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Multi-manager view

By Darius McDermott, managing director of Chelsea Financial Services

Although multi-manager and fund of funds continue growing in popularity among investors, I still have a few niggling issues.

The concept of multi-manager and fund of funds is, on the surface, a good one. They offer the investor a broad exposure to several different sectors, asset classes and management expertise. They make the arduous task of choosing an investment easier for the investor. All good stuff.

But are their costs justifiable? Research carried out by Fitzrova recently found that the average actively managed fund has a TER 21 per cent higher than its quoted AMC of 1.39 per cent. In contrast, among the 15 biggest fund of funds, the TER was 41 per cent higher than the quoted AMC of 1.25 per cent.

If the funds are outperforming, then the fund provider is first to argue that the costs are justified but what if they are under performing? Should the opposite not be true?
Now I do not want to start mud-slinging here but there are some managers and some funds that have grossly underperformed over the medium to long term, yet still demand a 5 per cent initial charge and a 2 per cent annual charge.

Many of our clients are sophisticated investors and many quite happily and successfully create their own portfolios (many through fund supermarkets) at very low cost. Even many of the less sophisticated have created a successful portfolio with one of our suggested models at very low cost.

Another concern is the overcrowding of the market. There now exist so many multi-manager and fund of funds, with,I suspect, many more still to come, with many investing in virtually the same areas. What differentiates such funds, aside from the charges levied? The sorts of things that investors or IFAs might look out for is – does the fund have the remit to invest into other asset classes, that is, property/hedge funds, etc? Also, what is their bench mark?

My final issue is with fund disclosure. Many managers will not reveal their portfolio allocations for fear that others may steal ideas and replicate them. Personally, I would not invest in a fund that kept its cards that close to its chest. Who would want to give their money to anyone if they did not know where the money was going? The reputation of this industry has taken a serious beating with a big stick in recent years because of its small print and fear of disclosure. If someone came to you asking for 20 with the promise that they would be back in five minutes with 40, you qould ask what they were going to do with it.

If the reply came: “It is a secret,” you would tell them where to go. As Richard Philbin put it in this column a few weeks ago, “to suggest that investors need not concern themselves with the internal workings of their own portfolios echoes disturbingly of every great debacle visited on UK investors”.

I am not suggesting that multi-manager, fund of funds and manager of manager funds are bad – they are clearly not. These are simply my concerns. Multi manager/fund of funds are not for everyone but they certainly could be for many. Let us not just provide clients with what they want for the short term simply to fill demand, let us provide them with what they need for the long term.


Japan Economic Insight

James Dowey, Chief Economist, and Paul Caruana-Galizia, Economist

The conventional wisdom is that following a roughly 50 per cent rise in the stock market in 2013 in Yen terms, the Japan trade is over and done*. So the story goes, those big gains were due to a one-off boost from quantitative easing (QE) and a depreciation of the Yen — policies that one should think of as a palliative to Japan’s economic weakness, but not a cure. Rather the cure, and by implication the necessary condition for a longer-term investment case, is deep structural reforms — a painstaking re-weaving of Japan’s economic and social fabric, no less. The story continues: this is a much tougher test than launching a blast of QE, and one that prime minister Shinzo Abe, although well intentioned and well supported by the public thus far, is likely to fail. Stick a fork in Japan, it’s done…continue reading


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