Multi-manager funds: ten heads are not better than one
A raft of new launches over the last few weeks has brought the number of multi-manager funds available to UK investors to well over 200. There is now £33bn under management in these funds compared with the £5.7bn invested in 1997. But if the average fund manager is incapable of consistently beating the market, can a group of managers really do any better?
Well, that’s what the groups who offer multi-manager funds would have you believe. But what you basically get is a fund that invests in a selection of other funds or managers. So rather than handle the money himself, the fund manager picks a group of other fund managers to do it for him. The supposed benefit for the retail investor is that you can cut a few corners by having several different specialist investment styles under one umbrella. The new Skandia UK Strategic Best Ideas Fund, for example, splits the fund’s portfolio between ten independent managers – covering growth, value and momentum investment styles among others – with each manager picking their ten favourite stocks. With the managers including proven names, such as George Luckraft of Axa Framlington and Colin McLean of SVM, you get access to a “who’s who of the UK fund management industry”, as the FT’s Richard Anderson puts it.
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Of course, having the best brains in the business didn’t do Long Term Capital Management any favours, and multi-manger funds haven’t distinguished themselves either. On average, multi-manger funds have underperformed single manager funds by 8% over the past five years, according to Morningstar.
There are two reasons for this, says Anderson. First, multi-manager funds are so well diversified that they only deliver very average returns.And secondly, multi-manager funds are expensive. You have a double layer of fees – you not only pay the fund manager, but the managers that the fund invests in as well. So the total expense ratio (TER), which includes all annual costs, for the average unfettered fund of funds – those which invest in a broad class of managers and styles – is 2.36%, says Paul Farrow in The Daily Telegraph. This compares to a typical TER of 1.6% for single-manager funds and 0.5% for a tracker. All in all, if average performance is the best you can hope for, then you’d be far better off getting it from a cheap tracker, such as the iShares FTSE 100 (ISF) exchange-traded fund, which has an annual fee of just 0.35%.
