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Fof mixture

A number of factors have led to the growing popularity of funds of funds including a long bear market, a dying with-profits industry, increased FSA regulation and greater fund complexity as well as high fund manager turnover, none of which show signs of abating. A more recent addition to this list has been the increased interest in multi-assets and the benefits of non-correlation within funds.

With popularity and greater usage, the field of Fofs is becoming increasing complex. On top of the flexibility for Fofs to invest in property, commodities, gold and more esoteric assets, the underlying fund universe available to Fof managers has also widened considerably, changing the shape and analytics that can go into building such a portfolio. For example, a Fof manager can select from onshore and offshore funds as well as listed vehicles and exchange traded funds.

Then there are the newer, more innovative structures such as 130/30 funds or portfolios that invest in areas like private equity or asset-backed securities as well as the managers who are using derivatives in their funds.

The problem of fund manager turnover levels seemingly rises year on year. Remuneration and retention packages have become key issues for Fofs while the rise of boutiques and so-called multi-boutique models means that culture and business structures are also key elements to be considered when selecting funds. Is everyone able to operate efficiently in such a widening field?

Antony John, chief executive of multi-manager firm IMS, says it has more boutique managers on its buy list than ever. He says: “Some 70 per cent of fund managers do not outperform and within the remaining 30 per cent the turnover level is frighteningly high. Everyone is hunting for that 30 per cent and therefore bidding them up. Managers today tend to stay on the same fund on average two years.”

Boutique cultures are seen as the best at retaining managers but not every manager within a boutique is remunerated in the same way, has a significant stake in the business or has control over the amount of assets they will manage.

John says: “Where it can fall down is if the boutique’s franchise is wrong but you also have things to consider like are they being left alone to follow their own process?”

He says selecting managers now involves examining share ownership schemes and greater operational due diligence when it comes to the corporate structures that managers work within.

There is no guarantee that just because a group is seen as a boutique that it will retain a manager. Some notable examples reside in relatively recent history such as Barry Norris and Oliver Russ leaving Neptune to set up their own firm with the help of Resolution, David Mitchinson leaving Framlington to join JP Morgan or Scott McGlashan departing his own boutique Jade to join JO Hambro Capital Management.

Another perhaps even more problematic consideration for Fofs are the issues surrounding holding some of the new breed of Ucits III funds or non-Ucits retail schemes. Holding one fund that is using a high amount of derivatives is one thing but how do you hold a combination of them?

John says it is important to know who is using them and for what purpose. He says: “Groups are already very good at hiding funds in inappropriate sectors. Now we are having to spend even more time resorting managers into sub-sectors. Some managers are moving into fields that are more opaque at a time when we need greater transparency. It can stretch the boundaries of understanding and increases our need to get underneath these funds or we could miss opportunities.”

He says each of these issues does not just add an extra layer to the manager selection process. Examining each on its own and then pulling all the components together takes time, expertise and resource and he questions whether all Fofs can meet these challenges.

These factors mean Fof managers are having to devote more time to kicking the tyres, to use an overused financial services cliché. As a result, so too must intermediaries when they are looking for a multi-manager solution.

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