Putting your money in the hands of the experts effectively means you are letting them make your asset allocation choices for you, rather than determining for yourself which area of the market will be the fastest growing over the medium- to long-term.
However, do these funds offer the level of diversification investors need to protect their portfolio from sharp market falls, especially after asset classes proved they could once again move in the same downward direction in June?
Juliet Schooling-Latter, head of research at Chelsea Financial Services, says for weathered investors who take an active interest in their portfolio, they are likely to be better off selecting their own investments to put in an ISA or SIPP. "Our investors don’t have a lot in funds of funds, they tend to use our research to build their own portfolios," she said.
However, she says two types of investor would be best-suited to using these models.
"They do provide a useful tool for people who don’t want to make any decisions themselves on asset allocation or for people who are just starting out with a small pot of money to invest. You wouldn’t be able to get that level of diversification with a small amount of money."
Schooling-Latter (pictured) says the Jupiter Merlin range of funds of funds, managed by FE Alpha Managers John Chatfeild-Roberts, Algy Smith-Maxwell and Peter Lawery, stand out in this field. These hold an average of 15 to 20 individual funds.
Schooling-Latter adds that the portfolios closer to the 15-fund end of the scale are fewer than she would have expected, but says they can still offer investors a high degree of diversification without damaging overall returns.
"We all say diversification is good, and it is, but too many holdings and you dilute the benefits. It’s not going to contribute to performance. For fund managers who hold a lot of stocks, it’s not going to contribute a lot if you’ve got a lot of holdings in small amounts," she said.
The Jupiter Merlin Income fund, for example, has 15 holdings in the entire portfolio, including cash. Yet the four crown-rated fund has consistently outperformed the IMA Mixed Investment 20%-60% Shares sector over three, five and 10 years.
Over the last decade, the fund has returned 112.76 per cent while the sector has made 64.58 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The Jupiter Merlin Balanced fund, on the other hand, has 20 individual holdings, including a minimal exposure to cash. The fund has also outperformed its IMA Mixed Investment 40%-85% Shares sector over the long-term, although it has performed more in line with it over the last one and three years.
Gemmell Financial Services’ Chris Wise (pictured) says he also thinks funds of funds are a good choice for investors and adds that even those with larger amounts to invest can achieve a high degree of diversification by layering multi-manager funds with a different focus.
"If you look at the Cazenove Multi Manager Diversity fund, that has one-third in equities, one-third in fixed income and one-third in alternative investments," he said. "Within that, you can easily accommodate a lump sum of a certain size and it gives you a broad spectrum of investments. Then you can use a second fund of funds – like Cazenove Multi Manager Diversity Tactical for example – if you feel there are other areas to explore."
The four crown-rated Cazenove Multi Manager Diversity portfolio, run by Marcus Brookes and Robin McDonald, has nearly half the portfolio in its top-10 holdings. On average, each fund in the Cazenove Multi-Manager range has roughly 15 holdings, while the Aberdeen Multi-Manager funds will typically hold 22 to 24 funds.
The fund has consistently beaten the IMA Mixed Investment 20%-60% Shares sector over the last one, three and five years and absolutely walloped the consumer price index over each period.
Over the last three years, the fund gained 26.29 per cent while the sector picked up 18.97 per cent, according to FE Analytics. The consumer price index was up 9.49 per cent over this period.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Wise adds that funds of funds "do provide a very broad coverage depending on the mandate".
He says an added benefit of using multi-manager funds is that investors can access institutional products otherwise unavailable to retail investors.
However, Schooling-Latter says the biggest tool multi-managers have in their box is the ability to be flexible with their asset allocation, depending on their overall mandate.
"That’s what multi-managers should be able to do and that’s where they can add value," she said. "They should be able to tilt their portfolio within the parameters of the sectors in which they fall. That’s what the man on the street is paying them for."
She says most people who invest in funds of funds do not want to worry on a daily basis whether they are overweight equities or whether it is time to start picking up exposure to property and this is where the biggest advantage of multi-manager funds lies, in her view – a little bit of peace of mind.
