The seemingly obscure academic debate about whether markets are efficient – or not – really does matter enormously to private investors. It forces a choice between one of two approaches to building a sensible portfolio. If you think that markets are largely/mostly inefficient, then you should spend your time researching those price inefficiencies or find a gaggle of fund managers with the skill to do so (good luck!). If you think they’re always/largely efficient, then that’s a pointless task and you should mostly opt for simple index-tracking funds – in particular, exchange-traded funds (ETFs) and cheap unit trust trackers from the likes of Vanguard, Fidelity and latterly HSBC.
Luckily, if you decide on the former course – active fund managers – and you want a diversified collection of managers in one fund, there are plenty of “off-the-shelf” multi-manager funds available, such as Skandia’s ‘best ideas’ offering.
However, the same option for those who believe in efficient markets – an “off-the-shelf” diversified, multi-asset ETF or index fund portfolio – is not as widely available.
In my view, a successful multi-index tracking/ETF fund of funds needs to incorporate a number of simple ideas.
First and foremost, it has got to be cheap. As you’re not paying for all those expensive active fund managers, the savings should flow back to the customer. Crucially, as most ETFs charge between 0.2 per cent and 0.6 per cent a year in total expense ratios (TERs), I don’t think it is reasonable to charge more than another 50 to 75 basis points for the asset allocation element. That implies a TER of between 1 per cent and 1.25 per cent at most, but preferably less.
It also has to be easy to access for mere mortals who use wrap platforms. John Redwood, the former Tory minister, is pioneering multi-ETF investing through his outfit, Evercore Pan Asset Management. But its only for the wealthy and it’s not available on private investor platforms such as Cofunds. There are a number of upstarts touring the City with a similar idea but, at the moment, your choice is effectively restricted to two managers: Frontier Capital Management and 7IM.
A multi-index fund must be simple, too. If you are going to allocate money across a range of indices and markets, I want the decision to move in and out of different markets and assets to be transparent and open – not based on some magic juju voodoo that the manager calls on based on a communion with their Bloomberg screen. If there’s an asset allocation committee, I want to see the argument and understand why the decision was made.
Last, I’d like the managers to be adventurous and willing to include alternative assets. That may even include hedge funds but should certainly include emerging markets and commodities.
The best-known player that ticks most of these boxes is 7IM, with its Asset Allocated Passive funds. Crucially, though, the TERs for these funds (according to Lipper) is still a bit too high for my liking at 1.48-1.59 per cent a year. 7IM states that it will try and lower the fees as the funds grow, but thay are still above my desired level.
The other main competitor is Frontier Capital Management with its recently launched onshore MAP funds. These rebalance their holdings only annually, giving a TER of about 1.15 per cent.
I like both 7IM and Frontier but neither are quite there in terms of really low cost and absolute transparency. What I want is something with a TER of less than 1 per cent a year, easy access through a listed vehicle and an independent asset allocation process.
If I was based in the US, I’d get virtually all of this with the burgeoning number of multi-asset ETFs provided by the likes of TD Waterhouse and iShares. Sadly, iShares has yet to launch this family of ETFs in the UK – surely an opportunity for a competitor to move in before the BlackRock-owned group gets its act together.
adventurous@ft.com
