Abraham Okusanya, director at Finlaytiq, a consultancy firm which has investigated the sector, said the vast majority of multi-asset fund managers deliver worse risk-adjusted return than a simple market portfolio, but charge clients very high fees for the privilege.
He said his research found the median charge for multi-asset funds is 1.1 per cent.
A quarter of multi-asset fund ranges have an ongoing charge of 1.4 per cent or more, according to data from FE, he said.
This is before the platform fee and adviser charge.
He said his research, conducted with FE and covering the period up to 30 July, indicated that for the second consecutive year, multi-asset funds do not outperform a simple market portfolio, of individual funds, in this case represented by the Vanguard LifeStrategy range.
He said: “Nearly all the multi-asset fund ranges underperformed against the benchmark market portfolio and its real-life equivalent, Vanguard LifeStrategy range over a five-year period.
"This wasn’t in one or two funds; it was at all risk levels over a three and five-year period.”
He compared the charges on multi-asset funds to the medieval “window tax” where the government charged property tax based on how many windows a property had.
In order to reduce the tax bill, many households, he said, chose to brick up their windows, and the phrase “daylight robbery” was born.
Mr Okusayna said 23 of the 25 multi-asset fund ranges with 10 years’ performance to 30 July underperformed the benchmark portfolio, according to FE data.
He said: “Risk-rated multi-asset funds continue to play a vital role as part of the investment proposition for many advisory firms.
"For some, multi-asset funds are the primary proposition for most clients enabling advisers to completely delegate the asset allocation and fund selection process.
"The reality is that the odds of real return for a typical investor in these funds (in excess of inflation and cash) are worse than the odds of being struck by lightning."
His analysis of this fund type was rejected by a range of multi-asset investors and advisers.
One criticism of multi-asset funds is that there are two layers of charges, one for the multi-asset fund manager, and another for the underlying fund.
Paul Stocks, financial services director at Dobson and Hodge, an IFA firm in Doncaster, said he uses multi-asset funds as the “core” part of his client portfolios and then buys other funds to gain specific exposure.
He said: “Not all have multi-layers of charges, namely we’re not necessarily using fund of funds.
"For example we use Jupiter Distribution as a defensive holding. What we’re looking for is managers to get reasonable risk adjusted returns based on their macro views."
He said the funds of funds in which he does invest, particularly the Old Mutual Cirilllium range, achieve a level of returns high enough to justify the extra costs.
Peter Elston, chief investment officer at Seneca, which runs multi-asset funds, said the majority of such products beat passive multi-asset strategies due to asset allocation.
He said regular equity funds often don’t beat the market because they can’t really do asset allocation.
Anthony Rayner, who jointly runs three multi-asset funds with £800m of assets at Miton, said his clients often use multi-asset funds when they are cautious on an asset class.
He said many of his clients use multi-asset funds to have some exposure to a market, for example bonds, to which they are wary of allocating too much capital.
Jason Hollands, managing director for communications at Tilney Group, said multi-asset funds are a “one stop shop” for investors.
He defended the charging structure by saying the additional buying power of a multi-asset fund means investors get access to institutional share classes, which may be cheaper than a retail investor could buy the fund at, and also that as an institutional investor, multi-asset funds can buy funds not otherwise available to retail investors, creating additional value for the fees.
david.thorpe@ft.com
