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Fees frame

Clare Bettelley looks at multi-manager fees and explains how the established players have adapted their styles.

The traditional response several years back as to why advisers did not use multi-manager was that they added a layer of cost but one bear and one bull market later, views have changed. But any debate about the pros and cons of the service proves that fees are just the tip of the iceberg in determining whether it is the right choice for advisers and their clients.

The multi-manager concept can be divided into two categories – manager of managers and fund of funds. Mom is based on a hand-picked group of specialist managers to run portions of a fund while Fofs involve quite literally the appointment of one fund manager to invest in a pool of funds. This article will focus on Moms.

Multi-manager funds have grown in prominence as investors have become more savvy about diversifying risk across their investment portfolio, particularly following the 1990s equity market crash and the growing demise of pension pots.

Worldwide Financial Planning managing director Peter McGahan says the poor performance of single fund investment has also been a driver. He says it used to be the case that you could allocate clients’ assets based on UK equities to mitigate currency risk, with overseas equities and fixed income added alongside.

He says: “Normally, a managed fund can do that but they have been found out. It is very clear that they do not know what they are doing. They have produced very lacklustre returns and nearly always underperformed the FTSE All Share index.”

Established multimanager players include Axa Framlington Multimanager, Credit Suisse, Fidelity, Jupiter and Skandia, with each adopting its own approach to structure.

Axa Framlington Multimanager, for example, has created hybrid funds comprising fund of funds and manager of managers characteristics.

Axa Investment Managers head of multi-manager investments Caspar Rock says this method enables him and his team to tailor clients’ investment requirements.

He says: “There are two benefits – it helps control the cost to the end investor and it means you can have funds that do exactly what you want them to.”

Some IFA firms have developed their own in-house multi-manager capability. Hargreaves Lansdown has a portfolio of four funds – balanced, income and growth, special situations and cautious.

But cost remains the focus of multi-manager, regardless of fund structure and return on investment potential.

Multi-manager comprises three costs – advisers’ fees, the overlying manager fees and the underlying fund fees.

Hargreaves Lansdown head of research Mark Dampier says: “There are three mouths to feed, that is the problem.”

Multi-manager funds’ total expense ratios, which comprise all multi-manager fees, can range from between 1.5 per cent to more than 3 per cent, according to research by Lipper Fitzrovia. So, that is goodbye to £300-plus of a client’s £100,000 investment.

Comparatively, the research revealed that single equity fund investment comprises an average TER of 1.63 per cent, with bond funds lower at 1.16 per cent.

Rock says Axa Framlington’s total expense ratio ranges between 1.5 per cent and 2 per cent, with two of its income and growth funds capped at 1.85 per cent.

Fidelity business development director Phil Morse says the firm has capped its multi-manager fees at 2 per cent. Like Axa Framlington, Morse says Fidelity’s growth and income funds have a fee of sub-2 per cent.

Hargreaves Lansdown’s multi-manager balanced managed trust has a total expense ratio of 1.9 per cent while its New Star tactical portfolio charges 3.1 per cent.

So, what does this cost buy investors? Matt Tombs, a partner at accountancy firm Deloitte, says: “The advantage of multi-manager is clearly that no fund manager is very good at all asset classes – multi-manager is an asset allocation tool.”

Rock says fund manager selection is about ensuring appointed managers not only take risk but that they understand the risk they take. He says: “We use quant techniques to see what the risk is and where and why managers are taking it.”

Dampier says: “We spend time tracking fund managers rather than funds. It is about getting added value.”

He says he looks for value above and beyond what he has predicted from his analysis derived from both quant models and direct contact with the fund managers involved in the firm’s funds.

Consequently, he says multi-manager firms will usually be able to access information direct that investors would not necessarily be privy to, particularly sensitive information such as managers’ incentives and lock-in periods, which will help multi-manager firms decide, for example, whether to transfer client funds into a substitute fund in the event that a manager is moving on.

Credit Suisse head of product management Toby Hogbin says research is key with multi-manager investment based on clients’ investment objectives. He says multi-manager firms are also able to select managers of funds, which interact together, based on the risk of each.

He says: “Clearly, costs are associated. However, because we are a corporate purchaser, we are able to negotiate terms such as initial charges.”

But therein lies a clear conflict of interest – the incentive to drive down managers’ fees, in Dampier’s words, to “beat them down to a pulp” – balanced with ensuring added value.

Nevertheless, Hogbin argues that cost savings made through multi-manager are often over-looked. For example, multi-manager firms can transfer client funds into a fund on its substitute list in the event of a manager move or sub-standard performance without incurring additional initial fees.

In addition, multi-manager allows capital gains tax deferral – clients are only liable to pay CGT on the withdrawal of their funds, that is, not the transferral of funds within a multi-manager structure.

However, Hogbin says initial fees may apply in some instances. “If there is a hot boutique that wants a small initial charge while setting up, we may choose to pay it,” he says.

Of course, clients’ risk profiles and investment objectives are key in determining whether advisers should use multi-manager, but it should be a serious consideration for clients wanting exposure to a wide range of funds, which might not necessarily be open to new direct investment.

Dampier says: “Old Mutual’s small companies fund is closed but we still have money going into it.”

McGahan says that less emphasis should be paid to fees if returns are good.

He says: “If the funds are performing well, who cares about the fees? How many of us care about the cost when we go to a good restaurant? It is about cost benefit analysis.”

But he says consistency of fund performance is key. “How often does a manager outperform a sector that it says it is there to out-perform? In truth, a lot of them don’t and won’t.”

That said, McGahan says exceptions are Jupiter Merlin growth portfolio and New Star tactical portfolio, based on his own quant modelling and research.

Dampier also argues against the market’s preoccupation with fees. “I don’t know why people make such a song and dance about them. Discretionary services have fees of up to 1.5 per cent – probably higher – and they are not transparent. In the old days, people paid at least 1 per cent and 1.5 per cent for underlying funds, on top of other fees. What you are paying for is a service.”

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