Financial advisers are faced with a similar predicament with an increasingly large number of investment funds.
The IMA classification system covers around 2,000 funds across 30 sectors and this represents less than half of the funds registered for sale in the UK.
A solution for many advisers is to outsource investment management and fund research through the use of multi-manager funds. The IMA indicates there is £33.3bn under management in funds of funds and this has been increasing at an average rate of 22 per cent a year.
Data from Lipper indicates that over a third of the current universe of unfettered fund of funds was launched in the last three years. This growth has resulted in suggestions that multi-manager funds should be classified separately from the wider universe of funds.
Making comparisons from a shorter list might be easier but it loses sight of the investor’s primary objective, principally to maximise the potential level of return they can achieve for the associated risks.
The IMA classification system enables multi-manager and single-manager funds in each sector to be compared on performance, and that is how it should be. We pride ourselves on offering strong consistent outperformance at T Bailey and are happy to be compared with single-manager funds.
Where change could be helpful is in the sector definitions themselves to offer better comparisons of funds with similar investment objectives. At present, in the IMA cautious managed sector, for instance, some funds take full advantage of the 60 per cent maximum equity exposure limit of the sector’s definition. Others report equity exposures of around 20 per cent. Refinement is needed here.
Given that the objective of a fund takes precedence over its structure, comparison across multi-manager and single-manager funds remains meaningful. Multi-managers must continue to show they are meeting their investment objectives. Separating fund classifications according to structure does not help to this end and could even penalise investors who may struggle to see the performance benefits frequently to be gained from holding multi-manager over single-manager funds with similar objectives.
Elliot Farley is fund of funds manager at T Bailey