FTAdviser.com

Advertising

Choosing which approach to fund management is best suited to individual clients is the million dollar question for most independent financial advisers. Is it best to go for a portfolio of individual funds or opt for a multi-manager product and let someone else take the strain?

Of course, even if they choose the latter option this will not be the end of the decision-making process. Within the multi-manager world there are two distinct disciplines: manager of managers and fund of funds. A thorough knowledge of both, therefore, is essential to make the right decision.

Single funds buy into stocks that often have similar attributes, such as their exposure to a specific region or the fact they are expected to grow strongly. Funds of funds, meanwhile, invest in funds with exposure to a broad range of companies.

Then there are manager of managers funds. These invest in stocks and shares through appointed investment managers around the world. These individuals will usually be given a mandate to invest in a particular way in order to meet certain key objectives.

The first step is to look at what actually constitutes a multi-manager product and how the market has changed in recent years, suggests Dan Rudd, head of external distribution at HSBC Investments (UK). Then you will understand why an increasing number of investors are choosing this path.

“Five years ago, financial planners would be looking to invest their clients’ investment portfolios via single fund strategies and the key criteria would be the best fund manager in their relevant sector, focusing on long-term performance track record,” he says. “Unfortunately, we have all been somewhat blinded by perception and it is time to open our eyes and see the reality.”

This reality, he adds, centres on the fact that 83 per cent of the 2039 funds in the UK have managers who have been at the helm for less than two years. This remarkable turnover not only makes it difficult to select those likely to outperform, but there is no guarantee they will stay around.

When you consider that there are now well over 2000 unit trusts and Oeics – not including offshore funds – it is easy to understand why multi-manager products have increased in popularity. After all, very few advisers have time to keep a close eye on so many products.

Patrick Armstrong, the co-head of Insight Investment’s multi-asset team, believes funds of funds can play a vitally important role. “In our range of funds we can invest in everything from property in Asia to equities in Europe, bonds in the US and various arbitrage strategies,” he says. “There is no way that one firm can do all of these things which is why we outsource to those with the requisite skills within different areas.”

Advisers may still have about 40 fund management groups to consider when they go down the multi-manager route but at least the universe is manageable, points out Ben Yearsley, investments manager at Hargreaves Lansdown.

“The other benefit of a fund of funds is that an adviser does not need to asset allocate as the fund manager does that for them,” he says. “However, there has been an explosion in the number of funds of funds which means comparing them is increasingly difficult.”

The desire to lay down investment parameters has led to an increased demand for manager of manager products. Being able to dictate exactly how they want individual managers to perform allows fund houses to deliver more tailor-made options for clients.

Some groups, such as Skandia, offer a combination of manager of manager and funds of funds to their clients. According to Ryan Hughes, one of its fund managers, this hybrid structure enables investors to enjoy the benefits of both disciplines within the same portfolios.

“Many very good managers choose not to make their funds available to retail investors so the only way to get access to them is through a segregated mandate,” he says. “Our structure allows us to choose the most suitable way of getting exposure to these individuals.”

It might sound like a cop-out but the simple fact is that there is no right or wrong answer, insists Mr Yearsley at Hargreaves Lansdown. “Advisers with the time and resources to effectively research the market can easily use individual funds and this will give them access to more esoteric holdings,” he says. “One idea is to have the core of your portfolio in a fund of funds and a satellite of more specialist funds around the edge.”

Rob Griffin is a freelance journalist