Photo left: Paul Wilcox (WAY Group)

Paul Wilcox, technical director and chairman of the WAY Group, explains the development of collective investments which led to the multi-manager fund and why its success should not be allowed to be its undoing.

"The concept of collective investment has been around for almost a century. Unit trust companies like M&G and Save & Prosper were pooling investor funds and investing with the benefits of economies of scale from the 1930s onwards. The principle of collecting together investors' moneys and then appointing a specialist stockpicker to run a large and effective fund of invested shares became very popular with the more sophisticated investing public. Instead of having an individual portfolio which needed regular attention, large amounts of administration, including the completion of annual tax returns, and the potential for regular tax liabilities every time profits were taken, investors could suddenly buy and enjoy owning a collective fund. The benefits were not limited simply to convenience or to putting off any tax liabilities. The primary benefits were the ability to achieve much greater diversification than would be possible with one's own limited portfolio and the opportunity to share in the rewards of employing a top class manager and his or her 24/7 team rather than simply your tired local stockbroker.

"In those early days investment tended to be limited to the UK market where many international companies were, in any case, listed. As exchange controls disappeared (as late as 1979 in the UK when Margaret Thatcher opened up the markets) it then became more conventional to have some exposure to overseas companies within your mainly-UK portfolio. It was in the ensuing decade, the 1980s, when overseas unit trusts really took off. Specialist funds based on various markets around the world, both large and small, managed by specialist managers who were often based in those geographical areas, flourished during this time. I recall funds investing specifically in Hong Kong, or Singapore and Malaysia becoming very popular. During this phase your local friendly stockbroker would have progressed to setting up client portfolios, mainly comprising a range of UK blue chip shares, supplemented by two or three holdings in specialist overseas unit trusts.

"In my own case as a Licensed Dealer in Securities, back in the dim and distant early eighties, I became manager of a range of third party insurance funds. In my view funds like these were in the vanguard of the Multi-Manager movement. Regulation then was not even a twinkle in the Government's eye and yet most of us were highly professional both in our motives for establishing such funds and in the way they were managed. It was an opportunity to set up a pooled fund of investors' money and then to invest and manage it across the world, utilising the combined skills of all the top specialist managers and funds available. Many of those early funds (subsequently dubbed "broker bond funds") were pretty effective for their unitholders. In those early days the life companies tended to be scrupulous in their vetting of the competencies of anyone wishing to set themselves up as managers of such funds. Generally anyone appointed was extremely talented and professional.

"Unfortunately the success of such funds was their undoing. They had generally turned in competitive performances during those early years and were attracting increasing amounts of money. Not only that, they gave advisers the opportunity to collect their clients' assets into a more easily managed format – one which offered not only a greater sense of corporate ownership but a regular management income deducted at source and paid over by the life company. Soon a number of commercially successful advisers, but with far less adequate skills and experience, were set up with these broker bond funds. To compensate for their lack of skill certain insurance companies invented ways for such managers to "milk" the system by indulging in historically priced switching – betting on certainties. Of course any such benefits were always at the expense of the other unitholders in those underlying funds who suffered the cost of such historic dealing. By this time the new Financial Services Act was in force and it was not long before broker bond funds were under the microscope.

"As one door closes another one generally opens. Whilst the broker bond saga was brewing the more purist investment industry, comprising the unit trust companies, was developing funds which were not invested in shares but instead across a range of other specialist unit trusts – the fund of funds unit trust was born. Initially such funds were only permitted to buy underlying funds on a charge-free basis in an attempt to avoid double-charging. Fortunately it was not long before rule changes were introduced into the administration of such trusts whereby fund of funds unit trusts were permitted to buy underlying funds at "best" rather than at cost. This was October 1991. Being the unit trust industry this development was seen as offering a more comprehensive means of accessing specialised markets rather than as a potential panacea for portfolio investors.

"For us portfolio-style managers, however, it offered an even more effective means of delivering collective portfolio management than was available from the old broker bond funds. The costs were lower and the potential tax savings were even greater. Firms like Old Mutual and what subsequently became Capita, started offering their unit trust administration structures to third parties who wished to manage their various clients portfolios on a more efficient, contemporary and effective basis. Firms like WAY have come in later offering even more specialised services whereby third party managers can access sophisticated financial planning structures underpinned with their own funds and/or fund management.

"Recent bear markets and the associated volatility within funds and markets have continued to highlight the benefits of Multi-Manager style investment in the hands of competent and independent managers. More recent changes in fund rules permitting greater mixing of asset classes has improved the scene even more, allowing the professional Multi-Manager to utilise all the important funds, managers, assets, asset classes and financial instruments to generate competitive returns with low volatility. We must not allow this success to be the undoing of the new breed of third party Multi-Managers just as we did with broker bond funds.

"In reality TCF dictates that we all manage our clients' assets in the most effective and fair manner possible. So long as Multi-Manager funds are established with very clear investment mandates and are managed appropriately by fully-qualified and top-class managers they will go from strength to strength."

- Ends -

 Link: Read/print/download the: WAY MA Growth Portfolio Fund Factsheet

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Press Release Date: 25th April 2008.

Please Note: The above commentary was first published on 10th April 2008 by Professional Adviser. Reproduced with kind permission.

Note: This commentary has been prepared for Financial