Gleeson (pictured) says that there is little point in holding more than one fund in an asset class unless they have very different strategies."If you want to hedge away your manager risk by buying a series of similar funds in the same sector, you might as well buy a tracker," Gleeson said.
"We typically have one per asset class unless we can find two with contrasting strategies we need. For example, Unicorn UK Income, which is a small cap fund with an income focus, and then Liontrust Special Situations, which is driven by growth."
"If you have more than 12 funds in your portfolio, there are no more diversification benefits. We have done the numbers. On the other hand, below nine and you can’t really diversify."
Many investors worry that by putting all of their allocation to a certain asset class in one fund, they are leaving themselves open to the risk that it will collapse and leave them nursing large losses. However, Gleeson says this risk is negligible.
He adds that in many sectors, such as bonds, if any factor was significant enough to seriously harm a single portfolio it would affect the others, meaning that holding two or three funds would make no difference.
David Coombs, head of multimanager at Rathbones, agrees.
"I want to be active for the extra performance, so what’s the point of blending away that outperformance?" he said.
"Outside the US, last year every single fund I held outperformed its benchmark. You need to trust your work on the managers you have chosen. If you don’t want manager risk, then buy the passive."
Coombs says that a lot of multi-managers "play games" with a benchmark by buying different managers to hedge away the risk, but that this also hedges away the potential gains.
Both Gleeson and Coombs believe that focusing solely on a fund’s position in the performance tables rather than on its underlying strategy is a mistake.
Gleeson likes Liz Evans’ £89m Cavendish Asia Pacific fund, even though its numbers put it around the sector average over three years.
The fund has made 31.69 per cent over that time while the sector has grown 27.65 per cent, according to data from FE Analytics.
Performance of fund vs sector over 3yrs
Source: FE Analytics
However, Gleeson likes it for its high exposure to the less developed countries in the region such as Thailand, Indonesia and the Philippines.
This means it provides good diversification away from most funds in the sector which have large weightings to China, Australia and South Korea.
The fund has the highest exposure to Thailand in the IMA Asia Pacific ex Japan sector – 13.5 per cent, according to data from FE Analytics.
Only 12 of the 83 funds in the IMA Asia Pacific ex Japan sector have a higher weighting to Indonesia than the 5.2 per cent of Cavendish Asia Pacific.
FE Analytics data also shows that only three funds have less in Australia than the 4.9 per cent of Cavendish Asia Pacific.
Coombs says that it is difficult for investors to hold on to a fund when it starts to underperform, even when this is due to its style falling out of fashion rather than a manager losing form.
He says that this is also occasionally a problem for fund houses, who feel compelled to change strategy on a fund when it underperforms even if there are good reasons for the trend.
He gives the example of the Janus US All Cap Growth fund, which changed manager late last year after a period of poor results.
Even though performance has picked up since then – the fund has made 11.15 per cent over the past six months while the Russell 3000 Growth index has made 13.02 per cent – Coombs says that he has sold out of it as the strategy has changed and is no longer one he wants.
Performance of fund vs benchmark over 6 months
Source: FE Analytics
Coombs says that many investors do the opposite of what is good for them, selling out of a particular strategy just after it has had a bad period and just before a good one, "locking in their losses".