Multi-manager funds: Get the balance right

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The terms “multi-managers”, “managers of managers” and “funds of funds” are interchangeable names for a service that essentially controls volatility and reduces risk through a combination of different assets, managers and styles.

The term “multi-manager” means different things to different people and, even within the industry, people swap in and out of the three terms.depending on who you speak to. But one thing that is clear across the multi-manager market is that these products offer one of the few money-making areas left to fund management groups struggling amid uncertain stock markets.

Most fund management groups have at least one multi-management product on their shelves and enthusiasm for new products is still high. Gartmore and Frank Russell recently launched new products.

Mick Gilligan, Killik & Co’s associate director of fund research, says the concept behind multi-management is simple. “The idea is that by spreading investors’ money between different managers or different funds it will give it more diversification.”

The aim is to appeal to investors who have already learned to their cost how difficult it is to select good performers from the 2,000 funds on the market. Some of these are high risk, some low risk, some designed for capital growth and others to generate income.

A study by research company Cerulli Associates suggests that there are 512 operators worldwideglobal players in the multi-manager arena, with a prediction that this will grow to more than over 700 in the next two years. The corresponding asset base is forecast to increase from $500bn to $800bn, which Cerulli feels is conservative.

The two types of multi-manager products are fund of funds and manager of managers. Tand whilst here is a tendency among investors to see these as the same but fund of funds management comes from a retail background and manager of managers come from an institutional background. Although they are similar concepts, they are not offering the same things.

In essence, a FoF service is where the investmentsis in a selection of other funds. The FoF provider monitors the performance, replacing funds where appropriate. The providers charge for the selection,might adding perhapsanother 0.75 per cent or more to the annual charges you would pay foron the underlying funds.

A MoM fund is one in which individual experts are appointed to look after different parts of the portfolio. The provider appoints managers directly and therefore has total control over the asset allocation, the choice of managers and the investment style. The most sophisticated providers track every trade andin this way can monitor exactly what each manager is buying and selling.

Companies offering funds of funds include Credit Suisse, New Star, Fidelity, Henderson, Isis, Jupiter and Premier. Those offering managers of managers include Abbey National, Frank Russell and SEI Investments.

In the past, people have been scathing of multi-management because of double charging but, because a lot of institutional money is now flowing into these funds, it is increasingly possible for retail managers to negotiate lower costs.

“Research suggests that asset allocation and style account for the greater part of investment return but, for many investors, the most difficult issue is where to place their core holdings,” says Ian Jefferies, head of investment marketing at Friends Provident.

He says multi-manager funds are a good place to start because the underlying funds are chosen to provide a spread of investment styles. “Within a multi-manager fund you can diversify over the range of asset classes,” he says.

However, the diversification they achieved by choosing multi - manager funds comes at a price because the use of an umbrella structure with a main fund and a group of sub-funds adds an extra layer of costs. The total expense ratio (TER) of FoFfof tends to be 1 per cent higher than that of an average actively managed unit trust.

Balanced managed funds, often called asset allocation funds in the US, can also be used as an asset diversification tool. They invest in a range of assets, including property, cash, bonds and equities.

Balanced managed funds are cheaper than multi-manager funds because there are no charges levied by sub-funds but they are more expensive than trackers and their performance is affected by the mix of assets involved and the expertise of managers.

Another option for a balanced portfolio could be to use index trackers which have grown enormously in popularity since they appeared in the UK in the early 1990s.

Using trackers rather than active funds has several advantages. For one thing, trackers are significantly cheaper. They don’t usually charge an initial fee and annual management charges are typically 0.5 per cent. Actively managed funds, by contrast, usually charge 5 per cent up front and 1.5 per cent a year.

It is also very hard to find active funds that can be relied on to beat trackers over an investing horizon of five years or more.

There is also evidence that tracker funds are less risky over the medium to long-term because they are less volatile than actively managed funds which promise greater returns by taking bets on riskier shares.

This means that tracker funds may deliver less spectacular returns over a given period than actively managed funds that pick the right stocks but they will avoid the big losses that accrue to funds that pick the wrong ones. This is a significant issue for investors’ core holdings.

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