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The multi-manager muddle

You could have bet your life that Neil Woodford and his Invesco Perpetual income funds would be among the best Isa sellers this year while the Henley-based outfit’s corporate bonds funds were also a shoo-in. Ditto M&G with its recovery and global basic funds.

But I was also surprised to see multi-manager funds proving to be in vogue, taking six out of the top 20 spots according to Cofunds. Or perhaps I should not have been so surprised.

By their very nature, multi-manager funds should do a sound job because they take the onus away from advisers worried about choosing the right managers and allocating their clients’ assets correctly. After all, investment can be a cursed business – the financial crisis and never-ending volatility has compounded the problems.

What’s more, advisers have enough on their plate with compliance checks and the day-to-day care of clients without having to find time to analyse stockmarkets and fund perfor-mance, make asset allocation calls and monitor the never-ending stream of fund managers jumping ship.

And how the funds have flowed in. The IMA reported another all-time high of £58.2bn at the end of December. This is a rise of 36 per cent compared with the same time the previous year and demonstrates a doub-ling of assets under manage-ment in just two years.

However, while the rationale for using multi-manager funds makes sense, the concept does have a fundamental flaw. Multi-manager funds are only as good as the manager in charge of fund selection and history suggests that good fund managers are few and far between.

Trawl through the 2,000-odd funds in the IMA universe and it is apparent that most mana-gers of single funds fail to deliver consistent returns. Why should we expect so-called expert multi-managers be any different? There have been 72 multi-manager funds in existence since 2000. Out of the 22 funds with a demonstrable track record, only nine have been awarded the highest rating (five) in a new study by Defaqto.

Indeed, there is no credible evidence that multi-manager approaches are offering superior returns. In fact, in the balanced sector, the best-performing funds over three, five and 10 years tend to be single-manager funds such as Newton balanced.

Costs continue to be the black cloud hanging over the sector. Charges have always been a thorny subject and investors should expect to pay more than they would for a bog-standard unit trust. The issue is whether paying over the odds is worth it and for some funds it clearly is not. Some of the higher charging funds are among the worst performers

With TERs for many funds 3 per cent, it is difficult to achieve acceptable positive returns although there are suggestions that costs are starting to come down, with some funds adop-ting passive strategies using exchange-traded funds.

I can understand why advisers plump for a fund such as Jupiter Merlin but I still cannot fathom why other less inspiring multi-managers attract money. Some of the funds offered by players such as Skandia and Insight continue to disappoint. Insight’s diversified dynamic return has delivered fourth-quartile returns over one and five years.

Paul Farrow is personal finance editor at the Telegraph Media Group


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