While it might seem a logical step for a fund picker at a platform or adviser firm to launch their own multi-manager offering, it is anything but straightforward.
In an environment where investors often eschew fund-of-funds due to the higher charges associated with the strategies, launching a new product requires some bravery – particularly given recent market volatility.
Launching its range at the end of June 2017, Chelsea Financial Services’ managing director Darius McDermott (pictured) said the move came after two years of preparation. 
“We ran a paper-based portfolio but with real money for two full years prior to the launch of our funds to give us some greater experience,” said McDermott.
“I’ve been interviewing fund managers and been an industry professional for 23 years but actually it is a separate challenge when it comes to running your own money.
“There was some reputational risk for us because it’s not something we’ve done historically. We wanted to make sure we had the confidence to launch the funds and do a good job for our investors.”
McDermott said that as an execution-only business Chelsea did not have a discretionary management arm prior to launching its own funds, with its clients often comfortable to construct their own portfolios.
“But there is a portion of our client-base who know that they need to save and don’t necessarily have the time, skillset or want to do it themselves,” he said.
The Chelsea range – which includes VT Chelsea Managed Monthly Income, VT Chelsea Managed Cautious Growth, VT Chelsea Managed Balanced Growth, and VT Chelsea Managed Aggressive Growth – has been marketed at existing clients.
Performance of funds since launch
Source: FE Analytics
Launching in the middle of one of the least volatile years in recent memory, the funds were able to take advantage of six months of relatively benign market conditions before the environment started to deteriorate at the start of last year.
“What we’ve learned is that you do have to be all the things that fund managers have said to me about being long-term investors and appreciating that even the fund managers we have a high conviction in will have periods when they underperform,” he said.
“Last year was – and particularly the last quarter – was very interesting for us because we thought our portfolios were defensively positioned, cautious and well-diversified,” said McDermott. “And then we got the proof of the pudding: when markets really accelerated south that’s when our funds really started to outperform.
“Our balanced and monthly income funds were doing really very well anyway but actually all four funds were ahead of all their benchmarks top quartile in the appropriate IA sectors.”
However, McDermott said it hadn’t all been smooth sailing, with some positions working better than others.
He explained: “We’ve had a position since we launched in gold and silver for diversification, to hopefully give us some inflation protection and for all the usual reasons that you might hold them.
“But so far that has been the single biggest detractor from performance and we have to remind ourselves why we hold that position in the first place.”
Performance of Nasdaq Philadelphia Stock Exchange Gold/Silver index in 2018
Source: FE Analytics
McDermott added: “When things are going well, we pat ourselves on the back and say ‘well done’ but actually it’s the other way round when things are going less well, then you need to show your patience and conviction.”
For Skerritts Wealth Management head of investments Andrew Merricks, the launch of its own range in February 2018 coincided with a difficult time for markets, which proved a stern test for the funds.
“We launched just over a year ago into a correction, which wasn’t ideal,” he said. “We felt that we were on the backfoot from day one.”
Having run the funds – VT Esprit Careful Growth, VT Esprit Tactical Alpha Plus, VT Esprit Tactical Balanced, VT Esprit Tactical Growth, and VT Esprit Tactical Income – in a model portfolio format previously, however, the firm had a greater track record of experience to draw upon.
Merricks added that while the range had faced some stiff tests during the first 12 months of the year, it had performed as expected.
“I suppose in hindsight we had a strong conviction that it was a correction and not the start of a long-term bear market,” he said. “For that reason we were prepared to stick [by the strategies], because we invest quite thematically. 
“We’ve identified themes that are multi-year, so whenever there is a correction as long as those themes remain intact they’ll get bought again because they have become 15-20 per cent cheaper than they were three months ago. They’re still a good theme and good investment ideas going forward.”
However, the nature of the correction – particularly towards the end of the year – made for some painful performances.
“If we had our time again we would probably move to reduce the equity content and go more defensive a bit earlier in that downturn,” said Merricks (pictured).
“The research we were getting was suggesting another leg down in December and we should have done something there to protect [them] but if we did that maybe we wouldn’t have got the bounce that started the day after Boxing Day and that’s what we have to weigh up as well.”
Performance of funds since launch
Source: FE Analytics
According to Merricks, the launch of the fund range has allowed him to consider the strengths and weaknesses of the products over model portfolios.
For example, when it comes to rebalancing the model portfolios the process can often be lengthy and difficult to make projections.
“With the models we rebalance those quarterly but we have to start making sure that the funds are available on platforms we use, so that we have to start talking about the rebalance at least a month beforehand,” he said.
“You’re always taking a four-month view, really, on where you’re going to be. Four months is a long time in this current climate. Four weeks or four days is a long time to try and position.
“Because of the rebalancing process it means you can’t really change when it starts rebalancing. it’s a far more clunky approach. Whereas with the fund it can be more immediate.”
However, Merricks said that transparency of model portfolios was superior to the funds in that clients would be able to see what exactly are the underlying holdings.