Multi-manager funds that can only invest in products belonging to the investment house providing them have returned more over three- and five-year periods than those that are free from constraints.
Data shows fettered multi-manager funds in the IMA Active Managed sector have outperformed their unfettered equivalents by 8.1 per cent over a five-year period, and nearly seven per cent over three years.
Returns of fettered and unfettered MM funds in Active Managed sector
| Name |
3-yrs (%) |
5-yrs (%) |
| Fettered multi-manager |
17.6 |
24.1 |
| Unfettered multi-manager | 10.8 |
16 |
Source: Financial Express Analytics
It is a similar story in the Balanced Managed sector; fettered multi-managers again returned more over five- and three-year periods, by 6.4 per cent and four per cent respectively.
Returns of fettered and unfettered MM funds in Balanced Managed sector
| Name |
3-yrs (%) |
5-yrs (%) |
| Fettered multi-manager |
15.9 |
20.7 |
| Unfettered multi-manager |
11.9 |
14.3 |
Source: Financial Express Analytics
Unfettered multi-manager funds are traditionally seen as having a clear advantage over those that are fettered, as they are able to select funds from any investment house.
This research, however, questions the benefit of having a larger pool of funds to choose from. While fettered funds are cheaper, as they don’t pay a management charge on the funds they hold, the disparity in performance can not be solely attributed to lower costs.
According to Financial Express, the average Total Expense Ratio (TER) for fettered funds in the Active Managed sector is 1.73 per cent, compared with 2.28 per cent for unfettered funds.
Mark Dampier, head of research at Hargreaves Lansdown, says lower TERs do go some way in explaining the superiority of fettered multimanager funds, but thinks the advantage of working in-house is the defining factor.
"I think there is a misconception that multi-manager funds with a free licence will do better than those which are constrained," he said.
"Fettered funds have a better information flow since they’re in-house. They know exactly what’s going on with the funds and have a direct relationship with the managers."
"Unfettered multi-managers do not have this up-to-date information."
Dampier still favours multi-manager funds which combine a fettered and unfettered strategy.
"This way you get the best of both worlds," he explained. "A fund like Jupiter Merlin Growth holds a lot of Jupiter funds, but is able to outsource so has the pick of the best funds from elsewhere."
Performance of funds over 5-yrs
Source: Financial Express Analytics
Adrian Lowcock, senior investment adviser at Bestinvest, believes a wider choice of funds can actually hamper some multi-managers.
He commented: "Many people expect unfettered funds to outperform because they have no constraints – indeed, no investment house can claim to be the best at everything."
"However, having a bigger market to choose from does not necessarily translate to higher returns. It is all well and good having more choice, but if the fund manager gets it wrong, while charging clients more in the process, fettered multi-managers are always going to come out on top."
"However, I’d suppose the very best unfettered multi-managers would top the list overall. The worst performers will bring the average down, but unfettered managers have the potential for higher returns."
According to Financial Express data, two of the top-three performing multi-manager funds in the Active Managed sector over three years are unfettered funds: Margetts Venture Strategy and Jupiter Merlin Growth Portfolio.
However, Pru Growth, which only invests in M&G products, was the top-performing fund overall.
Rob Burdett, co-head of Thames River Multi-Capital, thinks unfettered products are a safer bet in down-markets.
"Unfettered funds tend to outperform as they are less exposed to the style bias of a single investment house," he said. "Unfettered products have more flexibility to change their investment strategy."
Financial Express data confirms unfettered funds in the Balanced Managed sector lost less than their counterparts between September 2007 and March 2009, although fettered funds came out on top in the Active Managed sector.
The news follows a Trustnet story that showed single-manager funds outperformed their multi-manager rivals.