From Special Report: Multi-Manager Funds - April 2012
Don’t choose on price alone
Price tags might be a good indicator when it comes to wine, but choosing multi-manager funds on a price basis is dangerous
More often than not quality comes at a price – you get what you pay for. But in the investment world, cost and quality are not always linked.
The FSA’s RDR implementation is looming ever closer and not only will it ban IFAs taking commission on new business, but it will also make the cost of investing more transparent.
In this environment, the more expensive parts of the asset management industry could find themselves in advisers’ cost-cutting crosshairs through no fault of their own. On the 301 funds of funds (FoFs) currently listed in IMA sectors, total expense ratios (TERs) vary widely depending on what the fund charges and what it invests in.
The most expensive FoF, according to Morningstar, is the Blacksquare Multi-Manager Absolute Return vehicle which most recently reported a TER of 4.02 per cent. However, the fund is small at £14.5m and it is natural for smaller funds to cost more, since they do not have the economies of scale enjoyed by their larger peers.
In addition, the Blacksquare fund invests solely in absolute return vehicles, which tend to charge higher fees, including performance fees.
At the opposite end of the cost scale are FoFs that invest purely in ‘passive’ funds, as well as FoFs that trade in investment trusts, which can offer TERs of less than 1 per cent.
Meanwhile, of the 62 manager of managers (MoMs) funds listed in IMA sectors, the most expensive is the CF GHC Multi-Manager Strategic Managed fund, which carries a TER of 4.36 per cent, while the Standard Life Pacific Basin Equity MoM fund is the cheapest at 88 basis points.
MoMs are based on a series of segregated mandates run by various sub-managers, rather than simply trading in and out of funds as FoFs do. This can have the effect of reducing costs because turnover, and therefore trading cost, tends to be lower and charges can be negotiated down.
Average TERs for the IMA’s mixed asset sectors, which consist mainly of FoFs and MoMs, range between 2 per cent and 2.1 per cent. This compares to an average TER in the IMA UK All Companies sector of conventional, single-manager funds of 1.46 per cent, 1.57 per cent for the IMA Global sector and 1.72 per cent for the IMA Global Emerging Markets sector, Morningstar said.
But advisers are still looking to outsource investments to multi-managers in anticipation of the demands and costs of keeping them in-house after the RDR.
Kevin Tooze, IFA and managing director at Equity Partners UK, says: “Diversification is an obvious benefit, both in terms of diversifying asset classes and investments in different fund houses through one vehicle.
“I know they can be a little bit more expensive but in volatile times the diversification can offer peace of mind.”
There are now and always will be advisers who see multi-manager funds as good value for money as a way of letting somebody else take over the strain of investing clients’ money.
But fund groups that offer multi-manager funds – and the advisers who buy them – will be aware that the funds’ cost will increasingly come into the spotlight under the RDR.
Some clients may be perusing the cost of investing for the first time and could conclude that they want their investments to be cheaper regardless of how valuable an adviser insists their ‘expensive’ fund holding is.
Multi-managers can reduce costs by purchasing institutional share classes, buying funds from their own company and using derivatives to increase or decrease market exposure as opposed to buying or selling units in funds.
Rob Burdett, co-head of multi-manager at Thames River with Gary Potter, has seen TERs on the five-strong active range of FoFs fall recently because of asset growth and, as a result, being able to negotiate better terms with underlying managers. “To keep costs down we are always seeking to arrange deals with managers. That sees fees continue to reduce if we grow assets further,” he says.
“Obviously we always also compare costs of funds before investing, both against expected returns and against industry averages.”
Other multi-managers have also made moves recently to reduce their TERs. Aberdeen Asset Management merged four of its equity FoFs and three income-based FoFs earlier this year. At the time, the group said the move would create “larger on-going funds with critical mass” which would reduce expenses.
Seven Investment Management has been able to reduce TERs on its AAP range – a set of passive FoFs – by purchasing baskets of stocks directly rather than buying an exchange traded fund (ETF).
Cost and value
The best-performing multi-manager fund out of all FoFs and MoMs with a five-year track record is the £67m Margetts Venture Strategy fund, run by Toby Ricketts. According to Morningstar, it has returned 38.48 per cent compared with the average return from funds in the IMA Flexible Investment sector of 8.16 per cent.
The TER on the fund is 1.49 per cent, which compares favourably with the average across the fund-of-funds universe as well as with the average TER in many single-manager fund sectors too.
Meanwhile, the multi-manager fund with the worst performance over five years is the £19.4m SVM Global Opportunities fund, a fund of investment trusts, with a loss of 32.05 per cent compared with the IMA Global sector average gain of 14.67 per cent, according to Morningstar. The TER of 1.73 per cent is fairly competitive but there have been challenges to its performance.
This snapshot of data demonstrates one of the difficulties advisers face when trying to select multi-manager solutions – TERs can be competitive but funds can still produce strong or weak returns.
Of the top 50 most expensive FoFs with a track record of five years, seven are top quartile over that time, while another seven are second quartile, according to Morningstar.
A total of 14 are third quartile and the largest proportion – 22 funds – are bottom quartile.
While at first glance these figures may make advisers think multi-manager funds are largely overpriced for what they deliver, closer inspection shows some of the best performing ranges feature in this matrix.
Three of Jupiter’s four-strong multi-manager range feature in the top 50 most expensive multi-manager funds with a five-year track record, according to Morningstar, but all three are first quartile.
Henderson’s Multi-Manager Active, Income & Growth, Managed and Distribution also feature in the top 50 most expensive FoFs. Two are first quartile over five years – Income & Growth and Distribution – while the other two are bottom quartile over the period.
Both ranges were recently cited in a report by Defaqto, which examined the consistency of multi-manager vehicles.
Of Defaqto’s universe of 184 funds – those with a track record since June 2008 and housed in one of the IMA’s former managed sectors – just 25 funds maintained a rating of 3, 4 or 5 consistently on a quarterly basis. The rating of 1 was the worst and 5 the best.
Just 18 of the 184 funds maintained a 4 or 5 rating on a quarterly basis and “remarkably”, according to Defaqto, only four funds maintained a rating of 5 consistently since June 2008.
But consistency is not just an issue for multi-manager funds. Research by Scottish Widows Investment Partnership’s multi-manager duo Mark Harries and Simon Wood has looked at the consistency of performance of single-manager funds.
The managers assessed how many funds in the IMA universe were either first or second quartile over each calendar year for five years and for 10 years to the end of last year.
In the UK All Companies sector, six out of 248 funds achieved first or second quartile performance over each calendar year for five years while only two out of 170 managed this feat over 10 calendar years. Only one fund out of 78 in the IMA UK Equity Income sector fit the bill over five years and none out of 55 managed it over 10. The IMA Sterling Strategic Bond sector saw none of its funds achieve this feat over five or 10 years. Some of the best-performing multi-manager ranges charge higher fees for a reason – good, strong, repeatable performance – while some are priced highly and struggle to deliver.
But, equally, just being cheaper than your peers is no guarantee of outperformance.
Price tags might be a good indicator when it comes to picking a bottle of wine, but preparing multi-manager fund selections solely on the basis of price may result in failure.
Bradley Gerrard is chief reporter at Investment Adviser