Investment: The CAT standard finds a champion at last

If a camel is a horse designed by a committee, then the ISA has clearly come from the same stable
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The Independent Online
NOBODY SHOULD be surprised that ISAs, the Government's replacement for PEPs, have got off to a slow start. The division between Mini and Maxi ISAs, the different classes of qualifying investment, and different amounts you can invest this year and next, are all needlessly complicated.

Savers are a cautious bunch at the best of times; they hate nothing more than change. The shape of ISAs bears all the hallmarks of a messy bureaucratic compromise that was always going to take time to win acceptance. In fact, if a camel is a horse designed by a committee, then the ISA has clearly come from the same stable. But this is still very early days and there is no reason to believe that the tax-free wrapper at the heart of ISAs will prove any less enduring an attraction than it has done in the past.

More interesting, but equally predictable, has been the reluctance of the fund providers to embrace the Government's so-called CAT standards. These standards were designed to put some kind of quality stamp on funds that met the Government's pre-ordained limits on cost, accessibility and terms. If the idea was to force the fund management industry into embracing a new cost and operating structure, it can hardly be counted as a great success so far.

To date, of some 525 retail unit trusts and Oeics (open-ended investment companies) monitored by the consultants Fitzrovia International, only 29 have chosen to meet the CAT standards on all the main criteria. Of these 29, not surprisingly around half are tracker funds. By and large, although some unit trust groups have tentatively offered a token actively managed CAT standard fund, the majority have opted not to provide any CAT standard unit trust funds at all. (Investment trusts are not included in the figures.)

The industry's public line is that it is next to impossible to provide a serious actively managed fund within the cost parameters set by the Government. In reality, most firms have simply concluded that they are better served by waiting and seeing how the new market works out before abandoning what has been historically a hugely profitable segment of the market.

Undoubtedly, some fund managers could not make any money by providing actively managed funds within the cost constraints of a CAT standard. Others, including many with the strongest brand names, simply have no incentive to cut their fees until or unless it becomes clear that investors value low-cost funds sufficiently to switch to the cheaper alternatives.

One company, however, has stepped out of line with the industry and is making a bold bid to become known as the champion of the CAT standard cause. That company is Norwich Union, which is offering no fewer than seven different CAT standard funds, or nearly a quarter of the entire industry's offerings to date.

One of these funds is a tracker fund, but the other six are actively- managed funds. They include three UK funds (Equity, Growth and Equity Income) as well as a corporate bond fund, a balanced fund and even a European equity fund. All these funds have annual charges of 1 per cent or less, in line with CAT standards.

Norwich Union is not prepared to say how much money (if any) it expects to make out of these funds. In the short term, clearly, its move is a calculated attempt to try and secure a distinctive position as the low- cost provider within the retail fund management business. The economics of the business are such that anyone who does succeed in securing that position can legitimately aspire to achieve significant economies of scale as their funds under management build up.

But it is interesting that an insurance company has broken ranks in this way. The irony is that life insurance companies have been in the fund management business longer than anyone, yet their expertise has never seemed to be greatly valued, either internally or externally. The performance figures of most insurance companies has traditionally been pretty mediocre, even after allowing for their traditionally more cautious approach to risk.

Yet all the big insurers are, with varying degrees of expertise, remodelling their investment management operations in order to make them competitive with the banks and specialist fund management companies. In theory, the financial strength and long experience of an insurance company ought to be valued by investors. In practice, so low has the reputation of the insurance industry sunk, that association with an insurance company has been more of a negative than a positive factor.

However, Norwich Union is a professional and reputable outfit, and its bold assault on the CAT standard market, is to be welcomed. Anyone contemplating an equity-based investment in an ISA should at least look at what it has to offer. The Norwich Union active funds provide a new kind of benchmark for anyone who thinks there is merit in a low-cost actively managed approach. Over time you can be as sure as eggs is eggs that, because of their favourable cost structure, its CAT standard funds will come out in the top half of the performance figures.

Remember that in addition to the annual charges (where CAT funds are on average around 0.5 per cent a year cheaper), CAT standard funds also do not carry the drag of the bid/offer spread, which eats up an average of pounds 5-pounds 6 of every pounds 100 you invest. The combined effects of the management charge and the bid/offer spread means that over 10 years many conventional managed funds will need to do 2-3 per cent a year better than a CAT standard fund merely to eliminate their initial cost disadvantage. Most funds have next to no realistic chance of doing that.