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Smith on Funds: jury's out on team Schroder/S&P

The collaboration between Schroders and Standard & Poor’s on two new funds of funds will be interesting to watch but investors should keep hold of their money for the time being.

Schroder Investment Management is the latest group to unleash a multi-manager product on the retail market, with the added twist that it is to take research input directly from Standard & Poor’s Fund Research.

Schroders’ existing multi-manager team, headed by Andrew Yeadon, will run the Schroder S&P High Alpha and the Schroder S&P Strategic Balanced funds. S&P will supply a short-list of 200 target funds spread across 50 asset classes and Schroders will whittle this down to 12-15 funds for each portfolio.

The Schroder S&P High Alpha fund will look to outperform the average Active Managed unit trust by 3% per year after fees while the Schroder S&P Strategic Balanced fund will look to be 2% ahead of the Balanced Managed sector each year. The latter is a conversion of the Schroder Strategic fettered fund of funds and so starts with £40 million under management while the High Alpha fund has been seeded with a few million quid.

The High Alpha fund will invest 70%-100% in equities and up to 15% in bonds while the Strategic Balanced fund will have up to 85% in equities, up to 20% in bonds and up to 10% in cash.

The High Alpha fund will also take advantage of Ucits III legislation and invest up to 10% in alternative investments such as hedge funds, private equity and property. At launch it has exposure to Candover SVG Capital (previously the Schroder Ventures International investment trust) and the HSBC Global Absolute fund of hedge funds.

Schroders says back-testing shows that had both funds been around five years ago and delivered their returns consistently they would sit comfortably in the top quartile of their sectors. Yeadon says this is a key aim of the funds and helped determine the target returns.

The concentrated portfolios are there because, as Yeadon says, ‘we want to make sure every position counts’. Schroders will make all asset allocation decisions on the funds, with a very big underweight on the US (currently just 3%-5%). This is partly driven by tactical asset allocation but also from recognition that rival funds are typically light on US equities anyway.

Yeadon says he will not necessarily buy funds recommended by S&P as the group’s recommendations will almost exclusively be drawn from their existing rated funds. He adds that Schroders’ internal fund analysts will also add an extra layer of research to anything delivered by S&P.

The funds chosen so far include what Yeadon describes as ‘boutique funds with big group support’, such as Ajay Gambhir’s JPMF UK Dynamic, Mark Lyttleton’s Merrill Lynch UK Dynamic, Mike Felton’s Isis UK Prime and Richard Buxton’s Schroder UK Alpha Plus. Yeadon describes them as ‘genuinely unconstrained funds’.

Other holdings include Philip Wolstencroft’s Artemis Europe, Andrew Rose’s Schroder Tokyo, Odey Japan and Aberdeen International Asia Pacific.

Schroders’ deal with S&P does not add to the funds’ charges, which are set at a fairly standard level of 5.25% initial, 1.5% annual with anticipated total expense ratios of between 2.25% and 2.5%.

However, the group admits it represents ‘a significant percentage of the gross revenues on the product’. Although Schroders will not make the details public, it does suggest the fee to S&P is material, which in turn indicates it values S&P’s input highly and is not merely outsourcing the ‘commodity’ part of the funds analysis.

This partnership is an interesting one but only time will tell whether S&P’s input, or indeed Schroders’ own analysis with the big positions it takes in a few funds, will lead to notably better results than existing funds of funds. I would be tempted to wait and see rather than invest at this stage.

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