Cherry Reynard considers ISA schemes designed for savers who want a fully managed investment portfolio

From Wall Street bankers to the judges on Strictly Come Dancing, it has become fashionable to mistrust experts. Investment management is not immune either, with many investors feeling that the people to whom they have entrusted their money have not negotiated turbulent markets with sufficient skill.

Incidents such as the Bernard Madoff scandal have left some experts looking at best credulous and at worst negligent. For other investors, the credit crunch will simply have exposed the complexities of the financial markets.

The past year has seen all major asset classes tumble in value and will have left even the hardiest self-directed investor feeling out of their depth as the traditional rules of investing are seemingly rewritten.

The top of the market
For this group, expert help remains invaluable – so what are the options for this year’s ISA season for would-be investors who would rather delegate their fund selection?

There are a number of different ways in which investors can take advantage of expert management. At the top end, there are discretionary managers. These deal in larger portfolios and many will only consider investors with £100,000 or more in investable assets – though this can be spread across pensions and combined ISA and PEP portfolios, and some are willing to offer a funds-only portfolio for a lower minimum investment level.

So, therefore, some seasoned ISA and PEP investors with sizeable tax-free portfolios may well qualify for their services. In practice, what the term ‘discretionary management’actually means can vary considerably.

At one end of the scale is the traditional private client wealth management approach, where a bespoke portfolio is created for every client.

This is likely to be invested in direct equity with a few collectives for specialist areas. Rensburg Sheppards, for example, uses direct equities for the core of its clients’ discretionary portfolios, consisting largely of FTSE 100 stocks. It will then use collectives for UK smaller companies and overseas equities.

These portfolios are sufficiently specialist to take account of things such as an investor’s profession, existing investments and likely inheritance.

With discretion
At the other end of the scale are the ‘mass market’ discretionary services, which have a lower entry level (which can be as low as £50,000 in some cases). Each investor will be slotted into one of a number of asset allocation models according to their time horizons and risk tolerance. Many stockbrokers and advisers will offer both services.

For example, Killik & Co offers discretionary services, which start at £100,000, but clients can access its fund of funds services for much less. Lee Smythe, director of financial planning at Killik & Co, says people who have invested regularly in PEPs and then ISAs will often have built up more than £100,000 in their portfolios and tend to use the full discretionary service.

In all cases, the discretionary manager will undertake a full financial planning process. He will usually be running an investor’s entire portfolio and will then apportion it between the different tax wrappers, including ISAs and pensions. Some, such as Truestone, will ensure the best assets are allocated to the tax-free environment.

‘We use ISAs to access the fixedincome element of a portfolio,’ says Simon Bullock, client director at the group. ‘Anything that is growth oriented tends to sit outside the ISA and we would look to use the investor’s capital gains tax allowance each year.’

Bullock believes that this strategy may work particularly well for clients in 2009 as corporate bonds look attractively valued.They certainly remain an important source of potential income as other areas dry up due to interest rate cuts.

The bigger picture
Henry Shires, senior investment director at Rensburg Sheppards, says the group’s service ensures that taxable investments are moved across consistently to fill the ISA allowance each year so clients don’t have to move in new money.

‘This gives us a much better focus on risk rather than trying to manage each ISA individually,’ he explains. ‘If you don’t look at the whole picture, you may have one manager selling holdings on the same day that another is trying to buy those same holdings.’

Back at Killik, Smythe says, ‘Our discretionary service is for investors who want to take advantage of the ISA allowance and make equity investments, but don’t need to know what we’re doing.’

These services are not a solution for one year’s ISA allowance, but instead represent a way to consolidate all your investments, including pensions, in one place and have them managed as a whole. property, into their standard portfolios.

‘Multi-manager is a good choice if you don’t have that much to invest as minimum levels usually start at £1,000 per fund,’ says Danny Cox, head of financial advice at Hargreaves Lansdown.

‘It is also a good way to get better managers into an ISA. In discretionary portfolios, the risk tolerance is set by the client, whereas risk parameters are applied externally in a multi-manager portfolio. This means that the risk profile of a multi-manager fund can change quite considerably over time.’

