Fund managers will have to learn to manage

IT must be a considerable comfort to global fund management group Amvescap that while it continues to battle with regulators in the US over alleged timing irregularities in the mutual fund market, at least profits are on the mend.

Markets have improved in the past 15 months. Sales of financial products, if not exactly buoyant, are at least off the floor and the firm that trades as Invesco and owns Perpetual in the UK is enjoying the effects.

The share price will continue to suffer, though, as long as Amvescap has New York District Attorney Eliot Spitzer and the Securities and Exchange Commission fighting over how much it should pay and who should be fired as a result of the market timing allegations made against the firm in the US.

It is a difficult negotiation because, as has been obvious in other cases, both Spitzer and the SEC want to get the credit, so they argue with each other as much as with the firm under investigation.

As a rule of thumb, however, there is a trade-off between the size of the fine and the number of heads that have to roll, which means that when a settlement is reached either a hefty fine comes out of shareholder funds or the management ranks are significantly depleted. Hence the uncertainty and the still-languishing shares - but when it clears they should bounce.

In many ways, though, that is the least of the group's problems in that it is easy to see how it will be resolved. The other problems facing the fund management industry - not just Amvescap - are in many ways more intractable. The optimists say fund management is in transition, but it currently appears only to be in turmoil.

There are so many problems. First, but in no particular order, the nature of the relationship between clients and fund managers is changing. In part, this means clients will sue if they feel let down; in part it means they want different styles of fund management with greater apparent professionalism and specialisation.

Above both, they are no longer prepared to allow the industry to define success as an ability to lose money more slowly than the next man. Clients want genuine absolute performance, not statistical sleight of hand. So they are turning away from the traditional industry leaders in a search - probably illusory - for something better.

At the same time, the industry is polarising. Most middle-sized firms continue to struggle with their costs and lose their brightest and best to hedge funds. So the industry fragments, with a proliferation of small managers with low overheads putting the squeeze on those in the middle who in turn wait in hope for giants like Amvescap to come along and buy them. But Amvescap and the others are in no hurry. Prices are still too high for what you get.

On top of this, the industry has to weather a regulatory onslaught. From Europe come harmonisation directives that have to be complied with, while at home the industry's financial relationships with brokers and clients are condemned for lack of transparency and for excessive cosiness. They may soon be prised open - with who knows what painful long-term results.

So, as Amvescap's figures bear witness, this may not be the best time to be in the fund management industry. But no one can claim it is dull.

French lesson

THE French government yesterday openly and unashamedly used its clout to pressure Aventis into accepting a bid from Sanofi with the specific intention of creating a French national champion in the pharmaceuticals business.

On the same day came a leak from a soon-to-be-published report from the British regulator Ofcom, which apparently considers the breaking up of British Telecom to bring more competition to the domestic phone market.

Nothing could more clearly illustrate the contrasting approaches of the two countries. The French see the world as a global market and want to create a French firm with the scale to compete in it. The British, despite all the talk of globalisation, think competition begins at home and seem willing to break up the few businesses that do have the scale to compete internationally.

The same thing is seen in financial services, where policy is time and again determined on the basis of an insular, narrow British perspective, which has the effect of fragmenting the UK market, weakening the UK players and making them less willing and able to compete in overseas markets. As a result, the City could in time become marginalised.

It may not suit market purists to acknowledge the point, but maybe the French have a better understanding of the world as it is and how to build businesses that can prosper in it in the longer term.

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