Dastardly or multi?

This article is part of
Multi-manager – June 2016

Dastardly or multi?

The investment world has always been awash with buzzwords and fads. Trends in management styles come and go. Absolute return, Brics, total return, 140/40 funds and many others have all enjoyed their moment in the spotlight. Recently multi-asset funds have enjoyed a boom in their appeal, especially since RDR and the resulting demand for off-the-peg, one-size-fits-all solutions.

But against the backdrop of these changing trends, multi-manager funds have consistently held a place in investors’ affections since they first appeared in the late 1980s, and new products continue to launch. With their in-built diversification, the funds have an obvious appeal to any investor looking to spread risk.

Various basic models exist. Some fund management groups rely on their own internal expertise, restricting choice to their own internal funds when selecting those that will underpin the broader multi-manager offering; others use a range of funds to create the targeted asset mix.

Whereas multi-asset funds rely on one manager or team to create the right balance across a range of markets, multi-manager – as the name suggests – rely on managers who can be specialists in each asset class held. By tapping into broader expertise, a multi-manager fund does not require the same level of stock selection as a multi-asset fund. Picking funds rather than stocks may be a different skill, but multi-managers also need to be as discerning in choosing the funds that will underpin the offering.

Limiting risk

A successful multi-manager fund will spread risk for the client, with minimal effort from the adviser. As Laith Khalaf, senior analyst at Hargreaves Lansdown, explains, multi-manager should represent a “one-stop shop for the kind of investor who wants to delegate investment management and wants some diversification. If they picked a portfolio of five funds themselves, that’s a lot of fund-specific risk to take on.”

By picking a selection of multi-manager funds, Mr Khalaf argues, investors can access an even more enhanced spread of risk. Investing in four or five multi-manager funds rather than mainstream investment funds could leave an investor with “between 100 and 150 different holdings” within their portfolio. “That’s the broad appeal of multi-manager,” he adds.

Due diligence

However, this in-built diversification should not lead to complacency on the part of advisers. The spread of risk achieved in practice may not be enough to placate the regulator.

Steve Carlson, a chartered financial planner at Cardiff-based Carlson Wealth Management, expresses a concern that over-relying on multi-manager could be storing up trouble for advisers, especially if using a single fund. It is unclear where the FCA and Financial Ombudsman Service (Fos) stand regarding whether it is possible to argue you are offering full diversity while relying on what is technically one fund, even if it holds several funds within it.

Beyond scrutiny from the regulator, professional indemnity insurers are starting to take an interest too. And according to Mr Carlson, they have begun asking on renewal forms whether advisers are investing their clients in more than one fund, because those that do not are automatically deemed high risk, even if the fund in question is multi-manager.