Something for Everyone

by | Nov 23, 2011

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It would be nice if even one good thing came out of the last four years’ market turmoil. A sharpened sense of awareness among clients, for example, and a renewed drive to invest wisely. Instead, however, we’ve got confusion, a bewildering lack of comprehension about global and macro market drivers, and a severe and possibly permanent blow to the public’s faith in the soundness of its own judgement.

Perfect conditions, actually, for a sales surge among multi-manager funds. Clients know that they need to invest – but, with their own confidence shattered, what could be more attractive than to leave the task to someone who’ll spread the risk cheaply, effectively and with judgement?

By opting for multi-manager funds, investors are clearly saving themselves considerable time and effort – not only in choosing the actual funds for their portfolios from the thousands on offer, but also in keeping track of performance and making changes to the composition and weighting of their portfolio when necessary – for instance, in response to changing market conditions.


And yet. Such potential positives can pretty much be taken as a given with all multi-manager offerings. And that in turn would imply that there must be a different reason for the recent explosion in demand?

Yes indeed, explosion is not too strong a word. Data from the Investment Managers Association (IMA) indicate strongly that although the financial crisis of 2007/08 sent investments of every kind into a tailspin, the fourth quarter of 2008 saw a fresh surge in demand which has escalated into a positive tidal wave in the last three years.

A Sevenfold Increase in Three Years

Way back in the halcyon days of 2006, when the financial crisis was no more than just a twinkle in Nouriel Roubini’s eye, net retail sales of fund of funds totalled £3.06 billion, according to the IMA. But they almost halved to just £1.60 billion in 2007, as the financial landslide got under way – and by 2008, as the crisis went into overdrive, sales slumped to just £990 million. Indeed, in the third quarter of that year they hit a new low of just £73 million.


And that, you might have thought, would be the end of that. But you’d have been wrong. Rather incredibly, the seeds for the rebound appear to have been sown in the fourth quarter of 2008 – perhaps the darkest period of the whole financial night. The quarter saw net retail fund of fund sales jumping back to just over £182 million. 2009 saw total retail sales soaring to nearly £3.9 billion, and in 2010 year they positively rocketed to £6.62 billion.

This year has been much the same. Forget about timid investors – IMA figures for the first and second quarters show aggregate fund of fund retail sales of £3.81 billion – 21% ahead of the equivalent £3.15 billion for the first two quarters of 2010. On this reckoning, sales are now running at twice the levels of 2006.

Trust in the Professionals

These figures suggest that investors who are worried about the extraordinary market volatility are opting to place their trust in the hands of professionals with their fingers on the pulse. The inherent positives of fund of funds – the handson management in very uncertain times, and the very significant savings in time and effort– have clearly assumed much greater importance.


As you’d expect, the majority of fund of funds investments come with labels that place them in the active/cautious and balanced managed sectors. And now that so much detailed research about portfolio strategy, composition and asset allocation is available through sources such as Trustnet, you might imagine that all the client has to do is look up the right category and make his own choice. But as IFA Magazine discussed last month in Emma- Lou Montgomery’s feature on multi-asset funds, the categorisations of terms like ‘cautious’ and ‘balanced’ can vary widely. So investors still need to be very clear in their own minds how the funds are aligned to the risk they themselves are willing to take on board. And that’s a task that a conscientious IFA should be anxious to fuilfil. Indeed, he’d be failing in his duty if he didn’t make it absolutely clear.

Investors also need to be made aware that fund of funds, in general, come in two flavours: ‘fettered’ or ‘unfettered’. The manager of a fettered fund of funds can only invest in the funds of the investment house that employs him or her. An unfettered manager, by contrast, can of course invest in whatever he or she believes to be the best funds from across the entire market place.

The Sector-Based Approach

Jupiter, whose four market-leading Merlin portfolios are all unfettered, insists that allowing the managers of its funds of funds full freedom to invest in what they consider to be the best funds across the entire market place is an absolute. So would they all, given the choice. But there is still room for divergent policies when it comes to labelling the funds.


Rather than asking detailed questions about the client’s risk preferences, Jupiter prefers to go start the discussion with a clear idea about market segmentation. The four Merlin portfolios are designed with differing weightings in respect of geographical issues, equity exposure and fixed interest assets – plus the option to invest in property assets. This, says Jupiter, enables advisers to direct their clients toward portfolios that best match their own investment circumstances and needs.

