Where to invest a small ISA pot

With an objective of delivering top-notch performance by picking the best fund managers whatever the market conditions, multi-manager funds should have fared well in the volatile markets of the last three years.

But while the strategy worked well for some, it appears to have let others down completely.

This can be seen in performance figures from Lipper. For instance, the top-performing multi-manager fund in the balanced managed sector over three years to the end of 2009, the CF Miton Special Situations Portfolio, delivered a return of 18.9% against an average for the sector of -5.3%.

But, at the other end of the table, the worst-performing multi-manager fund in the sector, New Star Balanced Portfolio, was down 20.2%.

Why invest?

While it might hurt to be holding a losing fund, Richard Philbin, chief investment officer at Architas Multi-Manager, warns against focusing solely on performance when it comes to multi-manager funds.

"We want investors to view our funds as a long-term investment solution. They should feel confident that they're not being exposed to more volatility than they expected just because it delivers performance."
Certainly, reasons for holding multi-manager funds are broader than chasing performance. Martin Bamford, chartered financial planner at Informed Choice, says he would recommend multi-manager in a number of circumstances.

"If someone has a small amount to invest, a multi-manager fund can get them good diversification quickly.

"Likewise, where someone doesn't want to be actively involved in their investment decisions then multi-manager can take care of all of the asset allocation decisions for them," he explains.
Although Bamford prefers multi-manager for smaller investors, they can also be used within a larger portfolio. Philippa Gee, head of marketing and communications at investment house T. Bailey, says they can be used as core holdings.

"A larger investor could have multi-manager funds to get diversified exposure to markets and then invest in more specialist funds to get concentrated exposure to the areas they believe will perform strongly," she adds.

What's available?

There is plenty of choice on offer if you're looking for a multi-manager fund. According to the Investment Management Association (IMA), there are 369 multi-manager funds available in the UK.

These can be found mainly in the cautious, balanced and active managed sectors although other funds also sit in more targeted sectors such as UK equity income. Between them they have netted just short of £40 billion of investors' cash.
Although multi-manager allows you to access a range of assets, Bamford believes this approach is best suited to equities. "This is really where the most value can be added by picking different management styles and adjusting allocation to suit market conditions."
Squeezing out this value isn't so easy for other asset classes. For instance, in fixed interest there is much less choice available so fund managers, as well as multi-managers, can struggle to add value.

But this hasn't stopped management groups from exploring other multi-manager opportunities. For example, at the beginning of the year, T. Bailey launched a passive multi-manager fund, T. Bailey Growth Fund Lite.

Gee explains: "It has the same asset allocation as our growth fund, but rather than pick actively managed funds we'll pick trackers and exchange traded funds to make up the portfolio."

Double charges

Another interesting feature of the T. Bailey launch is that it puts a limit on the annual cost of investing by capping the total expense ratio (TER) at 0.99%. This addresses one of the main criticisms of the multi-manager approach: the double layer of charges.

Although multi-managers are able to secure significant discounts when investing in other funds, the TERs on these funds often nudge 2% a year. For example, the Architas MM Growth Portfolio has an annual management charge of 1.80% but other costs push the TER up to 2.01%.

While hefty charges can be a handicap to performance, Tim Cockerill, head of research at financial planning firm Rowan & Co, advises that investors don't get hung up on them. "If the performance is there, it's worth paying extra," he says.
Neither is it always necessary to pay over the odds. While T. Bailey is capping its passive multi-manager TER at 0.99%, you can access active management through multi-manager investment trust Witan, which has a TER of 0.70%.

Picking a performer

When it comes to picking a multi-manager fund, the huge number of funds available means that research is essential. Cockerill explains: "Multi-manager funds appeal to investors who want to let someone else make the decisions about where and with whom they should be investing.

"Ironically, the amount of choice that's available now means that you have to do as much homework picking a multi-manager as you did before they were available."

For starters, it's important to know where you're investing and the level of risk you'll face. Philbin says you need to look beyond the sector label in which the fund sits. "There can be huge variance in the portfolio make-up of multi-manager funds within a sector," he explains.

As an example, he points to the cautious managed sector. The IMA permits funds in this sector to have equity exposure of up to 60% and requires at least half of the portfolio to be in sterling or euro.

"You could argue that 60% equity exposure isn't particularly cautious to start with, but what if this includes a large chunk of emerging markets or technology? Is it still cautious?"
Philbin adds: "I've seen research from Distribution Technology, using its system to rate funds from one to 10 according to risk, where funds in the cautious managed sector varied from three to eight.

"Because of this, make sure you have a good look at the portfolio before you select a fund."
Once you've found a portfolio that suits your investment objectives and appetite for risk, analysing performance will help you pick a winner.

"Look at the fund's performance against that of the benchmark. Most funds will outperform the benchmark at some point, but you want to see it pulling away and delivering that extra return," Cockerill explains.

This article was originally published in Money Observer - Moneywise's sister publication - in March 2010

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