1st September 2010

CGT dilemma for those not keen on multi-manager funds

IFA letter of the week

CGT dilemma for those not keen on multi-manager funds - By Jeremy Askew, Conduit Financial Solutions

Investment and financial planners often ignore multi-manager funds because they do not believe they offer value for money. Where the manager is providing real value it's hard to argue against them.

But there are strong arguments in favour of multi-manager funds and the Chancellor might just have added another in his June Emergency Budget.

Take absolute return investing as an example. The sector is a minefield. The available funds cover a multitude of different strategies all purporting to achieve the same thing. Unfortunately individual funds often correlate significantly with equities and each other.

A multi-manager approach can work very well in this sector. It is possible to have a globally invested, multi-asset fund with zero FTSE correlation and positive returns that are produced regardless of market direction.

But multi-managers have also received a boost from HM Government in the form of an increase in the headline rate of Capital Gains Tax (CGT). How so?

There are many investment portfolios that are not held in a tax efficient wrapper for any number of reasons - ease of access, to avoid highly personalised rules, because assets are held in trusts.

Going forward gains in these types of portfolios may well be subjected to the higher rate of CGT. Gains are often generated to bank profits, rebalance portfolios or to reflect changed circumstances. i.e. they are tactically desirable and necessary.

So what to do? Make fewer disposals in the hope of paying less tax?

You might, for example, be selecting a few different absolute return funds for client portfolios. It makes sense to invest in a range of assets and strategies - it avoids betting on the nose.

A well thought out multi-manager absolute return fund could provide the same benefits but with greater tax efficiency - changes to the multi-manager portfolio do not create taxable gains.

The net result? A happier client with improved investment returns.

Adviser Letter of the Week