The Jupiter Merlin Income Portfolio, for instance, holds up to 60% of its underlying funds in (mainly UK) income-focused equities, and much of the balance in fixed interest. The Balanced Portfolio invests in funds that provide exposure to international equities and fixed interest stocks; the Growth Portfolio retains a core holding in the UK but spreads its equity and fixed interest holdings across a wide range of geographical areas; and the Worldwide Portfolio has no particular geographical bias at all but focuses on international equities and fixed interest stocks across the entire planet.

The Client’s Needs as a Starting Point

Standard Life’s range of five MyFolio Multi- Manager funds adopt a slightly different approach to their presentation of risk to the client. Rather than focusing specifically on tactical strategies such as growth, UK or international, Standard Life prefers to present the options as a gradation of risk.


Thus, MyFolio Multi-Manager I is therefore marketed explicitly at those who are “conservative” with investments; My Folio Multi-Manager II for “relatively cautious’ clients, and so on – through to My Folio Multi-Manager IV for clients who are “very comfortable” with investment risk.

Of course, the risk profile for each MyFolio Multi-Manager fund is reflected in the underlying asset allocation. So MyFolio Multi-Manager I heavily geared to underlying funds that major on defensive assets, while the emphasis of MyFolio Multi-Manager V is overwhelmingly on growth assets.

Like its rivals, Standard Life says it conducts regular strategic asset allocation reviews to optimise the expected return of each portfolio. Managers are free to replace funds whenever a more appropriate alternative is found. Standard also has a “fund selection governance committee”, including independent experts from outside the institution, that oversees the research process used for the MyFolio funds.


The full MyFolio range of 15 risk based funds (which include the multi-manager offerings) were only launched a year ago, but already they have become one of the fastest selling fund ranges in Standard’s history, with over £700m in assets under management.

To grab 11% of a market from cold in twelve months is impressive, and Standard believes there are two reasons for its success. Firstly, it says that the MyFolio range delivers diversification in a “simple and cost-effective” way. And secondly, it stresses that the suite meets the essential needs of most investors and that it can easily be delivered through the IFA advice process.

These two institutions are far from unique in their wish to lead the investor toward simpler decisions. Henderson, Cazenove, Russell and Legal & General Investment Management are all making significant offerings in the field of fund of funds, and more seem to get launched with every passing week. It’s clear that the growing demand comes from an increased level of concern among investors about the ongoing financial crisis and market turmoil – and, in no small part, to the suspicion that the markets are being driven by macro developments that the layman cannot hope to understand. At times like these, the maximal diversification of a fund of funds comes into its own.

RDR: Opportunities and Challenges

Yet there are still more factors that are helping to support the rising demand for these products. Regulatory changes such as the Retail Distribution Review (RDR) are already beginning to directly affect advisors, their work and their relationship with their clients.

RDR, of course, aims to ensure that clients benefit from fairer, more transparent business and a higher level of expertise among investment advisers. Aviva Investors describes the change as “an opportunity to develop more competitive business models, principally by focusing on where they add most value and outsourcing elements which can be provided more efficiently by third parties”.

As RDR forces the move away from commission-based systems to a more transparent, fee-based regime, advisers will of course find themselves under even greater scrutiny. Clients will probably want to likely take full advantage of being able to look much more closely into the service that’s being provided, and they’ll be looking to compare added-value benefits between advisers – including things like the quality of their research, how well qualified they are to advise – and, over time, their track record of success.

Part of the problem is that IFAs will also be required, in theory at least, to consider the full range of funds available if they are self-selecting for clients. With literally tens of thousands of funds available, that’s a mighty tall order. And that’s before we get to the serious cost implications of all this research, which could be daunting not just for the IFAs but also for their newly-wary clients.

It stands to reason that multi-manager funds offer a ready-made and proven solution for IFAs in this situation. The ability to mitigate the administrative and best-advice burden of RDR, while also leaving themselves with valuable time in which to attract and retain clients, is the other side of the equation which neatly matches the renewed demand from investors. It’s a win-win situation.

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