Do multi-manager funds justify their price?
If today’s shaky markets are making you nervous, you might feel like letting the experts take control of your investments. One option is the multi-manager fund - if you’re prepared to pay the charges. But with these extra costs, are these funds really worth it?
The ‘multi-manager’ label is actually an umbrella term covering two specific concepts - namely ‘fund of funds’ and ‘manager of managers’. In simple terms, a fund of funds is a collective investment fund that buys other funds. These can all be from the same investment house (a fettered fund) or from a variety of houses (unfettered).
Manager of manager funds don’t invest in established funds. They attempt to track down the best fund managers they can and sign them up to invest money for them under a separate mandate. However, this type of fund is not usually available to private investors, so the funds we are focusing on here are funds of funds, or multi-manager as they are sometimes called.
These funds offer access to a range of different asset classes and sectors, while risk profiles go from cautiously managed through to actively managed funds of funds, with investors able to get exposure to everything from bonds to emerging markets. Similarly, some funds will take a broader investment remit than others.
As a result, you need to take care when selecting a multi-manager fund and take into account a whole range of factors, not just performance.
Arriving on the scene
Multi-manager funds hit the UK investment scene back in the 1980s. They began largely as fettered funds, and it wasn’t until the mid-1990s that unfettered funds - taken from across the market – began to make their mark. In the last 10 years, the market in the UK has grown rapidly.
Net sales of unit trust and open-ended investment company (OEIC) funds of funds have ballooned from £712.2 million in 1998 to just under £3.5 billion in 2007, Investment Management Association figures show. At the end of last year, the amount of money being managed in these funds reached £34.3 billion. Today there are more than 300 multi-manager unit trusts and OEICs available here.
So, what does multi-manager offer? There are several main advantages to the multi-manager approach, the most notable perhaps being within different funds. This means that those with little to invest can get access to a huge range of companies and funds - fast.
Multi-manager funds have other merits than this diversification. Investors have an expert picking funds for them, someone who is constantly monitoring and managing the portfolio on their behalf, says Jason Hollands, head of group communications at F&C Investments. “The other thing that a multi-manager can clearly bring to the party is asset allocation decisions,” he says.
A further benefit is that the manager of a multi-manager fund can have a much closer relationship with the funds and fund managers they have invested in. On top of this, the multi-manager approach has tax advantages. For private investors, holding a portfolio of different unit trusts, for example, every time they sell one they are left with a potential capital gains tax (CGT) charge.
However, when sales are made within the multi-manager portfolio, through a unit trust or an OEIC, no CGT liability is created. It is only when the fund of funds itself is sold that any relevant CGT charge will bite.
Not all good news
The big bugbear with multi-manager is the cost - they are consistently more expensive than ordinary funds. This is because a multi-manager fund encompasses an extra layer of charges compared with the typical single-manager fund.
Philip Pearson, a partner at Southampton-based IFA P&P Invest, says funds of funds typically have an initial cost of anywhere between 0% and 5.5%, with annual management charges of between 1.5% and 2%. As a result, the typical total expense ratio (TER), which includes all annual costs, is generally about 0.6 to 0.8% higher than single-manager funds.
Based on figures from Morningstar, over the last five years the average fund of funds unit trust or OEIC has returned around £180.71 on a £100 investment. This compares with £186.33 for the average single-manager fund.
Martin Bamford, joint managing director of Surrey-based IFA firm Informed Choice, says that while charges are important they shouldn’t be the only consideration when making investment decisions. "Equally important is ensuring that the investor is putting their money into an appropriately diversified mix of funds and asset classes to suit their risk profile and long-term investment objectives," he says.
However, he too questions whether the multi-manager approach can consistently generate enough additional long-term returns to justify the charges, and he believes single-manager, multi-manager and tracker funds can all play a role in investor portfolios.
But Jason Britton, co-fund manager of fund of fund specialist T Bailey, argues the costs are justified. He says research suggests the chances of picking a fund that will make the top quartile of league tables over five to seven years are significantly higher if you pick a fund of funds rather than a single-manager fund.
With the credit crunch and housing market concerns making investment markets volatile, many experts argue that now is a particularly good time to consider multi-manager funds.
Philip Pearson says: "A multi-manager approach, investing across different asset classes within the fund, can significantly reduce investment risk, especially during periods of high volatility."
Light on their feet
These funds can also be “much lighter on their feet” and adept at meeting changing circumstances, argues Simon Pimblett, head of research and development at the wealth management firm Route Group. This is because the multi-manager is largely free of constraints on the amount of equity or cash that is to be held in a single-manager equity fund, for example.
“The theory is that the multi-manager has no such allegiances and no such ties,” Pimblett explains. “If he thinks equities or the Far East are not the places to be, he just dumps these completely and switches into something else on behalf of his clients.”
This diversification is what makes multi-manager appealing in times like these, and suitable for most investors.
So multi-manager and funds of funds are suitable for both the sophisticated and the less sophisticated investor - who wants to take a simple approach to achieving diversification - as they can get exposure to areas they may not have considered or feel they don’t have the expertise to invest in personally.
Investment experts suggest that many investors can use multi-manager funds as a core element of their investment portfolio, with more specialist investments built around the fund.
IFAs can help investors decide if multi-manager is right for them and, if so, which funds will be best. To find one near you, go to unbiased.co.uk or call 0800 085 3250. If you prefer to do your own research and know what you’re looking for, multi-manager funds can also be bought through the usual routes for buying single-manager funds, including fund supermarkets such as Interactive Investor and Fundsnetwork.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Investment funds that invest in other investment funds from a wide range of asset managers and are often referred to as funds of funds. Some multi-manager funds only invest in the funds of the investment house providing the fund of funds and these are known as “fettered”. An “unfettered” multi-manager fund is free to invest in what the fund manager believes are the top performing funds from across different markets and industries. Investing in multi-manager funds means your risks are spread across geographical regions and industry sectors but it also adds another layer of charges and some multi-managers also levy an out-performance fee.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.