Multi-manager: Onwards and upwards

The number of multi-manager offerings on the market has risen dramatically over recent years in response to the demand, real or perceived in anticipation of future sales, from the market. The main reason for this demand is usually stated to be for the purpose of diversification (of fund managers) but undoubtedly the other big driver is the continuous rise of multiple asset class investments held in a single offering; in effect a single fund is often presented as a risk-rated portfolio, risk-rated to meet the clients risk profile.

Multi-manager has historically consisted of two concepts, fund of funds or manager of managers (or perhaps a combination of the two). A fund of funds does what it says on the tin; a single fund manager purchases shares or units in other unit trust or Oeics funds and wraps them into a single product wrapper. A manager of managers is different in that the fund manager of the wrapper will allocate chunks of money, or mandates, from his fund and ask other fund managers to manage that money within certain criteria.

Both concepts have supporters who will claim advantages over the other, along the lines of cost, control of the asset mix and management styles, and the ability to act quickly if a fund manager begins to underperform. The other recent trend is for these funds to be “unfettered”, or in other words the funds/ managers being held inside the host funds tend to be spread around managers from different fund groups – so the claim is to offer a widely diversified, best of breed and often risk-rated portfolio within a single fund wrapper. Fettered funds of funds are these days very unusual.

The downside is of course that whichever route is chosen, the result is another layer of fund management – and another layer of charges which the investor must bear. For example, the best-selling range of funds in the fund of funds sector tend to have a TER in the 2.4 per cent to 2.6 per cent range which is considerably above the TERs for the constituent funds and there is therefore a huge challenge to the fund manager to earn that level of premium.

Another alternative now exists which is gaining momentum. Some platforms have developed a competitor to these established approaches by offering ranges of model portfolios of funds managed by a wide range of discretionary fund managers. The competition among DFMs has meant that the cost has got keener and keener, now getting as low as 0.25 per cent a year, including VAT.