Paul Stewart is the head of wrap funds and managing director of m Cubed Capital Unit Trusts.
As little as a year ago, wrap funds were all the rage. More recently, however, they have drawn criticism after certain "prominent" players made it known that they are going to be exiting this area of investment management. Confusion now abounds in a market place already running scared.
To generalise that the whole wrap funds industry is dying is somewhat premature and of great concern. The industry is imperfect, point taken, but if you follow this same logic, most of the financial services industry should also vanish for eternity.
Some of the regular complaints levelled against wrap funds are that the costs are excessive, performance reporting is not transparent and that the individuals managing the funds have "questionable" fund management experience.
Furthermore, the complications that capital gains tax (CGT) will bring to the industry when it is implemented in October 2001 are being used as the reason for converting wrap funds to fund of funds unit trusts. In reality, the decision for linked-product companies to exit probably has as much to do with the difficulty of administering CGT efficiently in the wrap fund, without the appropriate systems, than anything else.
Why has the wrap fund been singled out? Is it not possible that such a huge weight of expectation was placed on these funds (after the crash of 1998), that they were never going to be able to deliver on the unrealistic expectations the market demanded of them?
You need to remember what a wrap fund is and what its investment objectives are. Wraps are multi-manager portfolios, meaning a group of underlying unit trust funds are combined into a diversified, composite portfolio, managed by a professional fund manager. Wrap funds remove the necessity for the financial adviser to consistently pick winning funds (an impossible task), and thereby allow the adviser to focus on other complex issues associated with successful financial planning.
The resultant wrap portfolios are usually targeted at pre-determined risk levels, principally low, moderate or aggressive. Their main aim is therefore to achieve the financial planning goals of investors according to their assessed risk acceptance or aversion.
Long-term savers can enjoy a higher exposure to more aggressive and volatile portfolios, which will reward the investor with higher returns in the long term, being 10 years plus. More conservative investors should use the less volatile risk profiles to suit their shorter-term needs (three to 10 years), while the highly risk-averse investor can preserve capital in near cash portfolios.
The critical issue here is that risk and reward have a third vital dimension - time horizon. One cannot expect funds designed to assume higher risk and, hence, volatility to perform in the short run. Yet many people naively expected this miracle of investment from the wrap fund.
Certain wrap fund managers are providing the market place with more robust solutions for investors with very competitive costs. Performing quantitative fund analysis is easier and by controlling the mandates of the underlying funds, portfolio construction is facilitated. Secondly, by controlling the pricing in the underlying unit trust funds, investors are not exposed to excessive layering of fees.
It is vitally important that investors are aware that not all companies offering wrap funds are out to rip their clients off.
Certain providers offer substantially lower fee levels, with greater transparency than even the unit trust industry.
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