Wednesday, September 01, 2004
FOFs vs Multi-Strategy Funds (RE: Mariner; Axa)
Boom time for funds of funds(Filed: 01/09/2004)
telegraph.co.uk
Multi-manager funds are popular in uncertain markets, but the higher charges don't necessarily mean they perform better. Paul Farrow reports
Five years ago, multi-manager funds were thin on the ground. Today, it seems, every fund management group wants at least one on its product shelf - and the enthusiasm shows no signs of abating, with Schroders set to enter the market next month, while Gartmore is due to expand its existing range with the launch of several new funds.
It's boom-boom time for multi-manager funds
Multi-managers, which give investors access to the services of several fund managers within a single wrapper, are viewed as one of the few money-making areas left to fund management groups struggling amid uncertain stock markets.
The aim is to appeal to investors who have already learned to their cost how difficult it is to select good performers from the 2,000 funds on the market - some high risk, some low risk, some designed for capital growth and others to generate income.
And, as if picking the right fund were not tricky enough, investors also have to grapple with the problem of fund managers seemingly hopping from one company to another every week.
In short, managing an investment portfolio, keeping track of what's happening and spotting future trends can be a full-time occupation for which most private investors have neither the time nor the inclination.
Enter multi-manager funds, run by people whose job it is to research markets on a daily basis, talking to analysts and fund managers, and using the information gleaned to spot underlying trends and adapt strategies to suit the economic environment.
A report published by Cerulli Associates, the analysts, shows that the global multi-manager market soared by 28 per cent to $680bn (£380bn) last year.
These funds are becoming increasingly popular with independent financial advisers (IFAs) who lack the resources to manage client portfolios proficiently. According to a survey of 800 IFAs by Fidelity, three in four now regularly recommend multi-manager products to clients.
There are two types of multi-manager funds: fund of funds and manager of managers. The first type puts money in a portfolio of funds selected from across the spectrum of UK-registered unit trusts and Oeics.
The second hires different managers to run bespoke segments of the fund rather than buying off-the-shelf unit trusts.
Companies offering funds of funds include Credit Suisse, New Star (formerly Edinburgh Fund Managers), Fidelity, Henderson, Isis, Jupiter and Premier. Those offering managers of managers include Abbey National, Frank Russell and SEI Investments.
Funds of funds have so far proved the most popular with investors. They typically try to figure among the top 25 per cent of funds in the sector over the longer term, although in practice many languish in the second, third and fourth quartiles.
"By its very nature, picking a number of funds means that you'll always have some underperforming the best in the short term," says Jason Britton, a fund of funds manager at T Bailey Asset Management. "But your fund should be in the top quartile over three years: anything less is not appropriate."
Robin Stoakley, a marketing director at Schroders, agrees. "What's the point of offering funds of funds that don't aim to be in the top quartile?" he asks. "Our two new funds will aim to outperform their benchmark by at least 2 per cent, which would put them in the top quartile."
The handful to have delivered first-quartile promises over a three-year time frame include Credit Suisse, Jupiter and New Star (Edinburgh), while Axa, Isis and Henderson Independent Growth are among the many to have turned in below-average performances over the past three years.
The performance of any fund is only as good as its manager or investment team, and funds of funds are no different.
The same names crop up time after time in the lists of funds held within fund of funds portfolios. American portfolios commonly include Legg Mason and Gartmore, while Artemis, Fidelity and Odey make frequent appearances in the popular European funds. Aberdeen and First State both figure strongly in Far East funds.
The emphasis is on much more than simply picking the most suitable funds; the right mix of geographical areas and sectors is one of the key drivers.
Axa blames poor asset allocation rather than the quality of the underlying funds for its dismal performance record. Simon Ellis, head of multi-manager at Axa, says it has now changed its former strategy, which he described as "static" and inflexible.
Axa Multi-Manager Growth, for example, had to remain 60 per cent invested in UK funds - no more, no less - even if the management team thought there were better opportunities elsewhere. The new, more flexible strategy allows the managers to go overweight or underweight in any area, depending on their view of the market.
When a "star" manager quits a fund, managers of funds of funds claim they are best-placed to decide whether to stick with the fund, or dump it for another. When David Mitchinson, the well-regarded manager of Framlington's Japan fund, announced he was quitting for JPM Fleming in May, multi-managers switched £40m out of the fund. The fund, ranked second in the Japan sector when Mitchinson left, has since slipped, albeit not disastrously, to ninth.
Robert Burdett of Credit Suisse, one of several managers to bail out of the fund, says: "When a manager says he's leaving, his performance can be marred by major outflows from the fund. Mitchinson continued to do a reasonable job through his notice period, but we didn't need to take the risk that he wouldn't, so we didn't."
The major gripe with funds of funds has always been the higher charges, caused by the double layer of management fees, one levied by the underlying funds and the other by the overall fund manager. Total expense ratios (TERs), which take all annual charges into account, range from 1.6 per cent to as high as 3 per cent.
"Our funds of funds have outperformed the average fund by more than 100 per cent since 1989, after charges. I would argue that is good value for money," says Rob Page at New Star. "The bottom line is, you get what you pay for."
Management groups argue that investors should expect to pay more for funds of funds because they are paying for both the management of the underlying funds and also the expertise of those putting the fund portfolios together. The charges also take in the cost of the many fund switches in any given year.
But there is no sense in paying over the odds for bad performance and investors in this position should think seriously about switching to another fund.
