From Special Report: Multi-Manager Funds - April 2012
The ones to watch
With roughly 300 multi-manager funds available, which have outperformed and are expected to achieve steady returns?
One of the core arguments made by multi-manager fund providers is the idea that by investing across a number of different funds the risk of suffering due to poor manager performance is mitigated.
Therefore multi-manager funds should, in theory, perform better than single-manager funds in disappointing markets.
It is not too surprising, then, that the four IMA Mixed and Flexible Investment sectors, formerly the managed sectors, where most of the IMA-listed multi-manager funds sit, all produced positive returns of more than 30 per cent for the three years to March 30, according to FE Analytics.
However, while the IMA Flexible Investment sector performed best with a return of 46.06 per cent – more than 15 percentage points better than the IMA Mixed Investment 0-35 per cent Shares sector, which produced returns of 30.66 per cent – all four sectors were beaten by both the FTSE All Share and MSCI AC World indices, which returned 74.69 per cent and 58.84 per cent, respectively.
That said, while the two indices may have had a better overall return for the past three years they have also experienced extreme volatility, while the performance of the IMA sectors has been more stable suggesting that multi-manager funds’ greater diversification is having an effect.
But with approximately 300 multi-manager products available to investors through different tax wrappers, according to Defaqto, are there specific funds that have consistently outperformed or are expected to make a turnaround in 2012?
Defaqto’s latest Guide to Multi-Managers includes the results of its proprietary quantitative fund analysis rating, Defaqto QuantRater. Every quarter the rating tool looks at the past performance of multi-manager funds and their volatility-adjusted outperformance in the past 69 months, leading to a QuantRating (QR) of one for the lowest and five for the highest.
From its universe of approximately 300 multi-manager funds, 184 have received a rating since June 2008 – the others had insufficient performance data or were in the IMA Specialist or Unclassified sectors – of which only four funds have maintained the top QR of five since 2008.
These comprise three Flexible Investment funds – the £1.24bn M&G Managed Growth fund run by Graham French, the £68.9m Margetts Venture Strategy fund run by Toby Ricketts, and the Prudential Growth trust, which merged into the M&G Managed Growth fund in February this year – as well as the £3.49bn Jupiter Merlin Income fund run by John Chatfeild-Roberts and the Merlin team in the IMA Mixed Investment 20-60 per cent Shares sector.
In the three years to March 30 2012 the Margetts Venture Strategy fund, the smallest of these four, produced the best return of 59.72 per cent, closely followed by 59.04 per cent from the M&G Managed Growth fund and 44.91 per cent from the much larger Jupiter Merlin Income fund.
Fraser Donaldson, insight analyst for funds at Defaqto, says: “Looking at the ones that have performed consistently well in the past few years, they tend to be the funds that have a settled management team, and/or the company has an obvious focus on multi-manager investment, and/or they maintain a consistent style.
“This is an indicator that they should continue in the same vein in the future although you obviously need to keep an eye for changes to the management team or its strategy.”
The Jupiter Merlin range seems to stand out among its multi-manager peers, having been picked as one of the more consistent performers by more than just Defaqto.
Ben Willis, senior analyst at Whitechurch Securities, says: “The name that we always find ourselves up against by some distance is Jupiter Merlin. We do not consider ourselves in direct competition as we are discretionary investment managers. However, as we provide investment solutions to the IFA community, our sales team are always finding themselves up against the Jupiter team.
“This is not surprising as their longer-term performance has been excellent, and across their fund range too. You have to respect what John Chatfeild-Roberts and the team have achieved. They continue to make astute asset allocation decisions yet they are not aggressive short-term traders.
“Furthermore, they are also adept at selecting excellent funds, in many cases the leading fund(s), to fit their asset allocation decisions. They do have short-term periods whereby performance will lag but, in general, these periods are rarely sustained and they have created an excellent track record. In my mind they are the benchmark against which all others are judged within the multi-manager universe.”
Defaqto acknowledges in its report that asset allocation is an important factor in the performance of multi-manager funds, with Mr Donaldson noting: “Another point to mention is that some fettered funds have performed as consistently as unfettered. This probably indicates how important asset allocation [to entire regions, sectors or themes] is compared to picking the right managers. It is also probably the reason that the most successful multi-manager funds are to be found in the managed [or Mixed and Flexible Investment] sectors.”
Darius McDermott, managing director at Chelsea Financial Services, says his firm does not tend to recommend too many multi-manager funds as they aren’t overly popular with clients who like to build their own portfolios and want to keep costs low.
But he adds: “Multi-manager funds lend themselves to higher costs as you are effectively paying for two levels of management: stock picking and fund selection, and we find many of these funds just can’t produce the performance after costs to make them a worthwhile investment.”
Those that they do like include the £167.2m HSBC Open Global Return and the Jupiter Merlin range.
Although the HSBC fund is at the lower end of the performance spectrum over three years, with a return of 31.12 per cent, Mr McDermott explains: “The HSBC fund is a multi-asset fund of funds and what stands it apart from its peers is that it isn’t limited to funds available in the UK. Instead HSBC makes full use of its global multi-manager team to select the best funds from around the world.
“The Jupiter range are all good, consistent performers. They have a strong team, the members of which have worked together for more than 10 years. In the past three years, the funds have done very well compared with their respective peer groups.
“The Jupiter Merlin Income fund may be one to watch this year. It invests in fixed income, equity income and overseas equity income funds and exchange traded funds (ETFs) so will provide a decent level of diversification for investors looking for an income producing investment with prospects for capital growth, without all the volatility of the equity markets.”
Meanwhile, the Defaqto research showed of the 184 funds with a rating only 25 have maintained a QR of three or above, while a review of the managed sectors shows the Flexible Investment sector had eight, with a consistent QR of three or more, including the three with the top QR of five.
The Mixed Investment 20-60 per cent Shares sector contained 45 funds that were consistently rated since June 2008, with eight rated QR3 or more, and just one fund with a QR5, while the Mixed Investment 40-85 per cent Shares sector contained 47 funds that have been rated since June 2008, yet none of these could boast a consistent QR5 over that same period.
Defaqto explains: “This shows that consistency in fund management is extremely difficult to achieve. The challenge is to be able to pick those that are most consistent.”
Nyree Stewart is deputy features editor at Investment Adviser