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.