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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.”

With 40 per cent of the firm’s portfolios invested in these alternative asset classes, Mr Yousefian explains, the issue of double charging can almost be reasuringly assigned to the status of myth.

Which leaves us with the performance issue. The argument runs that if a fund is invested in, say, 10 funds – or different asset classes, to take Mr Yousefian’s point – then it is unlikely all will provide stellar performance at the same time. Those that outperform will be dragged down by those underperforming, and while the opposite is also obviously true, the simple law of averaging surely also means average performance.

Not true, argues Gartmore’s Mr Lanning, perhaps unsurprisingly. “By overdiversifying you can begin to dilute the performance,” he concedes. “But at Gartmore, we have our own proprietary risk tools that tell us what is the best mix and match within asset classes.”

The Multi-manager Cautious fund, which Mr Lanning manages, has just four underling funds, for example. He also analyses the investment strategies of the funds in which the overall portfolio invests. “We invest in funds that play out the same themes that we do,” he explains. “We also can see the portfolios of all the funds in which we invest so we know which holdings overlap with which of the others.”

For example, many of the more mainstream FTSE100 funds will have holdings in HSBC.

“You have to be cognisant of that,” he shrugs. “We do try and add managers who manage money in different ways.”

Mr Yousefian is far blunter in his denial there is a dilution effect. “Far from it,” he says. “There is none whatsoever. The job of a fund of funds manager is to add alpha over and above the fund’s specific benchmark by three ways: first, through asset allocation; second, stock selection; and third, by careful fund manager selection.

“These are all crucial and have to be taken into account. The fact is that we can manage them on an active basis – no other form of management is capable of adding value to the overall returns. Through using the fund of funds structure you can scrutinise the managers on a regular basis and immediately change direction if need be.”

It is all about being “proactive”, he stresses again. “To be that proactive will add value long term rather than actually dilute the performance.”

The third question surrounds daily pricing – the time at which the fund is valued. Because some funds are priced at midday and others at 3pm there can sometimes be short-term discrepancies in performance: the market might move radically late in the afternoon, for example.

Both Mr Lanning and Mr Yousefian are agreed on this point: certainly over the short term it can have an impact and should be monitored, but over the long term the anomalies will be smoothed out.

“There are discrepancies that you have to be aware of,” stresses Mr Yousefian, “as they can throw up anomalies up from time to time. But this is an opportunity in itself: if a particular investment has a particular value at 7:30am then you have the window of the previous day to make a decision as to whether or not to buy it.

“But on a medium to long-term basis these price anomalies do not make much difference. You should not be looking at collectives for a short-term investment anyway.”

“It would be easier if they all priced at the same time,” adds Mr Lanning. “It can lead to short-term fluctuations and if the market moved very sharply at 3pm it could impact those funds that value at 3pm rather than midday. But then if you have a portfolio of 10-15 different collectives it will only impact on a couple of those.”

“But, he adds, backing up Mr Yousefian’s point, “in the round you should only be looking at performance over the long term.”

In essence, then, multi-manager or funds of funds can be a little bit more expensive. But, as the managers argue, you are paying for additional skills that should hopefully provide excess alpha. There are no clear statistics that prove one way or the other whether either strategy will necessarily underperform the sector average because they are investing in several underlying funds.

Mr Lanning employs a medical simile to sum up the appeal for IFAs. “We as multi-managers are not trying to take away the role of the IFA,” he says. “They know the client far better than we could ever do. The way I see it is they are there to give the initial diagnosis to the client: the IFA is the general practitioner and if they think it is an appropriate investment, they will pas them on to us as the specialists to manage their money.”

Hugo Greenhalgh is editor of Investment Adviser