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Just rewards

Funds of funds’ total expense ratios have been criticised following the publication of analysis by Lipper Fitzrovia, the well-respected research agency that has a habit of getting to the bottom of things. Lipper Fitzrovia announced that Fof Ters were, in fact, only 50 per cent more than single manager funds, not 100 per cent more (the famous double charging) that has been widely reported for many years.

Indeed, Lipper Fitzrovia went further and broke down average Ters by type of product. External (unfettered) Fofs charge 2.44 per cent on average, manager of managers charge 1.86 per cent and actively-managed single manager funds charge 1.63 per cent.

Cost was one of the reasons that multi-manager became so popular a few years back when it first took centre stage. But choosing on the basis of price is fraught with danger.

Taking the Investment Management Association’s global growth sector as a barometer of multi-manager performance, the average external Fof has outperformed the sector average by 8.64 per cent over three years to December 31, 2006 while the average Mom has underperformed the sector average by 6.1 per cent and therefore has underperformed the average external Fof by 14.74 per cent (source: Lipper Hindsight). These are after charges. You do indeed get what you pay for.

I thought it would be useful to outline where all those charges go. Here are the major costs of our Fofs:

l The IFA is paid for managing the client relationship including monitoring their situation on an ongoing basis. The IFA’s share of our annual charge is 75 basis points a year in the form of trail commission.

l The underlying fund manager is also paid. There is no doubt that the skills of good managers are worthy of reward but groups that like to charge premium prices and deliver sub-standard performance are easily found out by the Fof manager. They are typically paid somewhere near 75bps for their work although a few do warrant higher levels for extra performance. Part of the skill of a Fof is in negotiating these charges down.

l Finally, we as the Fof manager are also paid. We provide ongoing monitoring of investments, fund selection, asset allocation and the tax benefits of the Fof structure. We retain 75bps a year for these services.

The performance statistics quoted earlier demonstrate that the partnership between IFAs, underlying fund groups and Fof groups is clearly working very well. All three parties provide benefits in the value chain that connects the investor with the stockmarket. All deserve to be rewarded equally.

Jason Britton is co-fund manager with T Bailey.


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