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.”