MM vs DFM: Counting the costs

This article is part of
Multi-Manager Funds: Under the Bonnet - May 2013

In the run up to the implementation of the RDR, and then after the regulations came into force, there were an increasing number of advisers looking to outsource the investment responsibilities of their clients.

Fund management groups responded to the expected surge in new popularity for multi-manager offerings by making sure they had their own multi-manager franchise, as shown by JPMorgan Asset Management recently hiring Tony Lanning to head up its new Fusion range.

Discretionary managers, the other expected beneficiary of the anticipated outsourcing surge, also responded. Many that had in the past been solely focused on bespoke portfolios with high minimum investments looked to launch managed or model portfolio services, either for direct investment or on platforms, with lower minimum investments to attract more adviser business.

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But it is the established franchises that have seen the bulk of the interest so far, with money pouring into the Jupiter Merlin multi-manager funds and into the larger DFMs, such as Rathbones, Brewin Dolphin and Brooks Macdonald.

Product comparison

Multi-manager funds and DFM model portfolios share a lot of similarities: both invest in a range of funds run by other asset managers across the spectrum of asset classes, while both tend to exist as part of a range - generally risk-rated - of funds that offer access across the risk spectrum for clients.

There are a number of differences that distinguish the two, as well. Where multi-manager funds are traditional unitised open-ended funds, model portfolios are not unitised in the same way. This allows multi-manager funds to be more portable, available directly from fund groups or on platforms and in a variety of different tax wrappers.

On the other hand, DFM portfolios will differ whether they are bought directly or, as is more common, on a platform. On a platform that has DFM portfolios available, such as Novia and Ascentric, the investment universe of the DFM portfolios is determined by the platform and it cannot go off-platform.

Discretionary managers argue that their model portfolios are merely extensions of their bespoke portfolios and are therefore backed up by the entire research teams that also work on the bespoke offerings, which they say gives them an edge over multi-managers.

However, the extent of the crossover between the two sections is often unclear, as is generally the case with discretionary managers, who have yet to fully subscribe to the wave of transparency sweeping through the investment industry.

Clarity on cost

A particular area in which there is less than full transparency is on the subject of fees. As both multi-managers and discretionary model portfolios invest in other funds, there are two layers of fees, those of the fund itself and those of the investee funds it invests in. If you’re investing via a platform, then there is also the platform fee to pay.

DFMs have long claimed that they can negotiate lower fees on the funds, giving them an potential advantage over multi-manager. However, after the RDR that claim is harder to make.