Multimanager funds invest in other funds to achieve their overall asset-allocation mix and can be either fettered – able to invest only with in-house managers, or unrestricted – can invest with any manager across the market.
Funds of passive funds had the lowest fees at 0.37%
With unrestricted fund selection choices, they should be able to deliver better returns for investors. However, investments in external managers also bring extra costs that need to be covered before there is a net benefit to investors.
Morningstar fund analysts have investigated how much extra costs unrestricted multimanager funds show on their clean share classes compared with fettered funds of funds, funds of passives, and directly invested multi-asset funds that achieve their overall asset-allocation mix by investing directly in stocks, bond and alternatives.
We have also looked at returns over the past 12 months and over five years annualised to the end of October 2017 from these different approaches to building a multi-asset product to see whether the performance generated from unrestricted fund selection adds value over the extra costs.
We have carried out research on all of the funds that sat in both the GBP Moderate Allocation Morningstar Category and the IA Mixed Investment 20-60% shares sector at the end of October 2017.
Funds of passives had the lowest fees at 0.37%. Directly invested funds had the next lowest fees at 0.8% but not significantly lower than fettered multimanager funds at 0.88%. Unrestricted multimanager funds had significantly higher charges of 1.48% on average.
Added Value from Fund Selection?
Unrestricted multimanager funds appear to add some value from fund selection, but not enough on average to cover their extra layer of fees. This can be seen by a comparison with fettered funds of funds.
Both have delivered an annualised return of 7.6% net of fees over the past five years, so the extra gross returns that have been achieved by unrestricted multimanager funds have, on average, been wiped out by the 60 basis points in higher fees. Over the past 12 months, gross returns have been very similar, so unrestricted multimanager funds have lagged fettered offerings on average.
Added Value from Security Selection?
The performance of fettered multimanager funds was not very different from multi-asset funds that invest directly in securities, with respective five-year annualised returns of 7.6% and 7.9%. That makes sense because the difference in charges is not material, reflecting the convention of not double charging on the management fee when investing with in-house managers.
However, there may still be small additional administrative charges, which would explain the minor difference in charges in favour of directly invested multi-asset funds and also in the narrow performance differential of 0.3%.
The performance of fettered multimanager funds was also not significantly different from funds of passives over the past five years annualised; 7.6% versus 7.7%, but again on the wrong side; although performance has been better recently.
With little difference over the long term between the performance of fettered multimanager funds – that, for the most part, don’t charge for in-house manager selection – directly invested multi-asset funds, and funds of passives, the indication here is that the added value from security selection has only just outweighed the higher charges of directly invested
multi-asset funds versus funds of passives over the past five years, and fallen slightly short in the case of fettered multimanager offerings, but the differences in net performance are not significant enough to draw a firm conclusion.
Strong Performance from Top Rated Funds
With the move to clean share classes, charges paid by investors for multimanager funds have come down. However, they have come down across the market place, and the differential between unrestricted multimanager funds versus fettered and directly invested multi-asset funds remains.
The hurdle to reducing this differential is that the extra layer of fees associated with external managers will always give a higher overall ongoing charge. Is there a role for unrestricted multimanager funds then?
It should be emphasised that there are exceptions to their general underperformance after fees. For example, Premier Multi-Asset Distribution and Premier Multi-Asset Monthly Income, which have Morningstar Analyst Ratings of Bronze, had five-year annualised returns 9.7% and 9.0% to the end October 2017, respectively, outperforming the average fettered multimanager fund, directly invested multi-asset fund, and fund of passives. Choosing from a very wide opportunity set, including closed-end
funds, is a differentiator for Premier. F&C MM Navigator Moderate, which also has a Bronze rating, is another example of a fund with a long-term record of added value after fees – 9.1% annualised over the five years through October 2017. The managers of this fund are amongst the most experienced in multimanager investing within the United Kingdom, and they also draw from a wide opportunity set in products, although primarily open-ended.
