When an asset manager is enjoying an excellent reputation or hitting a purple patch investors might be tempted to add several funds from the company in their portfolio.
This approach has its merits as investors can gain access to the same talent pool across multiple strategies. Also, once due diligence on this fund house has been done properly, then it should apply across all its strategies.
There are also financial incentives for investors, as holding several funds from the same provider might offer cost benefits through shared expenses and potential discounts on fund fees.
But there is also a risk in having a large exposure to a single fund house, which is known as provider risk. A component of this is related to the style bias, as a fund house may apply a similar proves across its range. As a result, investors might have diversification in terms of market exposure but not in terms of investment style.
Nick Wood, head of fund research at Quilter Cheviot, said: “Taking the most obvious recent example in the UK, Baillie Gifford is largely a growth house. Anecdotally, plenty of investors were attracted by the strong outperformance in recent years, and invested across different regions with Baillie Gifford, something which would have hurt when growth fell out of favour.
“That said other asset managers may be less of a risk. In the case of a manager where underlying funds have different processes and styles, with no distinct house view, the risk is lower.”
Rob Burgeman, investment manager at RBC Brewin Dolphin, added that JP Morgan and BNY Mellon are other examples of process driven investment houses, whereas Premier Miton and Polar Capital are more fund manager driven.
Therefore, it is essential to check what is held inside each fund and understand their style bias before buying units in different funds from the same investment manager.
Henry Cobbe, head of research at Elston Consulting, said: “Holding several funds from the same provider may not be a problem per se, but it can be a problem if it creates unintentional or misplaced biases within a portfolio.
“A more diversified approach across styles may have led to holding funds from different providers that could have helped mitigate this. It is not the name of the house that saves you, it is the diversification and adaptation of style factor.”
For Kamal Warraich, head of equity fund research at Canaccord Genuity Wealth Management, it is also more about what’s inside the funds than the number of funds from a same house.
He said: “If the funds are suitably differentiated and indeed managed by different teams within the same house, then numbers matter much less.
“It becomes more about whether you want to be aligning your client’s prospects with that of a particular house, and that’s largely philosophical.”
Yet, James Rowbury, portfolio manager at Brooks Macdonald, warned investors against holding three or more funds from the same group. He said that they should ensure each fund demonstrates distinct differences and contributes significantly to the overall portfolio mix.
Burgemann suggested having no more than 20% of the overall portfolio with one house in terms of active management.
In addition to the style, the financial situation of an investment manager is equally important, as a fund house can collapse.
Investors must, therefore, make sure they are satisfied with the robustness of the business they want to invest with.
A consequence of this is that small boutiques are inherently riskier than larger businesses as they are financially weaker and more often than not reliant on key individuals.
Burgeman said: “By all means have exposure to a small boutique house, but smaller houses tend to be less well-resourced and are often reliant on the expertise of certain key individuals.
“Risk controls are also important, and these can be lacking in smaller houses (i.e. with Woodford Investment Management).”
The now-defunct asset management firm run by former star manager Neil Woodford collapsed after it was forced to shut its funds in 2019 when it was unable to meet redemptions due to the amount of illiquid assets held in its open-ended funds.
Warraich added that there is more risk in having three or more funds from a small boutique because business prospects are less certain and the funds could close if cornerstone investors pull their money out.
Provider risk is less of an issue with passive funds, as they simply track an index without taking any style bias (unless they track a specific growth or value index). However, Cobbe warned that investors have to be more cautious with newly launched passive funds.
Cobbe said: “We do monitor AUM traction within newly launched index funds and ETFs in case there are any concerns around commercial viability.
“Providers can be quite brutal and if a fund is not gaining assets – even if it is cost-capped – they might decide to kill it off. A walk around the ETF graveyard will show you that.”