Their consistent low risk performance has meant that some IFAs have ignored fund of funds in the pas...
Their consistent low risk performance has meant that some IFAs have ignored fund of funds in the past but with only isolated pockets of activity within the FTSE, the approach is now coming into its own.
Recent research conducted by RSA Investments into Autif fund of funds performance figures has thrown up several interesting findings that support their increased use at this stage of the economic cycle.
Not least was the fact that the recent outperformance of active fund managers has been reflected in the results of the UK's growing number of fund of funds.
According to the study, it is now more than two years since tracker funds demonstrated any worthwhile outperformance against active managers and this, unsurprisingly, has translated into strong ongoing performance from fund of funds.
During the year to 1 July, the FTSE 100 moved up only 2.1%, for example, meaning that after tracking error and expenses, most passive managers were lucky to return 1% over the period. This compares to a 9% return from the average UK All Companies fund over the same period. Similarly, recent industry studies now report the rising number of funds in the UK All Companies, UK Growth, and Europe sectors that have outperformed their indices and the fact that almost three quarters of US funds have beaten the index. Naturally enough, this outperformance has been capitalised on by fund of fund managers.
Of the top 20 fund of funds for example, 18 have beaten the FTSE 100 and the FTSE All Share over the past year to 1 August.
Over two years, 18 of the top 20 beat the FTSE 100 and 15 funds of funds outperformed the All Share.
These numbers drop over three years to 9 funds outperforming the FTSE 100 and only 6 beating the All Share, reflecting the very different conditions in the index three years ago when financials, pharmaceuticals and oil companies were still making all the running in the market assisted by a steady stream of floatations and mergers.
Importantly though, the majority of those fund of funds at the top end of the performance spectrum have also been able to demonstrate lower three year volatility than the index. Of the top 20 funds, for example, 13 funds operated at lower volatility than the FTSE 100 and 12 at lower volatility than the All Share.
This growing trend of outperformance coupled with lower than index risk has already seen several larger IFAs review client portfolios as the performance differential between the average tracker and a worthwhile fund of funds hit more than 14% this year.
This, and their ability to hold diverse assets (such as cash or overseas equities) at low costs, could well see fund of funds enjoying a 21st century revival.
Martin Clements is lead fund manager of
RSA Investments' Portfolio and Managed Trusts
All-day event on 24 April
Consequences could be more severe than in stress tests
AFH has six segregated mandate funds
Variable operating expenses