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Multi-manager view

I was once quoted as saying that multi-manager was a solution for lazy IFAs. Multi-manager propositions start with the premise that IFAs cannot select decent funds for themselves or cannot be bothered.

I am part of a firm of IFAs with six registered individuals and I can tell you that it is quite possible for a small IFA to design a straightforward system for fund selection. It needn’t be rocket science.

What do I mean by a decent fund? It is one that can illustrate an ability to outperform its peers and index, observable by looking at discrete periods, say, each of the last three years, as reported by a number of independent publications or a large number of online sources.

Our own methodology, as set out in our six-monthly TopFunds Guide, probably involves more work than most IFAs would wish to take on. But the basis of our separate analysis of dud funds is one way that any IFA could approach this issue. Our analysis is designed to identify poor funds bigger than £400m but also highlights the best of them. Our experience is that about 50 per cent of these bigger funds outperform the index, which is not what you would expect if you believe everything you read or hear.

This leads to the second aspect of a decent fund – it must not just have outperformed in the past but there must also be good reason to believe it should do so going forward. The TopFunds Guide methodology is based on a statistical probability but the £400m funds that feature in our duds analysis have an inbuilt pillar of strength – their size.

If a fund management house that sells primarily to IFAs has a big fund underperforming, it will put a lot of thought and resources into turning it round. This has not worked for every big fund sold through IFAs that has failed investors but, in our experience, it has worked more often than not.

Multi-managers appear to do it with science or sex, some both. With science they can identify quite quickly the performance and how it is being achieved. With sex? It is all about timing. The manager will be looking to time entries and exits to gain a bit more performance. For example, if the manager believes that the market is overbought, he can switch to cash.

Some multi-managers will also try to convince you that they have the best snake oil because they see 3.75 fund managers every day. Think about your experience. Everyone says their fund is the best and will stay the best or that: “It hasn’t been great but we have got this new manager/process/chief investment officer/parent company, etc, and you must buy now.”

Fund managers are bright, well-paid and plausible individuals, so do you really think you learn much more by meeting them face to face? My guess is that an IFA who never meets a fund manager can achieve 80 per cent of the results with 20 per cent of the effort of the multi-manager.

Brian Dennehy is managing director of Dennehy Weller

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