Jim Clancy, at Clancy Financial Planning, is one of the many IFAs now recommending multi-manager products. He says: "The emphasis on asset allocation as a primary driver fits nicely with goal-based financial planning. There is an additional charge, but I feel clients will see the value of paying it in the long term."
telegraph.co.uk
Multi-manager funds are popular in uncertain markets, but the higher charges don't necessarily mean they perform better. Paul Farrow reports
Five years ago, multi-manager funds were thin on the ground. Today, it seems, every fund management group wants at least one on its product shelf - and the enthusiasm shows no signs of abating, with Schroders set to enter the market next month, while Gartmore is due to expand its existing range with the launch of several new funds.
It's boom-boom time for multi-manager funds
Multi-managers, which give investors access to the services of several fund managers within a single wrapper, are viewed as one of the few money-making areas left to fund management groups struggling amid uncertain stock markets.
The aim is to appeal to investors who have already learned to their cost how difficult it is to select good performers from the 2,000 funds on the market - some high risk, some low risk, some designed for capital growth and others to generate income.
And, as if picking the right fund were not tricky enough, investors also have to grapple with the problem of fund managers seemingly hopping from one company to another every week.
In short, managing an investment portfolio, keeping track of what's happening and spotting future trends can be a full-time occupation for which most private investors have neither the time nor the inclination.
Enter multi-manager funds, run by people whose job it is to research markets on a daily basis, talking to analysts and fund managers, and using the information gleaned to spot underlying trends and adapt strategies to suit the economic environment.
A report published by Cerulli Associates, the analysts, shows that the global multi-manager market soared by 28 per cent to $680bn (£380bn) last year.
These funds are becoming increasingly popular with independent financial advisers (IFAs) who lack the resources to manage client portfolios proficiently. According to a survey of 800 IFAs by Fidelity, three in four now regularly recommend multi-manager products to clients.
There are two types of multi-manager funds: fund of funds and manager of managers. The first type puts money in a portfolio of funds selected from across the spectrum of UK-registered unit trusts and Oeics.
The second hires different managers to run bespoke segments of the fund rather than buying off-the-shelf unit trusts.
Companies offering funds of funds include Credit Suisse, New Star (formerly Edinburgh Fund Managers), Fidelity, Henderson, Isis, Jupiter and Premier. Those offering managers of managers include Abbey National, Frank Russell and SEI Investments.
Funds of funds have so far proved the most popular with investors. They typically try to figure among the top 25 per cent of funds in the sector over the longer term, although in practice many languish in the second, third and fourth quartiles.
"By its very nature, picking a number of funds means that you'll always have some underperforming the best in the short term," says Jason Britton, a fund of funds manager at T Bailey Asset Management. "But your fund should be in the top quartile over three years: anything less is not appropriate."
Robin Stoakley, a marketing director at Schroders, agrees. "What's the point of offering funds of funds that don't aim to be in the top quartile?" he asks. "Our two new funds will aim to outperform their benchmark by at least 2 per cent, which would put them in the top quartile."
The handful to have delivered first-quartile promises over a three-year time frame include Credit Suisse, Jupiter and New Star (Edinburgh), while Axa, Isis and Henderson Independent Growth are among the many to have turned in below-average performances over the past three years.
The performance of any fund is only as good as its manager or investment team, and funds of funds are no different.
The same names crop up time after time in the lists of funds held within fund of funds portfolios. American portfolios commonly include Legg Mason and Gartmore, while Artemis, Fidelity and Odey make frequent appearances in the popular European funds. Aberdeen and First State both figure strongly in Far East funds.
The emphasis is on much more than simply picking the most suitable funds; the right mix of geographical areas and sectors is one of the key drivers.
Axa blames poor asset allocation rather than the quality of the underlying funds for its dismal performance record. Simon Ellis, head of multi-manager at Axa, says it has now changed its former strategy, which he described as "static" and inflexible.
Axa Multi-Manager Growth, for example, had to remain 60 per cent invested in UK funds - no more, no less - even if the management team thought there were better opportunities elsewhere. The new, more flexible strategy allows the managers to go overweight or underweight in any area, depending on their view of the market.
When a "star" manager quits a fund, managers of funds of funds claim they are best-placed to decide whether to stick with the fund, or dump it for another. When David Mitchinson, the well-regarded manager of Framlington's Japan fund, announced he was quitting for JPM Fleming in May, multi-managers switched £40m out of the fund. The fund, ranked second in the Japan sector when Mitchinson left, has since slipped, albeit not disastrously, to ninth.
Robert Burdett of Credit Suisse, one of several managers to bail out of the fund, says: "When a manager says he's leaving, his performance can be marred by major outflows from the fund. Mitchinson continued to do a reasonable job through his notice period, but we didn't need to take the risk that he wouldn't, so we didn't."
The major gripe with funds of funds has always been the higher charges, caused by the double layer of management fees, one levied by the underlying funds and the other by the overall fund manager. Total expense ratios (TERs), which take all annual charges into account, range from 1.6 per cent to as high as 3 per cent.
"Our funds of funds have outperformed the average fund by more than 100 per cent since 1989, after charges. I would argue that is good value for money," says Rob Page at New Star. "The bottom line is, you get what you pay for."
Management groups argue that investors should expect to pay more for funds of funds because they are paying for both the management of the underlying funds and also the expertise of those putting the fund portfolios together. The charges also take in the cost of the many fund switches in any given year.
But there is no sense in paying over the odds for bad performance and investors in this position should think seriously about switching to another fund.
Jim Clancy, at Clancy Financial Planning, is one of the many IFAs now recommending multi-manager products. He says: "The emphasis on asset allocation as a primary driver fits nicely with goal-based financial planning. There is an additional charge, but I feel clients will see the value of paying it in the long term."
# posted by Tom @ 9:22 AM 
