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Regional differences

Neal Underwood says many IFAs are sceptical over the value of regional and sector-specific Fofs.

Many investment advisers see multi-manager as an all-encompassing asset allocation solution, with offerings from fund of fund providers typically in the Investment Management Association’s active managed, balanced managed and cautious managed sectors.

For those who want to perform their own asset allocation and outsource fund selection and portfolio management, some multi-manager groups such as Credit Suisse, New Star and Skandia also offer regional and sector-specific funds of funds.

Laurence Boyle, investment director of Williams de Broë’s AssetMaster multi-manager range, believes that offerings will increase in this area. He runs cautious, balanced, growth and international growth portfolios but is keen to expand the range to include regional funds.

He says: “I can foresee this happening. We are looking at having several regional funds. I would love to launch a Japan fund of funds, then perhaps a European one. I would be a big bull that this will be a significant growth area.”

How much do IFAs use these types of funds? AWD Chase de Vere research manager Justine Fearns says that its advisers use regional multi-manager funds less than they do general ones.

She says: “We have been using multi-manager for a long, long while and it can be a really good core holding. Then we can build in other funds in satellite areas or where a client needs a bit more exposure, which tends to be done with single manager funds.”

AWD Chase de Vere does have at least one sector-specific multi-manager fund on its recommended list – T Bailey’s equity income fund. New Star’s regional funds of funds also get some assets from AWD.

Fearns says: “There are no hard and fast rule for our advisers. We use asset allocation tools, which is where we get our asset allocation calls from, then it is down to the individual adviser. Some might say: ‘I can save time by saying, New Star, you can do it for me, even though it might be a bit more expensive.'”

The higher cost of multi-manager funds is one of the arguments put forward by advisers as a reason not to use them. With an actively managed multi-manager fund, there is a case for paying part of the fees for the manager’s expertise in blending asset classes and making geographical calls. But are advisers better off picking funds themselves?

Chelsea Financial Services managing director Darius McDermott says not only do sector-specific funds of funds tend to be more expensive but they also tend not to perform so well although he accepts that there are exceptions.

He says: “If a multi-manager team were to outperform consistently, we would consider them. But generally, why would you buy, for example, a multi-manager Asia fund versus a general Asia fund?”

Boyle believes that multi-manager lends itself just as well to regional funds. “With our investment process already in place, rolling it out to, say, a European portfolio makes a lot of sense. If you can find and blend competent investment managers in Europe, then the next stage is IFAs who recommend regional funds will start recommending regional multi-manager funds. If IFAs have bought into the growth of fund of funds as a managed solution, they also need an investment solution.”

Boyle cites Japan as one region where multi-managers might have an advantage over single manager funds. He says: “In Japan, the most important decision has been to get out of small caps and into large caps.”

He believes a Japan fund of funds will be less restricted, with more freedom to move around the market-cap scale. Boyle also predicts expansion in global or regional thematic funds of funds, such as financials or technology.

New Star head of funds of funds Mark Harris says his honest assessment is that not very many IFAs buy regional funds of funds although he is not entirely sure why. The inherent diversification of funds of funds would suggest that although risk is reduced, they are never going to be top performers, but Harris does not see it like that.

He says: “If you look at the long-term track record of our American fund, I think it stacks up very well against its peers, particularly on a risk-adjusted basis. It is difficult to pick US managers with any consistency. In that region, a fund of funds would seem to appeal but it does not seem to capture the imagination. You do incur extra costs but I think fund of funds stands up pretty well.”

The numbers appear to bear out Harris’s view. Over the five years to December 29, 2006, the New Star American portfolio returned 4.88 per cent versus the IMA North America sector average of -9.05 per cent.

New Star also runs a European fund of funds. Harris says it inherited a number of regional and sector-specific funds from Edinburgh Portfolio. “There was a tech fund of funds and Japan fund of funds but both have been closed. We have kept the ones that are viable in terms of size.”

He does not envisage further regional or sector launches. “Advisers see multi-manager as an all-encompassing asset allocation strategy. People have asked us to launch, for example, a property fund of funds, but I struggle to see a lot of demand,” he says.

Chelsea Financial Services does not outsource fund selection to multi-managers but believes multi-manager has its place for general strategies such as balanced or aggressive mandates. McDermott says: “Fund selection is where we add value. We like to pick funds early. We have had Neil Woodford for 15-plus years. There are plenty of good funds out there. We think we can select enough of them ourselves.”

One could argue that multi-managers are better placed to conduct in-depth research on funds, blend them within a portfolio and, perhaps most important, know when to sell.

McDermott concedes that his research capability is not as deep as some of the bigger multi-manager teams but where multi-managers really add value, in his view, is in the offshore fund market, where UK-based advisers tend to have less access.

Harris can understand that financial advisers want to be seen to be picking their own funds but reiterates his view that in the US, in particular, it is not an easy skill.

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