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Take your choice

Should IFAs be boldly going into the fund universe or is it better.

Why use multi-manager funds? Well, because we care about our clients.

Let us start from scratch. Take two investment professionals and assume that they have an equal natural ability for picking funds. One is a multi-manager and the other an IFA. The multi-manager gets to do nothing all day but look at research, choose funds and discuss markets and analysis. The IFA gets to do his or her research in between inheritance tax planning, tax structuring, client servicing, protection planning and all the other things IFAs have to cram in to the day. Oh, and take care of the business side of things too. Need I go on?

Who is going to choose the best funds for investors? My money is on the multi-manager, which is why my firm likes to hire specialists for our clients, such as T Bailey, who do nothing but manage funds. No distractions. We like clients to have the best, so we choose the best solution.

Furthermore, with ever more complex funds to choose from as a result of the Ucits III provisions, fund research is becoming even more of a full-time job. That is before you look at the offshore fund universe, the advent of 130/30 funds, private equity and all the other new launches that marketing departments churn out.

Take into account the importance of asset allocation and risk control and we believe this further strengthens the argument for multi-manager funds as a core holding.

Critics will talk about the costs and, indeed, multi-manager funds are more expensive but we believe the benefits they bring far outweigh any extra costs. Research on total expense ratios is freely available.

Recent research has shown that, on average, multi-manager funds outperform single-manager funds after all charges. In areas such as global growth and cautious managed, where asset allocation plays a vital role in performance, the margins of outperformance by multi-manager funds are greater still. Not selecting multi-manager funds on the basis of cost is like cutting one’s nose off to spite one’s face. In multi-manager, just as in many walks of life, you get what you pay for.

Multi-manager funds outperform for a variety of reasons but the most significant are that they have more time for fund research and can make fund switches instantaneously at the first sign of a problem, not after a client review. Add into that mix the skills to consistently adjust asset allocation and the structure to implement it for all clients very quickly, together with the capital gains tax benefit of switching inside the multi-manager fund wrapper, and you will soon see why multi-manager funds can add so much value for clients and advisers over the longer term.

In our view, the question is why not use multi-manager funds? They will not be appropriate for all clients – and we do not use them for all ours – but for the critics of multi-manager funds who do not use them at all, there is another question that may be asked sometime soon. When faced with the overwhelming and growing evidence that multi-manager funds work, are you really treating your customers fairly?

If you really believe you can outrun the efficiency of a multi-manager, prove it. Show us the evidence and publish your trades, costs and results.Why should investment advisers not need multi-manager funds? Most IFAs collect a part of their fees through trail commission. They provide investment advice but the research is time-consuming and expensive, particularly when slotted in between admin, client meetings, compliance and day-today business concerns.

Using multi-manager funds, an IFA can collect 0.5 per cent trail for doing a lot less work than they would do if they actually selected, monitored and reviewed funds and client portfolios.

Yet very few multi-manager funds end up justifying their higher annual fees with better performance over, say, a five-year term. Any outperformance is likely to come about through active and perhaps even aggressive portfolio management and asset allocation calls, which is likely to raise the volatility of a portfolio markedly.

Most multi-manager funds will not justify their high total expense ratios. So, in most cases, IFAs using multi-manager funds are probably delivering a poorer investment service for the same money or more in some cases.

A multi-manager investment service is only better for clients if an IFA is truly lousy at selecting funds, choosing the right asset allocation and creating portfolios. However, the advent of supermarkets and wraps means that it is possible to create a tailor-made, risk-appropriate portfolio for the client, provided you understand asset allocation and can genuinely research and select funds.

With multi-manager funds we are back to the good old industry practice of: “Here is a box. I am sure you will fit inside it.” Some more recent entrants to the multi-manager market make it even clearer what this is all about by currently offering 0.75 per cent trail.

IFAs using multi-manager funds are going back to selling products when they should be delivering a holistic service. If an adviser cannot deliver the service of creating and monitoring a portfolio of investments, how can they justify calling themselves investment advisers? More important, if someone feels they do not have the time or skills to choose the right funds, what makes them think they can choose the right multi-manager funds?

Offering an investment solution of a range of multi-manager funds from different groups, with varying risk profiles, does not solve the problem, it just distances the IFA further from the client’s investments unless they spend a lot of their time monitoring the multi-manager portfolios – a task they are clearly trying to avoid by using multi-manager funds in the first place. This runs the risk of a client’s portfolio and objectives not necessarily being aligned.

While there is a designated control function category of investment adviser, how many IFAs feel they are truly doing “what it says on the tin”? Maybe IFAs who use multi-manager funds should consider outsourcing investment and fund research to specialists who get close to the fund managers and investment groups, research the funds on a continual basis, review asset allocation, create risk-appropriate model portfolios and review all these regularly.

After all, when the FSA comes knocking on the door and asks: “Why did you choose Credit Suisse multi-manager instead of Jupiter, Henderson, Insight, New Star and Gartmore et al?”, what will the answer be?

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