Multi-manager funds that can only invest in products belonging to their own investment house have made better returns over all time periods analysed by FE Trustnet.
Despite compelling arguments for both styles, investors would have been better off in fettered funds than unfettered over one, three, five and 10 years.
Data from FE Analytics shows fettered multi-manager funds in the IA Flexible, IA Mixed Investment 0%-35%, IA Mixed Investment 20%-60% and IA Mixed Investment 40%-85% have outperformed their unfettered peers.
Performance of sectors over one, three, five and 10yrs
Source: FE Analytics
The biggest area of dispersion is in the IA Mixed Investment 40%-85% where fettered funds outperformed on average by 17.4 percentage points though, as the table shows, fettered funds are ahead in all four sectors over all of the timeframes sampled.
Unfettered multi-manager funds are traditionally seen as having an advantage over fettered funds, as they are able to draw from a wider pool of investment houses, but this has not been the case.
Martin Bamford, managing director at Informed Choice, says more choice can be a problem for multi-manager funds.
“This is an interesting finding and seems to make a strong case for fettered funds. Possibly the biggest contributor to improved performance is less choice in terms of a universe from which to select funds,” he said.
“With unfettered multi-manager funds, managers face a real dilemma of choice and could end up selecting inferior performers, simply because the choice is that much wider.”
Patrick Connolly, head of communications at Chase de Vere, agrees, noting “I think it’s evidence that despite having a much wider range of fund options, many managers aren’t actually that good at picking the funds that are going to perform the best.”
He also points to higher charges as a reason for outperformance of fettered funds, as managers are more likely to get better rates in-house. 
“I’m not surprised that fettered has come out on top but in some cases there are some pretty significant differences there so that’s interesting,” he said.
“[One of] the main reasons is unfettered are more expensive and they tend to be more expensive at two levels – both the managers themselves are more expensive, charging 1 per cent or even more than that.”
“And secondly the underlying funds they invest in are more expensive as well because obviously it’s more expensive to negotiate better rates with external managers than it is internally.”
He says the combination of better information from in-house managers may also have an impact, but says charges and the lack of truly exceptional fundpickers are the main reasons for the underperformance of unfettered funds.
Traditionally, fettered funds may not have had full access to every asset classes as not all investment firms have coverage of the entire investment universe, Connolly (pictured) adds.
“[There’ aren’t many] that have strength in investing in all different equity markets and asset classes be that fixed interest or property or wherever else they decide to invest.”
“But the numbers that have been produced sort of blow that argument out of the water on a comparative basis though I would expect that a large reason for the differences is the poor performance of unfettered funds rather than outstanding performance of fettered funds.”
He says that overall, he preferred to use multi-asset funds rather than multi-manager funds to give true diversification to a portfolio.
“I think there is a question mark in general over multi-manager funds and whether they have a role to play and what role that is because generally multi-manager funds charge a lot and under deliver.”
“If you look at the rationale for using multi-manager funds, really what you’re looking for is diversification, that’s why you would do it.”
“Generally if you have a larger portfolio you can get that diversification by investing in a range of specialist funds by investing in separate European, UK, etc funds.”
“But for people with smaller investment sizes or those that just want a buy and hold option that they’re not going to have to review or change, then we would typically prefer to use a multi-asset fund rather than a multi-manager fund.”
However, if investors do wish to use multi-manager funds, he says despite the evidence they should not dismiss unfettered funds as a matter of course.
“Would you dismiss unfettered funds in their entirety I would say the answer to that is no because there are some decent managers out there albeit they are very few and far between,” he said.
Informed Choice’s Martin Bamford added: “There is a risk that considering average performance like this hides both good and bad examples using each approach.”
“There are certainly unfettered funds which do a good job for investors and, at the same time, there are fettered funds which underperform.”
“For example, we have long been fans of the Jupiter Merlin range of unfettered funds, including Merlin Growth Portfolio which has done a solid job of beating the sector average over the past one, three and five years.”
Performance of fund vs sector over 5yrs
Source: FE Analytics
As the above graph shows, the five crown-rated, £1.9bn fund run by FE Alpha Managers John Chatfeild-Roberts and Algy Smith-Maxwell has outperformed the IA Flexible Investment sector by 13.91 percentage points over the last five years.
FE Trustnet will dig into each of the unfettered sectors in an upcoming series to discover the managers breaking the trend and outperforming over the longer term.