Multi-manager ISAs

Jo Tura examines the case for letting a professional fund
manager choose your ISA funds for you

OK, let’s start by understanding

what we are talking about. ‘Multimanager’ and ‘fund of funds’ are the same thing. They are funds that invest in other funds. Multimanager here refers to the multitude of managers running all the funds that go into the overall portfolio. It is not to be confused with ‘manager of manager’ funds, which employ several different managers to run different parts of a portfolio according to their specialism, not necessarily by picking other funds.

The fund of funds definition is perhaps the easier to remember: just think of a fund made of lots of other funds. Different investment houses just use the two different titles according to their taste.

Within multimanager, or fund of funds, a further distinction exists. Is a fund fettered or unfettered? A fettered fund of funds (or fettered multimanager fund, if you are still with me) is one that invests only in the funds of the investment house providing it. This can be an advantage when a house has a number of well-performing funds, as it will give the investor access to a number of these paragons through just one vehicle. Fidelity, for example, has offered a fettered fund of funds for 17 years. Investors can have their money in a variety of Fidelity funds whilst paying just one management fee for the pleasure.

Unfettered funds, though, are the ones that have been gaining a great deal of popularity over recent years. They collect (hopefully, if the manager gets his selection right) the best of the funds in a specialist area into one overall fund, so you might, for example, buy a UK fund of funds, or a North American fund of funds and so on. Craig Heron, fund of funds manager at New Star, explains: “We have eight funds of funds with different objectives and risk profiles, from the very low-risk New Star Cautious to the high-risk New Star Tactical.”

The range of funds of funds offered by many investment houses is intended to provide something for everybody. An investor with a lot of money already in UK equities, for example, might look toward a global or Asian fund of funds to get a diversified investment selection in a different geographical area.

Benefit of experience

The fact that all the funds within a fund of funds are constantly monitored and managed by an experienced fund manager is one of the chief plus points of this type of product. The manager running the fund is watching the markets and the performance of the funds both within and outside the portfolio all the time.

“ You are outsourcing your asset allocation decisions to a professional,” says Gartmore’s head of multimanager funds, Bambos Hambi. “At Gartmore, we have monthly meetings where we discuss the main asset classes we invest in – equities, bonds, property and cash. Then we drill down into each one of them. We discuss government bonds, corporate bonds, high-yield bonds, emerging market debt and inflation-linked bonds, then equities in Japan, Asia, the US, emerging markets, the UK and Europe ex-UK.

“ The man on the street just doesn’t have the time to manage his portfolio actively in the way we do with these funds.”

Merry-go-round of managers

One of the hardest things to keep up with these days in the investment business is the pace at which fund managers move from company to company. “Fund manager movement has got worse over the years,” says Hambi. “It is quite a task to keep track of it all. We have figures that tell us that three quarters of individuals in these jobs have moved in the last four years.” To combat this, fund of fund managers spend a lot of their time out and about, visiting other fund managers. Hambi’s team saw 500 last year.

Growth of choice

On top of the manager merry-go-round, as it has been termed, is the fact that new funds pop up with increasing regularity, adding to the pile from which both the investor and the fund of funds manager has to choose from. At the moment there are over 2,000 UK funds available onshore. As well as that, there are another 3,000 regulator-approved offshore funds to pick from.

“ This kind of breadth of choice brings with it the challenge of which fund you choose. Then how do you deal with the ongoing management?” observes David Cowdell, director of personal investments at Fidelity. Fund of funds managers, with a constant eye on the market, argue that they are much better equipped to deal with this conundrum than the non-professional investor.

Cost of costs?

One of the understandable accusations levelled at multimanager funds is that they must cost more than ordinary funds because each fund of funds must pay management charges for each fund it holds, plus levying management charges to its own investors on top of all that.

“ They can be expensive sometimes,” says Cowdell. “You are paying for the management of the fund selection, plus the underlying charges for those funds. Total expense ratios can be over 2 per cent, but Fidelity has made a commitment to keep them below 2 per cent.”

Total expense ratios, or TERs, are a clever way of figuring out how much a fund is really costing. Rather than basing your judgement purely on the management charge, a TER enables the investor to take into account all the expenses in a fund, because it is a calculation of all the charges that fund might incur, including trading costs, stamp duty on equities and – the part relevant to funds of funds – management charges levied from other investment houses for their fund to be used. The box above shows the TERs for a number of popular fund of funds.

But fund of funds managers, with their bulk buying power, are able to make deals with other fund management companies to avoid charges mounting up. “Because we manage a lot of money, we can get good discounts from the other houses we buy funds from,” says Heron. “We pay no initial commission and we also get a rebate on the annual management charges.”

At HSBC Asset Managers, which plans to launch multimanager funds this year, head of retail Andy Clark points out that his organisation has similar clout. “We are the second biggest bank in the world,” he comments. “Because of our distribution being massive, we can command significant discounts, and we can pass on the value that we get to our customers.”

Of course the charges can’t be removed altogether. There will be some sort of charge, however small, made by investment houses to funds of funds. “The question is, if you’re paying extra do you get something for it?” says Heron. “Here’s an example. Our office is near Harrods and if I go there to pick up a sandwich, it’ll be more expensive than a sandwich from Tescos would be. What am I getting in comparison? Probably a better sandwich.”

The same ‘you get what you pay for’ argument applies to some funds of funds, Heron reckons. “Investors need to be selective when looking at fund of funds providers,” he says. “The difference in performance between the top and bottom unfettered multimanager funds is big.” Differences of between 10 and 30 per cent can be seen in discrete annual performance between the best and worst funds of funds in different sectors. Over one year these differences are striking. But over three and more years the returns that can be lost by picking the wrong fund of funds (and of course this applies to any other type of fund too) are highly significant.

“ Let’s say, for argument’s sake, that you pay an extra 1 per cent per year for a fund of funds,” says Heron. “That’s not the case but let’s take that figure. Over three years, that would cost you 3 per cent. But the difference between the best and worst funds in Europe and Asia is 59 per cent over the last three years. If you look at those sorts of numbers against 3 per cent, it pales into insignificance. So yes, funds of funds can be more expensive but if you can deliver the outperformance the expenses aren’t that important.”

Specialism of specialisms

Perhaps in part due to their diversifying powers in uncertain markets, funds of funds have seen an almost unchecked run of popularity over the last few years. Investment houses continue to launch new fund of funds with increasingly specialist remits. Investors can now pick a fund of special situations funds managed by Fidelity for example: “We launched our Multimanager Special Situations fund and Multimanager Equity Income fund in January,” says Cowdell. “That’s where we see the market developing: there are already a number of core multimanager products out there but we are seeing demand for products that cater for specific needs.”

HSBC, too, plans to launch specialist products for its first wider retail steps into multimanager this year (the bank already offers fund of funds products through its branch network). “We have 26 analysts working on this all over the world,” says Clark. “Because of the resources we have, we don’t want to offer a ‘me too’ product. We’re asking ourselves, in the retail space, what products are we going to launch to add something different? We’re looking to be a bit more innovative because we have the capabilities to do so.”