Many investors believe that funds of funds offer better performance in these sectors, with a lower risk profile than investing in a fund of direct equities.
However, looking at the Active, Balanced and Cautious Managed sectors in turn, Trustnet built a portfolio of all the multi-manager instruments that had been around for five years or more and compared it with a portfolio of single-manager funds with a long enough record.
In all three managed sectors, multi-manager funds underperformed their direct equity peers over one-, three- and five-year periods. In each case, the longer the track record was, the wider the gulf in performance.
Difference in returns between single- and multi-manager funds
| 5-yr returns (%) |
3-yr returns (%) |
1-yr returns (%) |
|
| Active Managed |
|||
| Average single-manager fund |
27.7 |
11.8 |
10 |
| Average multi-manager fund |
22.6 |
10.9 |
10 |
| Difference |
5.1 |
0.9 |
0 |
| Balanced Managed |
|||
| Average single-manager fund |
25.6 |
13.7 |
9.3 |
| Average multi-manager fund |
19.8 |
10.9 |
7.6 |
| Difference |
5.8 |
2.8 |
1.7 |
| Cautious Managed |
|||
| Average single-manager fund |
20.8 |
17 |
7.9 |
| Average multi-manager fund |
16.7 |
11.9 |
7.2 |
| Difference |
4.1 |
5.1 |
0.5 |
Source: Financial Express Analytics
Over five years the average outperformance of single-manager funds across the three Managed sectors was 5 per cent. Over three years it was 2.9 per cent and over one year the average outperformance was 0.7 per cent.
The widening gap in performance over time indicates that it is the higher management charges associated with multi-manager vehicles that account for the underperformance.
"Total fund TERs in excess of 3 per cent allied with bid/offer spreads in excess of 5 per cent are all too common," said Iain Tait of wealth management company London & Capital.
Chris Spear, managing director of Spear Financial, agrees that high TERs can be a problem, but there are some lower-cost solutions available and investors are sometimes happy to accept high charges if a fund is performing well.
"Charges are an issue," he said. "Some providers have tended to be good performers despite their higher charges, such as Jupiter Merlin. Saying that, their shorter-term performance is not sparkling."
"I would always look to a strong management team, such as that at Thames River, where Burdett and Potter steered an enviable track record through the credit crunch. I like the multi-asset approach of Rathbones, although a longer track record is needed."
"For a lower-cost option I have used fettered funds, such as M&G Managed Growth and Invesco Perpetual Managed Growth. They have not disappointed," he added.
"The consequence is that the underlying securities held within a multi-manager fund have to outperform by around 3 per cent per annum if the fund is to perform even in line with the indices."
Investors who believe that multi-manager portfolios offer them a lower-risk investment will be surprised to discover that funds of funds in the Active and Cautious Managed sectors are more volatile than their direct equity counterparts.
According to Financial Express data, the average single-manager fund in the Active Managed sector has 16.6 per cent volatility over three years compared with 17.2 per cent from the average multi-manager fund.
In the Cautious Managed sector, the average single-manager fund has a volatility score of 10 per cent over three years, while the average multi-manager vehicle has 10.6 per cent volatility.
In the Balanced Managed sector, multi-manager vehicles have a slightly lower risk profile, but the difference in volatility is only marginal.
A closer look at the performance of the individual funds in each sector highlights the importance of fund selection. Whilst the study reveals that, overall, single-manager funds tend to outperform multi-manager funds, three of the top-five best-performing funds in the Active and Cautious Managed sectors over five years are funds of funds.
In the Active Managed sector, Margetts Venture Strategy is the stand-out multi-manager vehicle, returning 60 per cent over five years compared with 22 per cent from the sector average.
In the Cautious sector, Henderson Multi-Manager Income & Growth is the most notable. Managed by Trustnet Alpha Manager Bill McQuaker, the fund has returned 35 per cent over the last five years, compared with 15 per cent from the sector average.
In the Balanced Managed sector however, no multi-manager funds appear in the top-five best performers over five years.