We take enormous pleasure from meeting IFAs who (along with their clients) are benefiting from the use of funds of funds. This week, T Bailey has been doing presentations at a series of roadshows. It has been refreshing to discover how many advisers have approached the team to say they have become converts to the concept. We obviously cannot claim the credit for any Damascene experiences but it is satisfying that so many IFAs are coming to recognise the value that good funds of funds can bring to their business model and, most important, to their clients.
There is a downside, too. That passion means we also get frustrated when we see IFAs making generally disparaging comments about funds of funds that are statistically insupportable.
There are two old chestnuts that we would really like to roast. The first is that funds of funds double-charge. That is nonsense. The average total expense ratio for a single manager fund is 1.62 per cent. The average TER for a fund of funds is 2.37 per cent. For that extra 0.75 per cent, the client gets diversification, active management and expert fund selection. We do not say IFAs can’t select good funds but there are a team of us doing it all day and we like to think we are quite good at it and we do not have the distractions of dealing with investors’ other strategic financial planning needs.
The second objection is that funds of funds underperform. The long-term performance figures tell a different story. The Lipper data shows that over the last five years (and we encourage clients to invest in equities for five years or more), the proportion of funds of funds that were top quartile was greater than the proportion of single manager funds.
In other words, you had a much better chance of picking a fund that was top quartile over the longer term by picking a fund of funds than by selecting a single manager fund. We have a lot more data like that to demonstrate outperformance.
On a good day, we will be modest enough to admit that funds of funds are not right for every IFA practice and that there will be good reasons for not using them. However, once you rule out the old classics that they cost too much and do not deliver, then we are struggling to think of many.
Elliot Farley is an analyst at T Bailey