What are multi-manager funds and are they right for you?
We go back-to-basics to help you decide whether these products are right for you.
What is a multi-manager fund?
Run by a professional manager, a multi-manager fund invests in a selection of other funds and fund managers with the aim of providing investors with a well-diversified portfolio. These funds can invest in shares, bonds or other securities.
Multi-manager funds market themselves as being a ‘one-stop-shop’ for investors.
James de Bunsen, who manages several such funds for Henderson Global Investors, explains: “You’re essentially outsourcing asset allocation and the selection of good quality fund managers.”
There are two kinds of multi-manager funds: fund-of-funds and manager-of-managers.
What’s the difference between the two?
A fund-of-funds portfolio holds a range of other funds run by specialist managers.
Manager-of-manger funds appoint a selection of specialist managers who make investment decisions in their area of expertise. This way the fund can invest across asset classes but still have specialists making decisions about where to invest. The role of the manger-of-managers is to select the managers and monitor their performance.
What’s so great about these funds?
According to Andy Tuck, director at investment management firm Walker Crips, multi-manager funds appeal to people with smaller amounts of money to invest who otherwise couldn’t afford to build a diverisfied portfolio.
By buying a multi-manager fund, you get an entire diversified portfolio in a single investment. You are also outsourcing all of the day-to-day management to an expert.
De Bunsen says: “The alternative is that you do it yourself. Most people have day jobs – they’re focusing on other things, so they don’t want to have to focus on the markets every day.”
You are also benefitting from economies of scale: your manager is essentially buying funds in bulk, so individual investors get discounts and access to funds that are not marketed directly to retail investors. Being part of the larger structure will also shield you from capital gains tax when individual funds are sold for a profit.
What’s the downside?
Multi-manager funds are not cheap as you are effectively paying two levels of charges. You can expect to pay charges of 1.5 per cent on average compared to 0.75 per cent for a typical actively managed equity fund.
Some funds are also “fettered”, meaning they invest almost exclusively in funds from their own investment house. Because no investment house is the best at everything – the premise upon which the entire concept of multi-manager funds was founded – De Bunsen says fettered funds tend to have “limited success”.
How do I choose a multi-manager fund?
According to the experts, there are a few things you should think about when researching a fund.
The first is the team of managers. Look at their track record, their background and how much experience they have.
Next, look at the performance of the fund itself. De Bunsen explains: “You should be comfortable with what the multi-managers are actually investing in. Do you understand what they’re doing and how they’ve made their returns in the past?”
Ben Yearsley from Charles Stanley Direct says comparing performance is only relevant if you can find a relevant benchmark. He suggests using the sector average as a starting point but says sometimes it will be best to compare a fund against two or three difference indices to see how it had performed and whether it is up to scratch.
Be aware of the cost, but remember that these do tend to be more expensive products. The important thing is to understand why you’re paying more.
“You effectively get a second layer of discretionary management,” Tuck says.
Less expensive funds will mean more passive investments or a more fettered product.
Tuck also recommends researching what kind of resources the fund has access to including the number of supporting analysts the fund group employs. The size of the fund is also important since economies of scale are one major selling point of this product.