Danny Cox, certified financial planner at Hargreaves Lansdown says whatever side of the fence you sit, it is important to understand from the outset what the multi-manager fund is aiming to do.
“As you would expect, a multi-manager fund is aiming to provide the investor with diversification: whether this diversification is to provide market neutrality or access to a range of styles, markets and different stock selection. Multi-managers concentrate on retaining a consistent asset allocation, then aim to provide the best return. Those which take tactical or strategic positions are taking greater risk, but if they are successful, generate better returns. Those who adopt more of a static allocation, such as the Thames River team, aim to provide returns over and above the average over the long term.”
Cox argues the costs on the funds are generally reasonable. “The additional fees for running a multi-manager are typically 0.5 per cent per annum,” he says. “Is this a reasonable charge to run a mini portfolio? I think in most cases yes it is. But investors need to balance these additional costs with the skill of the manager to outperform.”
But Jason Butler, chartered financial planner at Bloomsbury Financial Planning sits firmly in the opposite corner, arguing that the performance of multi-manager rarely justifies the fees.
“If the total expense ratio is on average about 200bps then in most scenarios that completely wipes out the equity risk premium,” he says. “This product is used by lazy advisers and banks as an easy way of capturing assets under management without having to either bother going about labour-intensive financial planning or any rebalancing.”
It makes focusing on performance alone inappropriate he argues: “Performance is not assured whereas costs are. In investment management you get exactly what you don’t pay for. Every penny saved in costs is either a return for the investor or means they can adopt a lower risk exposure.”
Asked for what sort of clients multi-manager funds would be suitable, Butler is passionate to say: “They are for gullible people who like dealing with slick sales-based financial services ’distributors’.”
Investors need to balance the additional costs with the skill of the manager to outperform
Cox meanwhile sees multi-manager funds more as mini portfolios ideal for clients who would like some diversification without having to monitor and manage the underlying fund holdings themselves.
“Multi-manager funds work well as a core holding. Satellite funds can be used to provide additional exposure to add “sex and violence” to a portfolio or used the other way to reduce risk,” he says.
Robin Keyte, chartered financial planner at Towers of Taunton is another adviser who wouldn’t recommend multi-manager funds because of the charges: “It’s a doubling up isn’t it,” he says. “You have the overriding management charge and then you have the underlying fund manager charge so you are looking at an overall charge of anything between 1.75 and 2.5 per cent. Why that is incredibly relevant for me is that if you work on assumptions for the future of equities returns in a low inflation environment when returns may be 4 per cent over inflation you are only looking at future equity returns of 8 to 9 per cent per annum. If you are losing up to 2 per cent of that in charges that’s a huge chunk. If we had the double digit returns of the early 1990s I don’t think anyone would worry that much but it is a major issue.”
But there are exceptions to the rule which Keyte says even he will admit to. He has a client who arrived already in possession of Jupiter Merlin Growth and Merlin Income. “We have consistently put those funds under review for switch away and they have consistently outperformed. So if they are earning their crust so their fees are covered by their performance it is very hard to justify moving them away. I think it is a shame most multi-manager funds don’t perform the way Jupiter Merlin do. But you have to be brutal about it – if they don’t perform get rid of them.”
However Keyte is not inclined to put other clients’ funds Merlin’s way. “It’s a recommendation based on hope that there will be future out performance. I would rather use an index tracker where the TER is maybe 0.3 per cent instead of 2 per cent.”
Clients are not asking for multi-manager in Keyte’s experience. “They are funds that are sold not bought.”
Peter McGahan, managing director of Worldwide Financial Planning says the additional problem most IFAs have is that they are unable to recommend the best funds for their clients.
“A lot of IFAs will openly admit they are not investment specialists and can’t manage their client’s money and don’t know which funds are the best to invest in which is why multi-manager funds were born,” he says. “But are they expensive and does performance justify the fees over and above that of an experienced discretionary portfolio manager?”
McGahan thinks he has found the solution – for his own clients anyway, in finding the best funds generally – removing the need for the multi-manager solution. He argues that it is in the quantitative analysis that most investors lose out.
“Quite often you will see a fund shown as being top over one year, two years, three years and five years. An investor at that point might think they now have a fund that is good over the short, medium and long term. “But McGahan argues that fund could have had a large spike in the performance over the last few months. As those few months are included in the one year performance figure which shows the fund is top and is also included in the three year and five year data, this misleads the investor into buying the fund at exactly the wrong time when it is most expensive,” McGahan says.
He explains that to assess whether a fund’s performance is down to the skill of the manager and whether that skill is transferable to future decisions the manager might make, one has to exclude the small short term spikes by assessing a fund on a discrete monthly basis. This means that each month gets its own score, so any spikes only have a good score in that particular month.
Finally McGahan says risk has to be assessed using measures such as standard deviation and Sharpe ratio – respectively deviation from the mean average performance each month and outperformance relative to risk.
However for those still sold on the multi-manager story, while not particularly being a proponent of multi-manager funds, on McGahan’s own assessment criteria he can highlight Jupiter Merlin Growth and Jupiter Merlin Income and Henderson’s Multi-Manager Income and Growth as out performers with proportionate risk and deviation scores.
You have to be brutal about it – if multi-manager funds don’t perform get rid of them
Henderson Income and Growth has returned 17.1 per cent over one year against its IMA Cautious Managed sector average of 16 per cent. It has achieved 44 per cent over five years against the sector average of 20.3 per cent.
Jupiter’s Merlin Income Portfolio in the IMA Cautious Managed sector meanwhile has returned 23.2 per cent over one year and 44.2 per cent over five years while the Jupiter Merlin Growth in the Active Managed sector has returned 26.3 per cent against the sector average of 20.7 per cent and over five years has returned 56 per cent against a 33.6 per cent sector average.
Danny Cox says he likes the Thames River multi manager team as “they have a good record and their charges are reasonable”.
With Thames River Cautious Managed returning 13.3 per cent over one year and the Thames River Active Managed returning 14.2 per cent over one year both funds are nevertheless under the average for their respective sectors.
But there are still those who would not advise clients go within a mile of multi-managers. “I’d rather a client with modest means invests into an internationally diversified investment trust like Alliance Trust,” says Butler. “It won’t blow the lights out but it will deliver the market return at a modest cost. Failing that I’d suggest one uses a mixture of Vanguard index funds. We use mainly DFA funds ourselves and tightly rebalance them whenever they deviate from the agreed allocation.”
It is apparent that despite this decent performance over the downturn, the multi-manager debate is an argument where the two sides are clearly never going to meet.
