Multi-managerJun 20 2012

Universe of funds

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With little more than six months to go until the implementation of the retail distribution review, most financial advisers have probably had a good long think about how they want to do business in the future.

For some, this may have meant studying hard to achieve the level four qualifications that will be required of them in order to remain independent. For others, it could have been a decision to choose a restricted path, or even to look at bringing forward succession plans in order to enjoy a life away from regulatory tinkering. For many, it will have proved a distraction at a time when extreme conditions in investment markets demand a much closer focus.

But it is arguable whether focusing on the short-term ups and downs of investment markets is a good use of advisers’ time. When a client seeks financial advice, the chances are that he (or she) is pondering some of life’s major financial milestones: a house purchase, retirement plans, providing for a child’s education or even making sure the family is looked after should they die. What they need from their adviser is a wide knowledge of the strategies available to help them achieve their goals, not necessarily a narrow focus on the specific shares or funds they might use to get there.

Advisers are addressing this in a number of ways. Some of them may choose to link up with a discretionary wealth management firm whose consultants are focused on finding the best investments available to meet a variety of goals. Others may choose to use risk-profiling software or services, which may then feed in to risk-rated funds or model portfolios designed to meet the objectives of investors according to their individual risk appetite. Still more may decide to use multi-manager solutions, which come in a variety of shapes and sizes.

There is something of a lack of agreement across the financial services industry about the meaning of some of the labels used in regard to multi-manager investing. For the purposes of this article, we will assume ‘multi-manager’ is a catch-all term for all funds that have a variety of managers underlying them, whether through investing in existing funds or made-to-measure mandates.

Multi-manager funds that use bespoke mandates are often called ‘manager of managers’. Rather than buying into existing funds, they will engage fund managers to run a pot of money for a certain objective. This is a similar system to that operated by institutional investors such as pension funds, and is also commonly used in the US. ‘Manager of managers’ type products include the Best Ideas funds from Skandia, and the Russell Investments range, which also underlies that firm’s model portfolio service.

More familiar to the UK investor are ‘funds of funds’, which themselves fall into two main camps – external, or unfettered funds of funds, and internal, or fettered funds of funds. An internal fund of funds invests only in an investment house’s own funds, while an external fund of funds can cast its net more widely, looking across the whole market of funds registered for sale in the UK.

There are some very well-established and respected teams of fund of funds managers, particularly in the unfettered space, where examples include Robert Burdett and Gary Potter at Thames River Capital and John Chatfeild-Roberts and his team at Jupiter.

Why consider a multi-manager fund? Just as the idea of investing in a fund is to give the investor access to a wider pool of shares or other assets than they would be able to achieve by themselves, so multi-manager funds can offer a one-stop portfolio solution, diversified across a wide range of markets and asset classes.

The universe of funds registered for sale in the UK is now enormous, with more than 3000 onshore funds and many more available throughout Europe. Financial advisers are unlikely to have the time available to comb through the thousands of funds on offer, whereas a fund of funds manager’s entire focus is on understanding what is out there and choosing the best combinations of funds to meet broad investor objectives.

Fund of funds managers will spend time meeting managers of the underlying funds, just as those managers spend time meeting the companies they invest in. Because they have established relationships with fund houses, fund of funds managers will often have access to opportunities that are unavailable to other investors, such as being in on the ground floor of new funds, or still able to access those that have been closed to new investors. With financial adviser time increasingly focused on client service rather than fund picking, using a multi-manager fund (or funds) can give the client access to a professionally managed and broadly diversified portfolio that is administratively simple and may also have tax benefits, as switches within the fund are not subject to capital gains tax, whereas a portfolio of single funds might trigger a tax liability when rebalancing. Total expenses can be slightly higher than for single funds, but tend not to be appreciably so.

Where to find a multi-manager fund? Most multi-manager funds can be found in the Investment Management Association sectors previously known as Cautious Managed, Balanced Managed and Active Managed, which now go by the snappy titles of Mixed Investment zero per cent to 35 per cent, Shares, Mixed Investment 20- per cent to 60 per cent shares, and Mixed Investment 40 per cent to 85 per cent shares, together with Flexible Investment and UK Equity & Bond Income.

There may also be multi-manager funds in other sectors such as Global Growth. It is important to understand what you are looking at, however, as not every multi-manager fund is a mixed asset fund (some may invest only in equity funds) and not every mixed asset fund is a multi-manager fund.

Trends

Latest statistics from the Investment Management Association show that there was £64.2bn of assets under management in funds of funds at the end of the first quarter of 2012, up from £58.8bn in the first quarter of 2011 – a rise of 9 per cent.

The funds under management in funds of funds account for 10.5 per cent of the whole UK funds market, and are roughly equally split between external (51 per cent) and internal (49 per cent) funds of funds. More than 80 per cent of the funds under management are in the Mixed Investment 20-60 per cent Shares and Mixed Investment 40-85 per cent Shares sectors.

In March 2012, Mixed Investment 20-60 per cent shares was the second best-selling sector (behind Strategic Bond), with £232m of net retail sales, and the third best-selling Isa sector (behind Strategic Bond and Global Emerging Markets), with net Isa sales of £35m.

All this suggests that multi-manager investment is both an established and a growing part of the UK investment scene, which is a trend that is only likely to continue after the implementation of RDR.

Is there a fourth (and perhaps a fifth) way? Most of the multi-manager funds in the IMA statistics – with a handful of exceptions – are open-ended funds that invest solely in other open-ended funds.

With RDR bringing the requirement that fully independent financial advisers should consider the whole market when looking at investments – and that includes investment trusts, ETFs and structured products, not just the three thousand or so Oeics – those multi-manager funds that invest wholly or partly in investment trusts could be due a renaissance.

The arguments in favour of closed-ended funds are well rehearsed by those of us who manage them. They are less affected by flows of capital than open-ended funds, making them a more stable route into volatile or illiquid asset classes. Because shares sometimes trade at a discount to net asset value, there is potential upside for a fund of funds manager who buys into a trust at a discount with the expectation that it will narrow.

Trusts can use gearing (borrowing) to boost returns, although this is a two-edged sword and can work against investors in a falling market. Investment trusts can also provide smoother income returns to investors, because they are able to hold back a portion of their revenue returns, whereas Oeics have to pay out revenue as it comes in.

Some advisers feel that these points mean investment trusts are harder to understand or explain than open-ended funds, but using a multi-manager investment trust solution could be a simpler way to get the benefits of closed-ended investing.

Open-ended funds of investment trusts are managed by the likes of F&C and Jupiter, while there are also funds including JPMorgan Elect Managed Growth and F&C Managed Portfolio Trust, which are themselves closed-ended, meaning that all the points in favour of using an investment trust apply to them as well as to their underlying investments.

James Saunders Watson is head of marketing, investment trusts at JP Morgan Asset Management