While unfettered multi-manager funds have an unlimited pool of funds to choose from, they have fallen short of their less flexible rivals.
The average fettered fund has returned 8.93 per cent in the last five years, beating the average unfettered fund by 5.6 per cent. Over three years the margin of outperformance is 5.31 per cent.
Performance of average funds over 5-yrs
Source: FE Analytics
The trend is also prevalent if one looks at the performance of fettered and unfettered funds sector-by-sector.
According to FE data, the average fettered fund in IMA Flexible Investment – formerly known as the Active Managed sector – has returned 4.92 per cent over five years; by contrast, the average unfettered fund has lost 0.82 per cent.
In the old Balanced Managed sector, unfettered funds have fallen short by just under 5 per cent over five years.
Performance of average funds over 5-yrs
Source: FE Analytics
A number of fettered funds feature in the list of top performers in their respective sectors as well. Of the 20 top-performing funds in the IMA Mixed Investment 40-85% Shares sector over 10 years, five are fettered multi-manager funds.
These include the £202m Invesco Perpetual Managed Income and £939m M&G Managed portfolios, as well as Schroder Managed Balanced, which is also a top-20 performer over three and five years.
Although fettered funds have come out on top, Tim Cockerill, head of research at Rowan Dartington, says he’d always rather hold an unfettered fund.
"A house may have expertise in more than one area, but I can’t think of one that is the top of the tree across the board," he said. "Having the flexibility to outsource is very important."
"In this low-growth environment, the fact that fettered funds are cheaper has probably worked in their favour. However, the fact they’ve done better in general wouldn’t be enough to sway me."
"If you look at the very best unfettered funds, I’m sure they have done better."
According to FE data, the average fettered fund has a total expense ratio (TER) of 1.73 per cent, compared with 2.28 per cent for the average unfettered fund.
As Cockerill suggests, in general the best-performing individual multi-managers over three, five and 10 years have been unfettered. The likes of Jupiter Merlin Income Portfolio, CF Miton Special Situations, Margetts Venture Strategy and Unicorn Mastertrust can all hold external funds.
Danny Cox, head of advice at Hargreaves Lansdown, also prefers unfettered funds.
"Intuitively you would go for an unfettered fund since the manager has the opportunity to pick whichever funds he wants to compared to the fettered, which is restricted," he said.
"However there are clearly a number of average or worse-than-average unfettered funds in the multi-manager space which drag the average down."
"The difference in cost is also important: Schroder Managed Balanced has a TER of 0.92 per cent compared with Jupiter Merlin Balanced at 2.41 per cent," he finished.