Dispelling the myths of multi-managers

Sometimes myths can turn out to be true. Initial research for this article suggested multi-managers were keen to dispel some of the misconceptions surrounding their funds: the double charging, performance dilution, and the effects of midday pricing. But once the tape recorder was turned on, it seems certain myths are harder to dispel than others.

Take the issue of double charging. By their very nature multi-manager funds or funds of funds will have two initial charges: one when you buy the fund and another for the manager when they purchase the underlying funds. Certainly larger groups are able to militate more effectively for discounts, but a residual additional cost usually remains.

For Tony Lanning, head of multi-manager at Gartmore Investment Management, the only way to deal with this is to come clean. “It is not a myth,” he admits. “There is an additional level of charges, but it is not always a double charge. We work hard with underlying managers to make sure the TERs are as competitive as possible, but there is an inescapable amount of additional charge.”

It can be justified, though, Mr Lanning argues, by the extra skills he brings to the table: additional costs, sure, but you pay for a service. “That additional layer of charges pays for me and my extra resources,” he points out. “The bottom line is that the additional capability will give you additional alpha and should justify that charge.”

It is quite simple, he says: “If we are underperforming then you should not use us.”

It is an argument that carries currency across the industry, although OPM Fund Management’s investment director Tony Yousefian is a little more circumspect. For him paying a little bit more comes with a quantifiable benefit: something he describes as being “proactive”.

“We have always looked upon funds of funds as being more dynamic,” he says. “We have the ability to respond to the changing economic environment in a more proactive rather than reactive manner.”

With the advent of Nurs and Ucits III, he continues, the nature of the underlying investments has also changed. It is not quite as simple as only investing in collectives any more. “When you are investing in underlying funds there is an element of double charging, but this was when funds of funds were collectives only. Now under Nurs and Ucits III, you can mix all different kinds of asset classes that charge small or no fees. It is now questionable whether the double charging proposition is still a valid argument.”

OPM follows an investment strategy of investing in one core collective then adding various different assets classes as satellites around it. “We use ETFs, which have minimal TERs, as well as direct equities that only have the cost of dealing. We also employ reverse convertibles, a derivative of an underlying equity – so apart from the initial charge there are no other ongoing charges.”