Financial Express data shows funds of funds, which incur higher charges because they pay for the underlying funds in which they invest and then charge a management fee on top, returned an average of 11 per cent to investors over three years.
Funds that invested directly into equities returned 26 per cent in the period.
Direct equity funds vs multi-managers over 3-yrs
Source: Financial Express Analytics
Multi-manager funds lost more of investors’ cash in the downturn, too. An investor that moved into a fund of funds in February 2008 would have lost 27 per cent during the worst of the slump, while direct equity funds lost around 20 per cent.
In spite of this performance, funds of funds still have higher charges. Financial Express data shows multi-managers’ average total expense ratio (TER) is two per cent, while direct equity funds’ average TER is 1.49 per cent.
Proponents of multi-managers say the vehicles provide an extra layer of diversification, reducing risk without sacrificing the return. But funds of funds and direct equity funds took on the same amount of risk over three years: 14.3 per cent.
The same is also true on a sector-by-sector case. Of the 310 funds in the IMA UK All Companies sector, 20 are multi-managers. The average return of those funds of funds is less than the average return of direct equity funds.
Performance of sectors vs average MM fund since Sep-2009
Source: Financial Express Analytics
That differential in returns becomes wider over time, the research highlights.
Performance of average MM and direct equity funds vs sector
| Name |
1-yr returns (%) |
3-yr returns (%) | 5-yr returns (%) |
10-yr returns (%) |
| IMA UK All Companies - Multi-manager funds |
22.53 |
11.82 |
15.53 |
35.51 |
| IMA UK All Companies |
22.47 |
16.73 |
21.81 |
40.75 |
| IMA UK All Companies - Direct equity funds |
22.55 |
18.54 |
25.44 |
52.01 |
Source: Financial Express Analytics
Over 10 years, multi-manager funds in the sector returned an average of 35 per cent, while direct equity funds returned an average of 52 per cent.
These returns are not reflected in the cost of the funds; the average TER of a direct equity fund in the IMA UK All Companies sector is 1.4 per cent, while funds of funds charge an average 1.8 per cent.
The multi-manager funds are also only marginally less risky: the average volatility score for direct equity funds is 20.5 per cent over three years, while multi-managers took on 20 per cent.
Multi-managers have come under fire for their high charges, but most justify the costs by purporting to offer strong returns at a low risk.
"Multi-managers add an extra level of cost that is usually not justified by their performance. There are exceptions to this, such as the team at Jupiter, but they are exceptions," said AWD Chase de Vere’s Patrick Connolly.
"The TERs on some multi-manager funds are around three per cent and with this level of charges, it becomes more difficult for managers to drag back performance."
Some IFAs still favour the vehicles, however.
Chris Wise, director at IFA Budge and Company, said: "We use multi-manager funds for a number of reasons. In an advisory process they can help with tactical asset allocation calls."
"In addition, funds like Cazenove Diversity can only invest a third in equities, so it helps to manage asset allocation and volatility and provides exposure to, say, the hedge or alternative space, where we don't have the resources to do indepth analysis."