Lower charges and highly-rated active vehicles can also go hand in hand even in more complicated strategies than those investing in a single asset class, according to research by FE Trustnet.
Indeed, having considered the UK, Asia Pacific excluding Japan and global emerging market sectors, we discovered there are 17 funds out of 536 constituents in the Investment Association’s mixed asset sectors that hold the maximum number of five FE Crowns and have lower charges than the sector average.
The aim of our study was to find out whether the most expensive strategies were those that were the best performing and, therefore, most highly-regarded.
Although charges have been less of a concern given the strong performance in markets since the crisis, they may become more important if – and when – markets stop enjoying the current ride and start to fall.
As such, this could lead to investors returning to the best performing funds for the lowest cost.
It could also lead investors to look for funds that provide a greater degree of diversification such as those in the IA Mixed Investment and Flexible Investment sectors.
These types of strategies will help cushion occasional shocks that come with investing in a single asset class and will enhance the performance of those best-performing asset classes while reducing the impact of the worst-performing ones.
For the purposes of this study we first calculated the average ongoing charges figure (OCF) – consisting of the annual management charge and other expenses – for the IA Mixed Investment 0-35% Shares, 20-60% Shares, 40-85% Shares and the IA Flexible Investment sectors (with data to end of August).
Highly-rated and cheap multi-asset funds
Source: FE Analytics
We then filtered the results by rating and were left with a total of 17 funds. Although some funds may have lower charges, we have only included those with a five FE Crown rating.
IA Flexible Investment
Although the IA Flexible Investment sector is home to 162 active funds, we were left with only seven that have a five FE Crown rating and a lower OCF than their sector peers. Of those, the cheapest are Capital Group Global Allocation and F&C MultiManager Investment Trust.
The offshore Capital Group Global Allocation fund has an OCF of 0.85 per cent. The strategy is overseen by Hilda Applbaum, Mark Brett, Paul Flynn, Robert Neithart and Tomonori Tani.
The £14.7m F&C MultiManager Investment Trust headed up by Peter Hewitt is the cheapest, with an OCF of 0.81 per cent. The fund has been top quartile for one, three and five years.
It must be noted that the sector – characterised by the fund manager’s flexibility – has no maximum or minimum requirement for shares and is the second most expensive of the IA sectors, with an average OCF of 1.31 per cent.
Other top-rated strategies with lower OCF than their sector peers are LF IM Global Strategy, LF Miton Worldwide Opportunities, Rathbone Dragon, Unicorn Mastertrust and TB Wise Multi-Asset Growth.
IA Mixed Investment 0-35% Shares
The IA Mixed Investment 0-35% Shares Sector has 56 constituents whose average ongoing charges figure is 1.03 per cent.
With an OCF of 0.22 per cent, passive fund Vanguard LifeStrategy 20% Equity is the cheapest five FE Crown-rated strategy in the IA Mixed Investment 0-35% Shares sector.
The £872.3m fund – part of Vanguard’s popular LifeStrategy range – invests 20 per cent of its portfolio in other equity index-tracking funds with the remainder invested in bond strategies.
The Vanguard fund is followed by BlackRock NURS II Consensus 35 and Royal London Sustainable Managed Growth Trust, two strategies that, with respective charges of 0.23 and 0.69 per cent, are the only other two highly-regarded strategies with lower charges than their peers.
The ethical £178.7m Royal London Sustainable Managed Growth Trust – overseen by manager Richard Nelson – has beaten its sector year-on-year since launch and is also included in the FE Invest Approved list.
“This is a straightforward mixed-investment fund with a preference for corporate debt in the UK,” FE Invest analysts noted. “The manager’s ethical approach is central to the investment process and adds value to the product, helping it to generate an impressive track record.
“The corporate governance part of the process is crucial in helping the team avoid possible bad investments.”
The £152.4m BlackRock NURS II Consensus 35 fund, meanwhile is a fund-of-funds investing in a range of iShares index trackers with no more than 35 per cent of its exposure deriving from equity markets.
IA Mixed Investment 20-60% Shares
There are just five highly-rated funds with a lower-than-average OCF in the IA Mixed Investment 20-60% Shares sector. Funds in the sector must hold between 20-60 per cent in equities and at least 30 per cent in fixed income and/or cash instruments. The sector’s average OCF is 1.14 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
With an OCF of just 0.22 per cent, another Vanguard fund from the LifeStrategy range – the £2.9bn Vanguard LifeStrategy 40% Equity – stands out as the cheapest highly-rated fund out of the 155 strategies that form the sector.
While the average fund in the IA Mixed Investment 20-60 % sector is up by 27.53 per cent over five years, Vanguard LifeStrategy 40% Equity has delivered a gain of 37.92 per cent.
Royal London Sustainable Diversified Trust is another highly-rated fund for bargain hunters to consider. The £612m fund is headed up by an FE Alpha Manager and has an OCF of 0.77 per cent. It has also been top quartile for performance over one, three and five years.
The other three cheap highly-rated strategies in the sector are AXA Global Distribution, LF Canlife Portfolio IV and Zurich Horizon Multi-Asset II.
IA Mixed Investment 40-85% Shares
With no ongoing charges the £37.6m Orbis Global Balanced is the cheapest in this sector, which is home to 163 funds with an average OCF of 1.13 per cent.
Overseen by FE Alpha Manager Alec Cutler, the fund does not levy an annual management charge but carries a performance fee of 50 per cent of the return over its composite benchmark paid into a reserve, from which the asset manager draws periodically.
However, the performance fee is refundable at the same rate in the event of underperformance relative to its benchmark.
Since launch, the fund has delivered a total return of 93.68 per cent compared with a 53.37 per cent gain for the average fund in the IA Mixed Investment 40-85% Shares sector and a gain of 123.24 per cent for the MSCI World index, as the below chart shows.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
With an OCF of 0.22 per cent, the next cheapest strategy is yet another Vanguard LifeStrategy fund: the £2.1bn Vanguard LifeStrategy 80% Equity.
Other highly-rated cheap strategies in the sector are: Baillie Gifford Managed, Premier Diversified, Royal London Sustainable World Trust, Zurich Horizon Multi-Asset III and Zurich Horizon Multi-Asset IV.