Having first taken off in the early noughties, multi-manager funds have certainly survived the test of time.
What’s more, they’ve undergone quite a rebrand. Starting life in the institutional world, multi-manager funds have since become a product for the people. Today, they provide a neat solution for advisers and consumers alike: namely, a one-stop shop for investments.
By investing in a multi-manager fund you gain access to a diversified portfolio that is managed by a professional investor, who will take responsibility for asset allocation and rebalancing on your behalf.
The appeal of multi-manager funds has not gone unnoticed. Today, multi- manager and multi-asset stand at the core of many successful discretionary fund manager (DFM) and model portfolio solutions (MPS). The only thing missing is that they cannot be unitised.
That said, some discretionary investment firms have now developed their own in-house unitised multi-asset and multi-manager funds to sit alongside their MPS and bespoke propositions.
These in-house multi-manager funds can be used for smaller clients or for those who want to take advantage of the capital gains tax benefits.
Given the range of options available for advisers looking to outsource investment management, how do multi-manager funds stack up?
According to Nucleus’s 2017 census, close to four fifths of a 200-strong sample of advisers planned to allocate less than 20% of client investments to funds of funds or manager of manager funds.
In comparison, 50% of respondents planned to invest at least 60% of client money in in-house model portfolios.
Nucleus found that advisers have shifted away from passive in favour of active propositions since the start of the year. More than 50% allocated to active, versus 40% in passive.
Meanwhile, a little under 25% opted for a combination of the two.
Graham Bentley, managing director of investment consultancy gbi2, is not surprised that in-house model portfolios are the top choice for many advisers.
‘An awful lot of people are running model portfolios, the multi-asset and multi-manager approach themselves, because it means they have control of the client’s capital,’ he said.
He pointed out that many advisers are still running models on an advisory rather than a discretionary basis.
‘Those people are clearly less likely to want to dilute that by having multi-manager or multi-asset funds alongside model portfolios,’ he said.
He suspects that many advisers use multi-manager funds for clients with smaller sums to invest, rather than as a core solution. This is because it is harder for the adviser to show they are adding value via a multi-manager fund, particularly if the client receives a valuation sheet with just one fund on it. ‘When the client gets the valuation, they might say, “What is all the work you are putting in that warrants you getting 50 or 75 basis points off me per year, when all I get is one line on the valuation sheet?”
‘If they get a model portfolio with 20 funds on there, it looks like they have done a bit more work and the client thinks they are getting a more sophisticated solution,’ he explained.
Some fund groups have cottoned on to the need to beef up their multi- manager fund reporting in order to make it comparable to the reporting a client receives for a model portfolio investment or a bespoke mandate.
Nevertheless, Bentley suggested there is still a stigma attached to multi- manager funds for some advisers.
Costs under the cosh
The irony of the situation is that it can prove to be more expensive from a capital gains tax perspective to be invested in a model portfolio outside of a Sipp or ISA because gains are crystallised each time the portfolio is rebalanced. A multi-manager fund also allows the client to avoid paying VAT.
Bentley pointed out that the average cost for a model portfolio is around 87 basis points. If there is a large allocation to bonds, it could be closer to 70 basis points. You then add in the adviser charge, which Bentley estimated to be an average of 77 basis points, plus a platform fee of 35 to 40 basis points for a portfolio of around £200,000.
Lee Smythe, managing director at Smythe & Walter Chartered Financial Planners, acknowledged that multi- manager funds are by no means cheap. This is because you pay the underlying fund fee, alongside the multi-manager fee. Last year, Defaqto and Morningstar estimated that the average ongoing charges for a multi-manager fund in the Investment Association’s mixed investment 20-60% shares sector was 1.43%.
Nevertheless, Smythe said that in some cases it can still be more cost- effective to go for a unitised offering. ‘In my opinion, multi-manager (depending of course on the particular funds) tends to be lower cost than DFM or MPS in terms of the pure investment management costs, but more expensive than if an adviser constructs the full portfolio themselves,’ he said.
