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We all know that investing in a fund helps diversify your overall portfolio and is far less risky than buying a collection of individual equities.
It also gives you the comfort of having a professional manager at the helm whose day job is analysing markets and making such investment decisions.
But how about if you could tap into the knowledge and expertise of numerous managers by having a portfolio packed full of all their best ideas?
Sounds intriguing, doesn’t it?
Well, that’s broadly the idea behind multimanager funds. In this piece we take a look at these products and explain how they operate, as well as highlighting the pros and cons.
Firstly, let’s cover some basics. There are two types of multi-manager fund. The first invests in funds run by other managers. This is traditionally known as the ‘fund of funds’ approach.
The second are ‘manager of managers’. This is where external managers with particular skills in certain areas are appointed to run certain parts of a portfolio.
In this piece we are focusing on the first category: funds of funds.
This type of multi-manager fund invests in other funds, rather than individual stocks. Their role is bringing together various investment approaches within one overall portfolio.
Combining such strategies enables them to choose the perfect blend for their aims and objectives. It also means that the fund can potentially act as a one-stop-shop investment solution.
While multi-manager funds have been around for many years, it was the bursting of the so-called dot.com bubble more than 20 years ago that fast-tracked their development. The collapse of overly-hyped technology stocks at the turn of the century illustrated the benefits of having a spread of assets in an overall portfolio.
This is why the multi-manager approach can be very seductive during times of high uncertainty and stock market volatility, when it’s not clear which asset classes will thrive.
While a traditional fund manager will research potential individual holdings, such as shares in certain companies, a multi-manager will analyse other funds.
The multi-manager fund will then buy units in other underlying funds. Which ones it chooses will depend on its asset allocation calls and views on global markets.
Close attention will be paid to the types of assets included in the portfolio they’re interested
in, as well as the longer-term track record of the manager – or managers – at the helm.
A decent multi-manager will be able to decide the optimum asset allocation mix and pick the
funds that best suit their overall objectives.
The key benefit is access to a wider range of fund management talent, which will hopefully lead to better diversified returns – and less risk being taken.
Another potential upside is combining the skills and expertise of different fund managers that focus on individual sectors, regions, or asset classes. For example, depending on the fund’s stated aim, a multi-manager may include a US large cap specialist and an experienced investor in European small caps, alongside a global fund.
Theoretically, it’s also easier for multi-managers to shift between assets – and make significant calls in response to market movements – simply through buying or selling a few funds.
A multi-manager approach is particularly attractive for investors that are maybe less experienced or who don’t have the time to make decisions about individual funds and managers.
Of course, there are no guaranteed routes to riches when it comes to investing and the multi-manager approach is no different. There are some potential downsides that you’ll need to consider – even if you decide they are not pressing enough to deter you from making an investment.
Top of the list comes cost. In many cases, multi-manager funds are more expensive than traditional ‘single’ funds, which can cause concern. As well as paying the fees relating to the multi-manager fund, investors generally have to cover the costs of the funds bought by your portfolio’s manager too.
That’s why the expenses are a vital consideration. There’s little point in benefitting from superior asset allocation if all your gains are swallowed up by sky high costs.
Of course, while increased diversification should equal less risk, there’s always the risk of the manager losing money by failing to make the right calls.
Investors that are drawn to the concept of multi-manager funds will also be faced with deciding how to play them within their overall portfolio. For example, someone wanting to focus on UK-listed companies may opt for a multi-manager portfolio that encompasses many leading funds in this area as a core holding.
Alternatively, they may opt for a multi-manager approach to access potentially riskier areas of the world in the hope of getting exposure while simultaneously diluting the risk being taken.
In many cases, multi-manager and single fund approaches can be used together within the same overall portfolio. It all depends on the investor’s objectives and attitude to risk.