Universe of funds

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.

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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.