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Would you pay extra to access an army of fund managers through a single product?
Thursday 23 Nov 2017 Author: David Stevenson

Multi-manager funds are investment products which contain other funds as their main holdings rather than individual stocks, bonds or other assets. A multi-manager fund is also known as a fund of funds.

The advantage of using one of these types of investments is that it provides an investor with access to a greater number of brains. Many people like the concept of buying a single product which provides access to an army of fund managers looking for the best ideas, each a specialist in a certain field.

The downside is that these types of funds tend to be more expensive as you are paying for the services of multiple underlying fund managers. However, it is clearly worth paying extra if you’re getting a superior return.

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How are they constructed?

A multi-manager fund won’t tend to just be a hodgepodge of various funds contained in a single wrapper. Instead, the fund manager will have an idea of what type of portfolio they want to have and pick funds that will attempt to achieve a certain goal with specific funds added for downside protection, for example.

By choosing a multi-manager fund, an investor is basically leaving the day-to-day handling of a fund to a professional. Therefore it’s a great tool for the inexperienced investor, or one with a limited amount of investible money.

It is important to note that some multi-manager funds are only allowed to invest in funds managed by the same investment company, which is described as ‘fettered’. One that is free to invest in any third party fund is called ‘unfettered’.

Ryan Hughes, head of fund selection at investment platform AJ Bell says: ‘Cost is the best consideration for using a fettered fund. I work on a best of breed approach. One investment house might be great with one asset class such as UK equities but not good at fixed income. It might be a bit cheaper but you may be sacrificing returns opportunity to save a few fractions of a percentage point’.

Unfettered funds

An example of a multi-manager fund free to choose from any provider is Schroders MM Diversity Balanced Fund (GB00B5T87K87). It invests globally using a wide variety of external funds overseen by its managers Marcus Brookes and Robin MacDonald. The fund has returned 50.21% in five years and its fee is 1.33% per year.

For Japanese equities, the fund holds Man GLG Japan CoreAlpha Equity Fund (IE00B64XDT64) and its relative the CoreAlpha Professional Income Fund (GB00B0119B50).

For UK equities the Schroders fund uses a few different asset managers including Investec and Majedie.

Fettered fund

Old Mutual Managed Fund (GB00B1XG7V15) only invests in Old Mutual’s products. The fund has returned 62.7% in five years with an annual fee of 0.99%.

One benefit to using these products is that they tend to be cheaper although the range of funds to consider for the portfolio is limited.

Another benefit to using fettered funds is the product provider should have better access to the individual fund managers (and therefore more information) given they all work for the same company.

Choosing external managers

John Chatfeild-Roberts is head of asset manager Jupiter’s (JUP) Merlin range of funds that invest in other funds.

When it comes to choosing external fund managers, Chatfeild-Roberts wants certain qualities. ‘A good fund manager needs to have a clear head and, importantly, an ability to think for her or himself. The best managers come to their own conclusions about what to do next and don’t follow the herd,’ he comments.

Nick Watson, fund manager of Janus Henderson Multi Manager Active Fund (GB0031413593), says using fund managers with very different views of economic outlooks can be complementary for the fund.

Watson has invested in both Invesco Perpetual European Income Fund (GB00B28J0T16) and BlackRock Continental European Income Fund (BG00B3Y7MQ71).

Talking about the respective fund managers of these products, Watson says Stephanie Butcher at Invesco has a more constructive outlook on Europe and is finding attractively valued opportunities in more cyclical industries such as financials.

He says Alice Gaskell and Andreas Zoellinger at BlackRock are more cautious and hence have a more defensive growth stance through overweight allocations to consumer goods and healthcare.

‘Both funds have outperformed their index since we invested, however their positive relative performance is very complementary and enables our clients to experience a more stable journey towards competitive performance,’ he enthuses.

Witan Investment Trust (WTAN) is among the select few investment trusts with a multi-manager approach. Its chief executive Andrew Bell says he looks for ‘a high quality thought process, with both imaginative and analytical strengths’.

When to call time on a manager

External managers are not likely to outperform indefinitely. Witan’s Bell has certain ‘warning flags’ which he uses to tell him when a manager might be out of favour; this includes managers who start behaving very differently from their historical approach.

Bell is wary of key staff departing and says it’s a trigger for his team to meet with the respective organisation.

Watson at Janus Henderson wants to ensure his fund selection gives clients the best opportunity to outperform in a range of market conditions. This is done by identifying the right balance of regions and flavour of styles to invest in.

‘This can only be achieved if managers stick to their established investment approach,’ says Watson.

Alliance Trust (ATST) at the start of 2017 shifted to a multi-manager approach in order to boost shareholder returns after previously underperforming for a long period.

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