The standard multi-manager portfolios that sit in the Cautious and Balanced Managed sectors will tend to differentiate themselves both on performance and on asset allocation.

Some multi-managers believe fund selection is key and that taking large positions in, say, Japan or Europe introduces too much volatility. Others, such as Jupiter or New Star now have more versatile, conviction-based portfolios, Performance data is harder to access in this area as portfolios are often managed to bespoke benchmarks.

The indices provided by APCIMS – the Association of Private Client Investment Managers and Stockbrokers – used to be the industry standard, but a number of alternatives are now used.

Those who run discretionary portfolios using asset allocation models should be able to provide performance data. Multi-manager option For those looking for a much lower entry level, multi-manager funds are available through advisers, brokers and fund supermarkets.

Although multi-manager is a well-established concept, more options have opened up to investors over the past few years. Multimanagers have started to launch higheroctane and multi-asset portfolios and also to incorporate more sophisticated investments, including hedge funds, private equity and whereby the multi-managers will back their best ideas by taking significant positions against their chosen benchmark.

Cox says both approaches can work, but warns that investors should be aware of when a fund manager is taking these large tactical bets.

‘The tactical funds will get it very right sometimes and very wrong at other times,’ he adds. ‘Investors need to know what they are getting and not be led by past performance.’

Alternative approaches
A change in European legislation has meant that many multi-managers have started to use alternative investments in their portfolios and, as a result, a new breed of fund has emerged – the multi-asset fund.

These aim to offer a smoother return by investing in a diverse portfolio of different assets, which may blend traditional asset classes such as equities and bonds with property, hedge funds, commodities or private equity.

Many of the major fund management houses – for example, M&G, Fidelity,Newton and Aberdeen – have launched multi-asset funds recently. Most of these are structured as traditional multi-manager funds. In addition to standard unit trusts and OEICs,multi-asset funds will often access private equity or hedge funds through investment trusts.

They may aim to deliver an absolute rather than a relative return and will often be benchmarked against cash, but this is by no means universally true.

The Insight Diversified Target Return portfolio is benchmarked against cash, while the Fidelity Multi-Asset Strategic fund labels itself a cautious fund. However, these funds all aim to generate performance from actively switching between different asset classes – the Fidelity fund, for example, blends equities, bonds, cash, commodities and property.

Some will have the flexibility to take racier bets, possibly going to 100 per cent cash, while some only have the flexibility to go ten to 20 per cent above or below a benchmark weighting.

In the Fidelity Multi-Asset fund, manager Trevor Greetham held up to 50 per cent in equities at the start of 2008 against a benchmark weight of 35 per cent, but says he would never go to a zero or 100 per cent equity weighting.

Rob Fisher, head of UK retail marketing at Fidelity International, adds ‘The manager alters the balance based on his reading of the economy. He will look at growth indicators and decide on the right asset allocation. At the moment, he sees inflation falling and interest rate cuts, and believes we are entering an aggressive reflation phase.’

Coping with the volatility
Those funds that are benchmarked to cash usually have greater flexibility, but may also see higher volatility and, in the wrong hands, too much flexibility can certainly cause problems.

‘There was a big disparity in performance between multi-manager funds over 2008,’ says Rob Burdett, joint head of multi-manager at Thames River Capital. ‘A number of groups had just started investing in new areas and had relatively little experience in these asset classes compared with the longterm stalwarts of equities, bonds and cash.
Unfortunately, they did so in a year when correlation trends broke down. As a result, the diversity benefits they were looking for did not materialise.’

Taking one example, many accessed private equity and hedge funds through investment trusts, some of which moved to huge discounts during the year, and this had a significant impact on performance.

‘It has become more important than ever to know your manager and the portfolio.’ concludes Burdett.

Ultimately, the options for a managed portfolio will depend on the size of the potential investment and the extent to which an investor is willing to surrender autonomy. For those with large portfolios willing to hand over full asset allocation and fund selection responsibilities, discretionary management may be a solution.

For those who prefer to pick and mix, there is increasing choice in the multi-manager sector.