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In this regular slot Ash Mehta provides an inside view of what’s happening in the City and how it affects you the private investor.


The fun-damentals of fund management

It’s no fun managing a portfolio through the market downturn.


In this month’s article Ash Mehta discusses the current difficulties for fund managers and what you can learn from them to help you manage your portfolio through the downturn.

This last month I’ve spent a great deal of time talking to fund managers prompted by the release of preliminary results at Northbridge, where I sit on the board as Finance Director.


We certainly pick our timing well. The day we held our interim results presentations last September turned out to be the day when the HBOS share price began to fluctuate wildly. I remember going into a number of meetings with fund managers who looked as white as sheets. There seemed to be a backdrop of fear as many of these hardened professionals had never seen anything like the market uncertainty that arose after the collapse of Lehman Brothers. Last month, our investor presentations for the preliminary results happened to coincide with the G20 protests. This time the mood was one less of fear but more of uncertainty. So,for a number of reasons it is not a fun time to be a fund manager.


Poor performance

If you’re anything like me in running your personal portfolio, you tend to look at your portfolio and talk about it more often when it’s doing well and less often when it’s doing poorly. Fund managers, of course, don’t have the option of sticking their heads in the sand as their fund’s performance data is usually published daily. With the market turmoil over the last year there are many funds which are in dire straits, especially those investing in small cap stocks. One fund manager told me that they were losing faith in AIM companies as a group and would start moving towards larger holdings in fewer stocks. This would save time in overseeing these investments but also enable the fund manager to have more influence on the management of the company when issues arose. Some fund managers were pleased that they hadn’t been lured into resources stocks or been attracted by the impossibly high yields of some banks.


Of course, with fund values falling, the percentage fees charged by the investment industry also reduce meaning that remuneration and bonuses tumble for the fund manager. Moreover, many funds have shrunk to a size where they are no longer viable. In fact some asset management firms, which have focussed primarily on the small cap sector, are in the situation where their whole business viability comes into doubt. In that situation it becomes harder to attract new funds and turn the situation around.


The end of the tax year

Fund managers like the onset of spring because every April brings with it an inflow of new cash as private investors rush to use their annual ISA allowances by 5th April. This year though, whilst the official statistics haven’t yet been released, the anecdotal evidence I have gathered is that there has been no such rush. Private investors have been holding on to their cash as a precaution against redundancy and, in some cases, being disillusioned after the bad press the City has received. The effect of this is that fund managers don’t get a bump up in funds managed (and fees charged) and have less new cash to invest in new holdings for a gain with which to offset losses on existing holdings. Infact, one fund manager told me he had had to sell a share with good potential (albeit at a profit) to invest further in an existing holding which needed a cash injection.



I remember going into a number of meetings with

fund managers who

looked as white as


Ash Mehta              


many funds have shrunk to a size where they are no longer viable

Budget VCT changes

Much was hoped for but little was expected from the budget and in that sense the budget didn’t disappoint. Eligibility criteria for VCTs have been tightened over recent years: for example eligible companies need to have no more than £7m in gross assets compared to £15m when VCTs were first launched. An easing in VCT rules could have very simply assisted entrepreneurial businesses in this difficult climate as well as brought some life back into the smaller companies market. Instead, the Chancellor merely announced some tweaking of the rules around time periods to invest. The end result is that there will be no mad rush amongst fund managers to launch new VCTs and no increase in their fee income.


Absentee landlords

As if those problems aren’t bad enough, the fund management industry has had one of its own turn on it. Lord Myners, who as Mr Paul Myners, started his City career as a fund manager at Rothschild and went on to become Chief Executive and Chairman of Gartmore, criticised fund managers for being “absentee landlords”. He urged them to get more involved in companies and act as owners to engage in issues such as board pay and corporate behaviour.


This is very laudable but, of course, it assumes that they know what the issues are; they have the skills and willingness to be able to assist; and finally that they get rewarded for being proactive. I suspect that, unless they portray themselves as activist shareholders, most fund managers would rather bale out of a stock quietly than expend effort trying to influence management. Lord Myners’ comments, if he sees them through into an initiative, could have profound consequences for the industry, not just from a corporate governance perspective but from a customer perspective. Eg. now that we recognise that banks are run not just for profit but for social stability, what do customers of fund managers expect in return, from a financial and social angle, for entrusting their hard-earned money to professional investors (more of my thoughts on that on that in a future article).


Relevance to private investors

So, what’s the relevance of this to private investors? The top tips resulting from my discussions from fund managers this month were;


1. Monitor your portfolio regularly

This could be by using specialist software, an Excel spreadsheet or just within your online broker website. Look at it regularly, perhaps record the value in a monthly schedule, and compare it to a suitable index eg. the AIM All Share. As management guru Peter Drucker once said, what isn’t measured isn’t managed.


2.  Get your asset allocations right (and that includes cash)

Private investors often consider a buy decision on a share-by-share basis. However, next time you reach a buy decision, before you execute take a look at your existing portfolio and ask yourself whether you are happy with your exposure to different sectors. It might just help you to not become overexposed on a certain sector. You might still buy that share but perhaps you ought to sell another share in the same sector. Also, how much of your portfolio should be cash at any given point. It would have been a brave person to have invested new monies into AIM in February of this year, but since then the FTSE AIM All share Index is up by over 17%; not a bad return for three months in a difficult market. Should you invest now to catch further upside or is it a dead cat bounce?


3. Set your time frame

For VCT fund managers this is critical as they have to invest new funds within two years. Decide what time frame you are investing over. Use that to determine the degree you are prepared to tough out market and price downturns and that may also then influence your stop loss levels. But always remember a long term hold isn’t the same as a short term hold that went wrong!


4. Engage with your investment

By that I don’t mean phone the company up for a general ramble or moan, but if you have specific questions then ask them and as I’ve said in previous articles go to the AGM and make yourself heard.


The final tip is that you should enjoy managing your portfolio; if you’re not it may be time to give it up….and of course be thankful that you’re not a fund manager in this environment. It really is no fun.






As if these problems aren't bad enough,

the fund management industry has had one of its own turn on it







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Ash Mehta is Chief Executive of Orchard Growth Partners which provides Finance Director consultancy services. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations or of Aimzine Ltd.



© Ash Mehta










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