Abbey’s decision to bring the management of its £1.3 billion flagship UK Growth fund back in-house has thrown the spotlight on the practice of financial groups farming out the running of certain funds.
Has outsourcing worked for the groups that have tried it, or has it proved to be no more than an exercise in buck-passing, with few tangible benefits for investors?
Abbey’s experience has been mixed. In 2001, after a long spell of poor performance, it took the radical step of handing over all its funds to outside managers.
But while the medicine has worked tolerably well for some funds, it has definitely not proved effective for others. The Abbey UK Growth fund, which had a poor track record before outsourcing, has continued to be a consistent underperformer, with below-average returns in each of the past five years and now stands a lowly 213th out of 243 funds in its sector.
The £300 million Abbey Equity Income fund has done almost as badly, with only one year of the past five producing above-average returns, placing it 53rd out of the 70 funds in its sector.
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Both funds will now be managed in-house. The newer multimanager funds have done slightly better and will continue to be run outside, but even they have underperformed their peers.
Investec has also experienced mixed fortunes with outsourcing. Though most of its funds are managed in-house, it farmed out one European fund and one US fund – with very different results.
In April 2000, the European fund was outsourced to Albert Morillo, of Black Rock, who came armed with a tremendous track record but whose performance for Investec proved pretty dismal. Over the five years to January 1 this year Mr Morillo’s fund returned only 33.9 per cent, putting it 64th out of the 67 funds in its sector.
Investec finally tired of this poor showing and handed the fund to a pair of in-house managers at the start of this year.
However, its other venture into outsourcing has proved a resounding success. Its American fund, run by Thornburg and based in Santa Fe, New Mexico, has generated very good returns, putting it ninth out of 86 funds over one year and eleventh out of 78 over three.
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Justin Modray, of Bestinvest, the independent financial adviser, says that outsourcing tends to follow one of two patterns. “Either the fund group does what Investec did and hands over to managers with strong views and leaves them a fairly free rein, or it does what Abbey did and keeps the managers on a pretty tight mandate.
“A free rein can either work very well or very badly, as Investec has demonstrated.
“But handing managers a restricted mandate rarely seems to produce good results as it stifles any initiative they may have. All too often they end up doing little more than track the index, as happened with Abbey and Nationwide, which farmed out the management of its UK Growth fund.”
GAM, which has farmed out more than half a dozen funds, is perhaps the fund group with the biggest commitment to outsourcing. A spokeswoman says: “Part of Gilbert de Botton’s philosophy when he set up GAM in 1983 was that it was not possible to have all the best fund managers working for one company. So to be able to offer clients access to the world’s best investment talent, it was necessary to outsource.”
Several successful managers with other houses were persuaded to run GAM-branded funds. The first in the field was Nils Taube, of Taube Hodson Stonex. Mr Taube and his firm have been running the GAM Star Worldwide Equity fund since 1983. More recently GAM hired SVG Advisers, the private equity specialists, to run the GAM SVG UK Focus fund.
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Both have performed well. The Worldwide Equity fund has returned 212 per cent over ten years, putting it second of the 33 funds in its sector. The UK Focus fund has produced a return of 73 per cent since its launch in November 2003, placing it 128 out of 302 funds.
However, this performance has been more than matched by some of GAM’s home-grown stars.
Andrew Green, who runs GAM’s UK Diversified fund, has produced a return of 362 per cent over the past ten years, putting him at the top of the 144 funds in his sector. Gordon Grender, who runs GAM North American Growth, has returned 163 per cent over the same period, ranking him second out of 48.
Mick Gilligan, of Killik & Co, the stockbroker, says: “Outsourcing may seem like a logical step, because no fund group can be good at everything However, it is surprising how few groups have made a real success of it in practice. One of the rare ones that has is GAM. From the start it worked out where it was strong and where it was weaker. In areas of strength it kept funds in-house, while in weaker areas it was happy to outsource.
“Outsourcing works best where fund groups select the best managers in a particular sector and then let them get on with it.
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“A classic example of this is Marlborough Fund Managers, which picked Giles Hargreave to run its Special Situations fund and has been rewarded with outstanding long-term performance.”