Keith Herd, a financial consultant at GS Group, said investors should try to avoid focusing on headline charges, and instead think about how much value is being added after costs.
‘Charges on multi-manager are now very competitive and certainly better than us trying to build a bespoke portfolio. It’s the old story of charges not being an issue if performance is there and we are confident with our providers that they will continue to compete well in their peer group,’ he said.
Looking ahead, Bentley expects multi-manager fees to come under pressure, which could mean that fund groups’ margins take a hit. In this environment, he estimated that funds with a high active share and solid track record will find it easier to justify higher fees.
Multi-manager at the core
A number of financial planners are happy to use multi-manager at the core of client portfolios. They include Francis Klonowski of Leeds-based Klonowski & Co.
‘They are a great way to get a diversified portfolio with somebody professional choosing the funds,’ he said.
He is particularly positive about the capital gains tax benefits associated with the unitised route, which works particularly well for trust investments. He typically invests in Premier’s and Architas’s multi-asset and multi- manager ranges.
‘You get a portfolio that you could never choose yourself,’ Klonowski explained. For example, multi-manager funds are able to access funds that are not available to private investors.
One potential disadvantage is that you are outsourcing asset allocation. Klonowski said it is important to monitor the portfolio and make sure it stays in line with the client’s risk profile.
GS Group is also happy to use multi-manager and multi-asset funds. The company allocates to funds managed by BMO Global Asset Management (formerly F&C), Cornelian, Rathbones and Standard Life MyFolio.
‘Professional fund management is backed by huge resources which most IFAs can’t afford,’ said GS Group’s Herd.
‘Using multi-manager releases us to look after the client’s entire portfolio, which would encompass tax planning, pension contributions and so on, while knowing there is a robust process working behind us to ensure that the funds meet the clients’ attitude to risk and asset allocation,’ he added.
Depending on the client’s objective, GS Group also uses model portfolios and has occasionally appointed discretionary managers.
‘It depends what the client’s objectives are, how large the investment is, whether the client wants to have input or not, and of course what we agree with the client is appropriate for them. Some clients still harbour preferences for companies in terms of market presence and name awareness,’ Herd explained.
Smythe & Walter also allocates to multi-manager funds as part of a broader multi-asset strategy.
‘Using multi-manager funds allows us to target a particular level of risk exposure and then leave it to the particular fund manager to construct an appropriate portfolio. We then only need to monitor that fund to ensure it continues to meet our requirements and those of our clients, rather than having to monitor a much wider range of funds were we to construct individual portfolios,’ Smythe explained.
He also likes that the assets are managed 24 hours a day, seven days a week by a professional investor, freeing up his time to focus on the financial planning work.
In comparison to model portfolios and bespoke DFMs, Smythe believes multi-manager funds provide investors with greater transparency about performance.
‘There can be a lack of clarity with regard to investment performance with DFMs or MPSs, which you do not get with funds, making funds much easier to compare against their peers.
‘Depending on the size of investment and investment objective, all that a DFM or MPS provides is the same as a multi-manager fund would provide, usually with higher overall cost,’ Smythe explained.
Looking ahead, Bentley anticipated that the Financial Conduct Authority’s platform review could also level the regulatory playing field for DFMs and ordinary fund managers. At the moment, the regulator views multi- manager funds as a product and model portfolios as a service.
‘As a consequence, the whole framework which these people operate in might change. In which case, it should be “safety first”, and most advisers will probably revert to the old way of doing things – buying a multi-manager fund,’ he said.
Multi-manager perspective: Why active funds have the edge
By Nathan Sweeney, senior investment manager, Architas Multi-Manager
My view is that active managers will outperform passive. We are already starting to see bigger stock-specific moves, which is positive for good active managers.
At times like this, you can see which fund managers are doing the work on the stocks they are invested in and who is following the herd. We have been reducing exposure to funds where we have less conviction and thinking about the potential risks in the portfolio. We continue to focus on good active managers with a track record of good upside participation and downside protection.