While many investors are confident enough to pick their own diversified portfolios, others will prefer a one-stop-shop fund, outsourcing their investment and asset allocation decisions to the experts.
Some will happily delegate their decisions to their investment platform and park their cash in model portfolios, but there are other options: one of these is a multi-manager solution, also known as a fund of funds.
As the latter name suggests, these are collective, open-ended offerings, which invest in other open-ended funds.
BMO GAM, Jupiter and Schroders run some of the best known multi-manager options in the market and their ranges include a suite of different funds offering solutions for various types of risk profile. Jupiter’s Merlin range, for instance, has balanced, growth, income and conservative options, as well as a Worldwide Portfolio, which is an all-equity solution.
As a rule, fund of funds will invest across the asset spectrum, including alternative assets as well as equities and bonds. As a result, they can often appeal to less experienced investors, who don’t have the time or knowledge to do their own asset allocation, allowing them access to a diversified portfolio in a single fund.
David Holder, senior analyst at Morningstar, says multi-manager funds can be a good one-stop-shop, but it can be difficult to understand the overall asset mix within them. “I think for general investors, they’re a pretty good vehicle,” he says.
However, he does have one proviso – cost. A fund that invest in other funds come with multiple layers of costs: you pay a fee for the initial fund itself, which in turn pays costs for each of the funds it invests in.
“If you just sat on it for 25 years and each year they’re taking, say, 150 basis points out of you, that compounds enormously and it can be pretty painful,” Holder adds.
Funds do have the ability to negotiate fees downwards, meaning you may be able to access funds for a lower charge than if you invested directly yourself. Others, known as “fettered funds” will attempt to mitigate the fee drag by only investing in funds offered by their own house. However, this option narrows down clients’ investable universe hugely.
Holder says that some of the more cautious offerings will do this more as returns on conservative mandates are, inevitably, lower than more adventurous ones, meaning fees will take a larger chunk out of returns. However, adds Holder, if the fees are reasonable, you’ve got a good chance of getting a reasonable outcome over time.
Cherry Picking the Best
Unfettered multi-manager funds have other benefits in that they can “harness the skills of very talented and deep teams across the asset class”, explains Jupiter’s Amanda Siller; they can “cherry pick the very best”.
These vehicles can also give investors access to funds that may be unavailable to retail investors – or even to some investment platforms, notes Rob Burdett, co-head of multi-manager solutions at BMO GAM.
“There are many funds, which will never make it on to buy lists, that are available to people like ourselves,” he explains, giving examples of boutique houses Edgewood and Memnon, whose funds are held by his team.
Edgewood’s US Growth fund, which invests in just 24 companies, has thrashed what is widely seen as a difficult index to beat – the S&P 500 – over the long term and is only available to professional investors.
Memnon’s European fund, meanwhile, is soft-closed. Its largest investors are the fund managers; Burdett’s team is the second largest holder. “We’ve had a great time investing with those guys,” Burdett says.
Holder says this is an important distinction that can help to add value and go some way to justifying the extra layer of fees charged. It also brings in another consideration: manager experience, and their ability to identify lesser known funds.
“[Manager] experience counts for a lot,” says Holder. “To have seen these [different market] cycles is important.” Checking the teams behind the funds is also key, he adds.
Large Network of Support
While John Chatfield-Roberts is the named manager on Jupiter’s offerings, and Burdett and Gary Potter on the F&C products, there is a large network of support behind them. “We’re always interested in seeing how teams operate in terms of responsibility for sectors, decision making and who takes ownership of ideas for particular funds,” says Holder.
Morningstar rates a number of fund of funds, with Jupiter Merlin Balanced, Jupiter Merlin Growth and Jupiter Merlin Income all Silver Rated. The F&C MM Navigator Moderate fund gains a Bronze Rating. But, crucially, the price pillar is negative on all four funds.
There are alternatives, however. Holder rates the Premier Multi Asset team highly and points out that they are generally happy to go into more esoteric areas than multi-manager funds typically venture in to such as specialist lending and infrastructure. This, he says, “makes it genuinely more of a multi-asset proposal than what you’re getting from some of the mainstream houses”.
The Premier Multi-Asset Monthly Income, Premier Multi-Asset Growth & Income and Premier Multi-Asset Distribution funds all have Bronze Morningstar ratings, again, with negative price pillars.
