Manager of managers should provide superior risk-managed portfolios, strategies and returns compared with fund of funds, according to a report by Cazalet Consulting.
The report, commissioned by Scottish Widows to assess its tie-up with leading multi-manager Russell Investment Group, argues that Fofs are limited because they can only invest in retail funds available in the UK.
It says Moms can focus managers on strategies and parts of the market where they have a competitive advantage, providing better control and finetuning to ensure optimal efficiency.
The report argues that the use of bespoke segregated accounts also helps to avoid gaps and overlaps in portfolios created by differing manager skills while reducing the level of volatility experienced by single managers.
Compared with Fofs, therefore, it says Moms have better risk
controls, institutional-level reporting and increased returns.
Russell and some other Moms take this approach further by employing more than one manager for each asset type, giving a blend of styles for each of the main classes.
The report predicts this method will become established in the retail market and argues that Moms' clean institutional pricing – with no bid/offer spreads – will appeal to investors who would otherwise suffer value erosion.
But Fof managers say the report omits some vital benefits of Fofs and say its flexibility more than outweighs most cost considerations.
The report says: “Compared to a Fof format, a Mom approach should lead to better risk-managed portfolios and strategies, richer, faster institutional quality reporting and superior returns from managers working to their strengths.”
New Star Portfolio head of investment management (Fof) Mark Harris says: “I do not agree with nine-tenths of his argument. Most of his criticisms are not appropriate and I suspect that he has not
researched Fofs as well as Moms. Mom has a place but it is not everything.”