America’s big names alone. Add it all up and it’s a recipe for confusion and underperformance.
By contrast, at Bedlam there are six managers and each has a mere 25 stocks to manage based on a strict system. This only allows them to buy shares in firms that offer a free cashflow yield of at least 3% above the relevant risk-free interest rate, making them, in Compton’s words, “self-financing takeover plays” — you know you could borrow all the money to take them over and then pay it back out of cashflow.
This produces very concentrated portfolios backed by both strong opinion and intense analysis. That in itself is a good reason to like Bedlam, but I also approve of Compton’s insistence that the first aim of investing must be the preservation of capital and that all the managers disclose how much of their funds they own themselves.
I can’t say I agree with all of his economic opinions. Compton is convinced the commodity supercycle is over, for example, whereas I reckon it has only just begun. But if you have the strength to think about investing this year’s Isa allowance, I think you could do a lot worse than the Bedlam Global fund. It has heavy holdings in two of my favourite areas — gold and Japanese property — and a record of delivering regular absolute returns.
First published in The Sunday Times 15/5/07