Spotlight on fund wastage

Investment funds need to create an interim management process so they do not lose value when switching to new investment managers or moving assets around, according to the managing director of Russell Investment Services, Greg Gilbert.

Speaking at the Russell Investment Summit in Melbourne, Gilbert questioned how much funds were losing when implementing new investment strategies or administration processes.

"Over time, we start to develop costs within a portfolio that effect return, and these aren't costs that show up as an explicit number, these are costs that show up as a reduction in the return of the portfolio," Gilbert said.

Management changes, rebalancing, structural changes were all costs that drag down the return of a particular fund without having them factored into the cost, Gilbert said.

Any multi manager fund, for example, that was switching one investment manager needs to create an interim management function to manage the affected part of the portfolio in between moving from the old fund manager to the new, Gilbert said.

"During that period of time in which you do a transition, there is a performance holiday, nobody is accountable for the performance of that portion of the fund as the manager is leaving and the new manager is coming in, and the motivations around the manager's trading in that process can leave a little to be desired," he said.

"The idea is that if you can coordinate the futures, and the currency, and the equity and fixed trades, and have somebody carry and steward the assets as it moves through their transition, you should see much better outcomes," Gilbert said.

Gilbert also suggested that rather than the funds management company delivering a client's cash to a fund manager and the fund manager executing the buying strategy, the company itself should buy the matching amount of shares and deliver them to the manager, reducing the impact on the fund.