Time pressures on advisers and investors alike has led to a surge in outsourcing over recent years and the RDR is likely to increase this trend.
When it comes to managed solution offerings, there is a vast spectrum of products from which investors can choose, ranging from fully managed discretionary portfolios to off-the-shelf model portfolios.
Multi-manager funds sit closer to the discretionary end of the scale as the portfolios are constantly managed by a team of professionals within clear sector guidelines in terms of equity content.
Investors do not need to worry about any capital gains tax implications when fund switches are made as they are internal to the fund. Nor do they have to worry about actually enacting the switches.
Conversely, model portfolios veer toward the fully independent and financially literate private investor classification. Investors are recommended a readymade portfolio of individual, single-managed funds, either by an adviser or an online tool, that broadly suits their needs. That is to say a fairly generic portfolio that perhaps suits income or growth and/or low risk or high risk is suggested.
Indeed, a recent FSA review cited customers being “shoe-horned” into one-size-fits-all solutions without due consideration of suitability.
For investors happy to take a more hands-on approach, model portfolios could be a solution. However, multi-manager funds are more dynamic, with asset allocation decisions being made by the investment team. This can reflect short-term views on equities and bonds, as well as the ability to take defensive positions through the use of cash and even derivative positions to hedge out risk.
Multi-manager funds have a wider range of investments at their disposal, leading to greater diversification.
Model portfolios will often have a notification mechanism in place to alert investors when concerns arise surrounding a particular fund but the onus to make any changes will usually be on the investor. Many prefer to take a backseat and do not want to be actively involved. For these types of investors, multi-manager funds are a genuine option.
Market dynamics, investment companies and fund managers are constantly changing and there are many reasons why funds do not continue to be top performers.
Furthermore, despite often being criticised for being expensive, model portfolios are unlikely to be cheaper than multi-managers and their performance track records are far less transparent.
A multi-manager’s job is to find outstanding long-term top performers and ensure they remain at the top of their game. At the first sign of weakness our selections are scrutinised so as to determine whether the issue is a blip or something more fundamental that requires action.
Aidan Kearney is co-head of multi-manager at Aberdeen Asset Management