Picking funds is difficult task for everyday investors so the option to pass this task to professionals should always be considered where possible.

One route to achieve this is via multi-manager, which effectively involves buying a fund that invests in the best market’s best funds in a particular area.
Within multi-manager, funds are also either fettered or unfettered, with the former only investing in vehicles from a single group.

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.

Unfettered fund have been gaining a great deal of popularity over recent years, giving access to vehicles from the whole market, including those not readily available to retail investors.

The fact that all the holdings within a fund of funds are constantly monitored by an experienced manager is one of the chief plus points of this type of product.

The manager is watching the markets and the performance of the funds both within and outside the portfolio all the time, which means investors are effectively outsourcing asset allocation decisions to a professional.

One of the accusations leveled at multi-manager funds is that they must cost more than ordinary vehicles, with its own changes plus fees for each underlying holding.

Total expense ratios, or TERs, are a clever way of figuring out how much a fund is really costing. Rather than judging funds purely on the management charge, a TER factors in all the expenses that fund might incur, including trading costs and admin charges.

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.

New Star’s Craig Heron says: “Because we manage a lot of money, we can get good discounts from the other houses we buy funds from. We pay no initial commission and we also get a rebate on the annual management charges.”

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 Tesco 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.

“Let’s say, for argument’s sake, that you pay an extra 1 per cent per year for a fund of funds. Over three years, that would cost you 3 per cent. But the difference between the best and worst funds in Europe and Asia has been as much as 59 per cent over recent three-year periods. 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.”
 
Safety in numbers Anthony Bailey explains how to make sure you invest in the best funds run by the best managers

Investing in the stock market is not too difficult. Just contact a stockbroking or other share-dealing firm and buy some shares.

But which shares to buy? That’s the tricky question – and it’s why only a minority of private investors buy shares directly.

Most prefer to spread the risk by investing in funds, which can invest in a range of shares and other assets such as bonds and property.

But there are literally thousands of funds on offer and even if you know roughly what you want to invest in, there can still be scores of vehicles in a certain category.

According to data from the Investment Management Association, there are 323 onshore funds in the UK All Companies peer group for example.

Selecting the best fund for your investment objectives can be as daunting as picking individual shares. And it is highly unlikely that the same fund would top the charts year after year.

So you have the further challenge of monitoring the progress of your chosen fund and deciding whether or not to switch to another at some stage.

A possible solution to the challenge may lie in multi-manager.

Instead of picking one fund, you choose one manager whose job is to pick the funds that invest your money in shares.

By opting to invest in a fund as opposed to investing directly in shares, you diversify and spread your risk.

Using a multi-manager idea extends the principle. You diversify further by picking one manager to choose a range of managers on your behalf.

You could be your own multi-manager. You could choose to put your money in several different funds within your Isa and switch between funds when you feel it is appropriate. That’s exactly what keen and active investors do. They follow the markets and monitor investment performance closely.

Passive investors, however, may prefer to pay someone else – such as a multi-manager – to look after their money. They save on time and paperwork and may lack the confidence to choose funds or to chop and change.

But they do pay for the privilege, and the possible worry is that they pay twice. They pay both the charges levied by the manager of the fund of funds and the charges of the underlying funds.

These extra charges may be reduced because multi-managers deal with large amounts of money and can negotiate reductions on the fees charged by the funds they invest in.

They may also get a rebate of the charge in the form of commission, which can effectively be passed on to the private investor by way of lower charges.

A simple way of assessing and comparing charges on different funds is to ask about initial charges, annual management charges and (possibly) exit charges.

But perhaps a more meaningful way of looking at the costs of investing it to find out the total expenses ratio (TER) which includes not only the direct charges but other costs a fund has.

Comparing the TER, a multi-manager fund can work out at between 0.5 per cent and 1.5 per cent higher than other funds – though average costs on single funds can mask big variations.

Money that disappears in costs and charges will reduce your investment return – i.e. the money you have in hand when you come to cash in an investment.

Even a small percentage can build up to a significant difference in what you get over many years.

Defenders of the multi-manager approach will say any extra cost is money well spent. What matters is the investment performance you get after charges.

Paying someone constantly to check that your money is in the best place should improve returns. You are buying specialist investment expertise and – if the theory works out – the best people in different fields of investment. This should enhance your returns.

“There are few individual funds or investment managers that consistently add value” says Craig Heron of New Star.