Fund of funds: Costly stability?
Fund of funds are either a way of spreading risk across a number of investment funds or an expensive tracker.
Fund of funds invest across a number of different funds.
Different funds will have different focuses - be they in certain sectors or markets - but they invest in a number of different investment funds investing in equities, bonds, foreign equities or almost anything else.
The hope is they can both spread risk and tap into the best returns from the best fund managers and sectors.
However, the costs can be higher - as investors are in effect paying the manager of the fund of funds and the managers of the individual funds.
Criticism grows as some feel the point of paying a fund manager in the first place is for them to search the best firms in a sector to find the best or most stable returns depending on the risk demands.
Therefore a multi-manager fund becomes a middleman.
Marcus Brookes, head of multi-manager at Cazenove Capital, explains funds of funds can spread risk.
Speaking at a Morningstar investment conference, he said: "There are many funds where the risk is spread putting them together in one place to deliver against a bench mark."
He explained many investors take to such funds as a means of getting through the financial cycle unscathed.
Mr Brookes added fund of funds allowed investors to stay on top of movements in the markets through constructing a portfolio of funds.
Darius McDermott, managing director of Chelsea Financial Services, took a colder line towards the funds.
"The downside of mutli-manager funds is the cost," he said. "You could end up with an expensive tracker."
"What is key is the total expense ratio (TER) - which can be between 1.6 per cent to three per cent. Anything over 2.8 can damage returns substantially."
He added with fund managers and their teams moving around it would be hard to ascertain who you are trusting with your money.
Mr Brookes concurred that some of his competitors were just expensive trackers with fixed benchmarks.
"Too much diversity can ruin performance."
He explained the kind of clients that looked to funds of funds. "Some need diversity as a rock, such as accident victims with substantial sums to invest but want greater stability."
However, they can also give a little exposure to "spicy" areas, Mr Brookes said.
Michael Basi, of Coventry-based financial advisors IFA Stop, explained funds of funds do have a place - but as a niche product for specific needs.
"A good example is provided by Skandia at the moment who provide an Emerging Markets and Commodities fund of funds," he said.
"This allows maximum diversification within a relatively high-risk area; the decision to invest here is only part of an overall portfolio which will be designed by the adviser based on the risk profile and getting to know their client.
"For this purpose - diversification within a high risk sector - fund of funds do their job well, and are well suited to clients who want a large element of protection within portfolios, but are willing to risk a significant percentage in higher-risk to hedge against inflation and provide real growth."
He said typically these clients would place 20 to 25 per cent of their portfolio to higher risk asset classes of which the appropriate fund of funds could deliver 15 to 20 per cent of this.
However, he added there was little point to fund-of-funds across multiple sectors, assets classes and markets - leaving them as "effectively expensive trackers".
Mr Basi added such wider funds seem to take the role of an adviser but without the specific tailored approach for the individual client's life that is the advantage of taking advice - assuming everyone's approach to risk, and required diversification, is the same.
Comments
Newsletter sign up