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Fair game for Fofs

After the last bear market gave multi-manager the kickstart that has doubled growth in the last three years, funds looks set to benefit further from the treating customers fairly requirements. Neal Underwood looks at how the sector plans to progress.

Assets under management in UK funds of funds topped 30bn in the first quarter of this year. Investment Management Association figures show that assets in Fofs grew steadily from 5.9bn in 1997 to 15.0bn in 2004 but have more than doubled in the last three years. Fofs now represent around 18 per cent of all equity fund assets.

Jupiter Asset Management head of independent funds John Chatfeild-Roberts says: “We must be taking market share from someone but in asset terms we are still a very small part of the overall market.”

He believes there is scope for multi-manager to expand further. “We in the multi-manager space have demonstrated that it is not just an investment solution, it is also one that can deliver above-average returns. One of the main objections people have had has been knocked away.”

Thames River Capital investment director Michael Warren says: “The good guys have outperformed and have added considerable value.”

He believes that multi-managers continue to pick up assets when certain asset classes underperform and portfolios are repositioned. “Advisers like having the ballast of multi-manager in their portfolios,” he says.

Chatfeild-Roberts says the success of multi-manager products relates partly to the last bear market. “People were scarred by that. Some investors realised that picking your own funds was not quite as easy as it looked.”

He also believes the FSA has had an influence. “If you look at the regulatory environment for IFAs, the FSA has made it more difficult for them in terms of the ongoing monitoring requirements.”

Anand Associates financial architect James Brooke says: “I can foresee assets continuing to grow. The reason is that under the FSA’s treating customers fairly rules, holdings within a portfolio need to be reviewed on a regular basis regarding attitude to risk and so on.” Brooke believes that for clients with relatively small portfolios, the cost of this is not financially viable either for advisers or clients, meaning that increasing numbers will have multi-manager as the core of their portfolio.

When former Credit Suisse managers Robert Burdett and Gary Potter join Thames River in August, they will do so with a blank sheet of paper, having had time to think about what advisers really want from multi-manager products for the future.

Warren says one of the problems multi-manager has had in the past is that it has built too many products. “Multi-managers tend to launch things without asking IFAs what they want. What IFAs want are good multi-asset portfolios,” he says.

He believes that multi-manager should be used as the core building block in a portfolio, which in Thames River’s case is likely to mean cautious and balanced managed Fofs. It will also look at replicating Burdett and Potter’s success at Credit Suisse with the Constellation fund.

Multi-manager products have evolved over time, with increased flexibility of underlying holdings and hybrid manager of manager/Fof products from the likes of Axa Framlington and Skandia Investment Management.

Chatfeild-Roberts says his main focus is on continuing to offer a range of products with a decent track record that people understand. “When we converted to Nurs last July, we broadened the scope of what we look at. Since then, we have done quite a lot of digging in areas we knew less well but people are buying us for performance and things they understand.

“We are not going to give people any nasty surprises although we never say never and we never stop learning. Our portfolios have evolved a lot over the last 10 years but ultimately people are trying to buy what is coming out at the end. There is no sense in putting together things to get a good splash if you are not getting the end-result that you want.”

Multi-manager products now incorporate a whole range of asset classes but Brooke believes there are only really five separate asset classes – cash, equities, property, fixed interest and commodities. “I think you need to have some exposure to each of those,” he says.

In his view, hedge funds give exposure to equities, property and commodities but through a different method. Equally, private equity is still equity, being played in a different way.

“It is more of the same diversification argument. Provided the investor understands why they are doing it and the implications in terms of risk and reward, there is no reason not to go down that route,” says Brooke.

He says Anand Associates uses Miton’s Arcturus Fof which incorporates alternative strategies.

The FSA continues to look at funds of hedge funds and issued its consultation paper on funds of alternative investment funds in March. It seems increasingly likely that fund groups will be allowed to market a version of funds of hedge funds to retail investors in the not too distant future.

Chatfeild-Roberts runs the Jupiter Merlin absolute return portfolio, an offshore fund of hedge funds, in addition to Jupiter’s longonly Fofs. He says: “We are going to wait and see what the FSA actually comes up with. We do not want to jump the gun but we will almost certainly produce an onshore clone of the offshore fund of hedge funds.”

He does not believe that funds of hedge funds will be anything more than a complementary product to long-only Fofs. “We just see it as another string to the bow. My sense is that we will have it there if people want to use it. There is no one solution,” he says.

He thinks that, initially at least, advisers will be cautious in recommending funds of hedge funds to clients.

Brooke says: “There is a place for funds of hedge funds or certainly an iShare or exchange traded fund of the Tremont hedge fund index, provided the client understands what they have got and why.”

However, he warns that depending on the strategy, there is always the possibility of another blow-up, as seen with Amaranth and LTCM. “My concern is the level of sophistication and education that the adviser has to take the client to. For many clients, that would not be right,” he says.

Thames River also runs a fund of hedge funds, Hedge+, managed by Ken Kinsey-Quick. Warren says: “High-end intermediaries are already using them but the broad market is not. There is interest in them but people are a little anxious. I do not see a mad rush.”

He says one of the things that has been discussed is whether to combine traditional Fofs with hedge Fofs, which could lead to a further product launch from Burdett and Potter. “We will think about it and ask intermediaries if that is what they want,” he says.


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