What is the product Fund of Funds – also known as Multi-Manager Funds or Packaged Funds?
Today investors have a huge array of funds from which to select and this choice is not getting any easier. At the beginning of 1995 there were less than 1,600 funds available in the UK and now there are over 2,000 funds with even more on the horizon. Further, with the increased popularity of offshore investing, there is now over 1300 offshore funds which are recognised by the Financial Services Authority (FSA) and are also available to UK investors.
Even if a fund choice can be made fund manager resignations are becoming more common and can mean long-term investors find themselves in the care of a steady stream of temporary fund managers or incur unnecessary costs by following the manager to his/her new fund. With this broad fund range, high manager turnover and asset management group changes, the task of choosing the right fund is far from simple.
Contrary to popular belief fund selection is not just selecting the fund that has recently performed well, with the FSA regularly reminding investors that past performance is no guide to future performance. Whilst past performance in isolation is a poor measure of the future it can indicate the expertise of the fund manager to provide returns through his/her skill. This may help individual investors select funds to form part of their portfolio, but as the following will highlight this is only one aspect taken into account by the new breed of Fund of Fund Managers.
The basic concept behind a Fund of Funds, sometimes referred to as Multi-manager funds, is simple. As the name suggests this type of fund invests predominately in a number of underlying funds rather than directly in stocks & shares, as traditional funds would do. The fund mainly invests in unit trusts, open ended investment companies (OEICs), exchange traded funds (ETFs) and other collective investment schemes. Instead of making the choice of a fund or selection of funds yourself, you hand matters over to an expert fund manager who will carry out these and other complicated tasks for you.
The main characteristics and benefits of fund of fund are as follows:
Asset Allocation — This is probably the most influential factor in determining the overall return an investor receives. Asset association is the choice of which type of asset is used i.e. equities, fixed interest and/or property. It also involves deciding on the geographical spread within the fund as from year to year there is a large gap between the world’s best and worst performing markets. There is the need to constantly monitor this mix on an ongoing basis to achieve the best possible performance and reduce risk, a task carried out by fund of fund managers on a daily basis.
Fund Manager Selection — A Fund of Funds Manager will draw on a wide variety of research in order to first select the best fund managers available within each sector and then to monitor the managers on an ongoing basis to ensure the fund contains the optimum mix of assets, geographical split and underlying fund managers.
Diversification — Due to the range of fund managers and asset/geographical sectors within the resulting portfolio, a fund of funds will provide investors with increased diversification and therefore generally reduce a portfolio’s risk and exposure to any one single fund manager.
Reduced Paperwork — Although investors in a fund of funds have exposure to a number of managers in a portfolio, which is monitored and actively managed, this is effectively only treated as a single fund holding with all the paperwork handled by the fund of funds manager. So, investors only receive one set of documentation relating to the one fund. A directly managed portfolio of individual funds can, on the other hand, rapidly generate large volumes of paper.
However, one criticism regularly made of fund of fund managers is that they are expensive because of "double charging" due to the two sets of management fees associated with them. However this is not strictly true as because of their size, fund of fund managers are able to negotiate large discounts not available to individual investors, which are used to reduce the overall cost. Also if you were to manage your own portfolio, without the same tools and research available, initial charges would be incurred when funds are switched by individuals. These can be reduced or even eliminated using the discounts available to the fund managers, further reducing the cost of this type of actively managed fund. Invariably charges will be higher as it is difficult to reduce the effect of two levels of management fees but these potentially higher costs have to be offset against the advantages to individual investors as described above.
Finally if you have built up a portfolio of funds over a number of years, a fund of funds may provide you with a method of consolidating some or all of these funds and take advantage of the benefits they can offer. This should then ultimately reduce the growing headache associated with monitoring and managing your portfolio.
You may now feel that this fund selection and monitoring is indeed a full time job, best left to the professionals and that is why a growing number of Fund of Funds have been launched into the market place over recent years. Before you undertake such an overhaul of your portfolio you should seek advice about potential tax considerations and other costs associated as well as your choice of fund of funds manager.
Why not take a look on MoneyExpert’s Investment service at the Fund Of Funds available under Packaged Funds today?