These funds allow investors to outsource decisions regarding asset and region allocation to a professional fund manager. Furthermore, they offer a level of diversity that a small investor could not hope to match. This should give the funds the flexibility and expertise to maximise potential returns. The question is, have they been successful?
Initial scrutiny of these funds suggests strong results. FE Risk Scores, which represent risk relative to the FTSE 100, show that the average multi-manager fund has seen its score drop by 4 per cent in the past three months. Only a fifth of the funds saw an increase and three quarters saw a fall, while the rest showed no change.
However, these falls are in line with what has been seen across the whole industry, suggesting that multi-manager funds have no significant advantage in volatile markets, and the extra diversification that they offer does not translate into the desired fall in risk.
Multi-manager funds have their largest presence in the Active, Balanced and Cautious Managed sectors. Over the past three months the Risk Scores for these sectors have experienced a fall of 6 per cent, 4 per cent and 7 per cent respectively. When looking at the average multi-manager fund in these sectors, there is a fall of 5 per cent, 6 per cent and 6 per cent – a negligible difference.
The figures relating to risk are particularly disappointing when considering that multi-manager investing comes at a price. The extra level of management means these funds tend to be more expensive, with an average total expense ratio (TER) of 2 per cent. Yet this expertise, paid for by the investor, does not translate into any additional security.
The performance figures are similarly disappointing. Looking at the year-to-date figures vs their sector, we see multi-manager funds have underperformed the Active Managed sector by 0.2 per cent, the Balanced Managed by 0.9 per cent and the Cautious Managed by 1.2 per cent. Even when taken over a longer period, for instance five years, this slight level of underperformance is still replicated.
All this suggests that the diversity of investment offered by these funds offers no real advantage for those with an already diverse portfolio. For a small investor, who carries the risk associated with a small portfolio, this may be considered an advantage, allowing them to achieve the diversification of a larger portfolio.
However, the advantage of these funds should be that the investor does not have to keep moving their investments around to suit the economic climate and maximise returns, as this is the fund manager’s responsibility. The reality is rather different as it appears that the investments are spread so widely that the performance of the strong holdings is counterbalanced by the poor performance of others.
Nevertheless, there have been some notable success stories. CF Miton Special Situations Portfolio has seen its Risk Score drop by 10 per cent over the past three months, whilst seeing a return of just under 1 per cent. By comparison, its sector has seen its Risk Score drop by only 4 per cent while performance dropped by 9 per cent.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
Longer-term its performance is even more impressive, returning 38.84 per cent over the past five years compared with just over 9 per cent from its sector.
Troy Spectrum has been another impressive performer, seeing its Risk Score drop by 13 per cent. Although it has seen losses of 4 per cent, this is compared with 11 per cent from the average Active Managed fund.
It also has unusually low costs for a multi-manager fund, with no initial fee and an annual management charge of just 0.65 per cent.