While multi-manager funds are a well-known resource to turn to, other options also offer a similar level of diversification for people who prefer a simpler method of investing.
Funds of passives: HSBC World Index portfolios
In October 2011 HSBC launched a range of three risk-rated funds of passive investments – index-tracking funds and exchange traded funds.
The HSBC World Index funds are baskets of passive investments – which do not use a manager but seek to track the performance of a market – which are given a different weighting in each portfolio in order to vary volatility.
Performance of funds vs index since launch
Source: FE Analytics
Data from FE Analytics shows that the Dynamic and Balanced portfolios have produced similar gains to the MSCI AC World index of global stock markets, while the returns of the cautious portfolio have been more modest and much less volatile.
The funds do not aim to track the MSCI World index, however, which is just used for comparative purposes.
The portfolios have the ability to invest directly in assets rather than using a passive product, and use this facility largely to hold US and UK government bonds.
This adds an element of active management to the products, which is compounded by their periodic rebalancing: HSBC does not rebalance the portfolios to a particular index, meaning that the manager – which the group refers to as the "authorised corporate director" – uses his or her judgement.
Shaun Port, chief investment officer of Nutmeg, said: "I like the concept of the HSBC index funds."
"They have a similarity of approach to the way we manage our discretionary managed client portfolios – focusing on diverse asset allocation as the key driver of returns, using passive managers to deliver the returns of an asset class as well as reducing costs to maximise returns."
"However, HSBC only offers three portfolios. We believe that client goals, risk tolerance and investment time-frame lead to many more optimal portfolios than just cautious, balanced or dynamic."
Port also cautions that using these particular products may not give investors access to the very best passive funds on the market.
Some of the holdings are not the cheapest for the region or sector, and, as explained in a recent FE Trustnet article, charges can have a large effect on the performance of passive funds.
Port said: "Also to note, while the portfolios are not fettered funds as they use non-HSBC funds where there is no HSBC fund available, the majority of the holdings are HSBC ones, which are not always the cheapest or best."
"For instance, the fund uses the HSBC Index All-Share fund, (0.28 per cent on-going charges) whereas the Vanguard equivalent index fund charges 0.15 per cent."
"Similarly with Europe, the difference is 0.35 per cent for the HSBC product compared with 0.25 per cent for Vanguard. Also, the portfolios use the HSBC Emerging Markets ETF at 0.6 per cent TER whereas the Vanguard EM ETF is 0.45 per cent."
Tim Cockerill, head of research at Rowan Dartington, said: "I think it will appeal to a very specific market: those investors who are maybe looking to put money into an ISA for the first time or make their first investments and do not want to be involved in making investment selections and have a small amount of capital but enough to invest."
"There’s a fair amount of security behind it. It won’t go that wrong. It might not be the best investment, but it won’t be the worst, and that will appeal to some people."
The three funds require an initial investment of £1,000, while the total expense ratio (TER) varies from 0.84 per cent to 0.87 per cent, according to FE Analytics.
Managers of managers: Skandia UK Best Ideas
The most familiar form a multi-manager fund takes is a fund of funds, with a central fund manager investing the money in a portfolio of other unit trusts.
A fund of managers works in a different way, hiring a selection of managers to invest some of its assets.
The Skandia UK Best Ideas fund utilises six different managers, each investing roughly 16.66 per cent – or a sixth – of the money.
Cockerill said: "The idea is good in that it’s like if you were putting together a football team and saying who would you want to have in each position. I’ll have Nigel Thomas for the UK, or whomever."
"However, you have to select the managers carefully, particularly if each manager is running a very concentrated part of the mandate."
"If the managers are all picking the same types of stocks with the same ideas, and then they are all wrong, it can impact on results very harshly."
Data from FE Analytics shows that Skandia UK Best Ideas is a top-quartile performer in the IMA UK All Companies sector over one and three years.
However, it had a rough start to its life.
Performance of fund vs sector and index since launch
Source: FE Analytics
Data from FE Analytics shows that it lost 44.68 per cent in 2008, while the sector was down 31.96 per cent and the FTSE All Share 29.93 per cent.
The number of managers was trimmed from 10 to six, and performance recovered. Over three years the fund is up 36.02 per cent while the sector has made 27.19 per cent and the All Share 25.85 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Cockerill said: "When they came out there was a lot of hype, but performance has been mixed."
He suggests that managers pulling in the same direction may be responsible for the poor performance in 2008; however, he adds that this same dynamic is a danger with funds of funds too.
Skandia has occasionally switched managers on the mandates on its funds, which is something investors should be aware of. It also runs European, global and UK strategic funds, with the same style.
The minimum initial investment is £1,000, while the TER is expensive, at 2.35 per cent.
Funds of investment trusts: Unicorn Mastertrust
Unicorn Mastertrust, run by FE Alpha Manager Peter Walls, is a portfolio of investment trusts.
The fund has five FE Crowns and is the top-performing fund in the IMA Flexible Investment sector over three years, with returns of 31.96 per cent.
The fund is also top quartile over 10, five- and one-year periods, having made 158.89 per cent over the past decade.
Although it is still tiny – at just £5m – Cockerill says it offers an interesting opportunity for those who are wary of the complications of closed-ended funds to leave the details to an experienced manager.
"I think the investment trusts are unknown to most investors; you have to buy them through a stockbroker and so on. If you were looking at buying an investment trust instead of an open-ended fund than you have to be aware of factors such as discounts and premiums, gearing, what form that gearing takes and so on."
"You also need to be aware that closed-ended funds can be more flexible as to what they invest in – Mastertrust’s biggest holding is in Electra Private Equity for example. This means it gives you the chance to access the areas that you might not otherwise be able to."
"Unicorn are a small team but in Peter Walls they have a manager with a lot of experience."
"It’s not a one-stop shop, however – just look at its holdings and you can see he is not holding back on risk."
However, data from FE Analytics shows that the fund’s three-year annualised volatility of 12.46 per cent is comparable to that of the sector's 11.48 per cent and the FTSE All Share’s 13.71 per cent.
Investors can gain access with a minimum initial investment of £2,500. The total expense ratio is 1.61 per cent.