A new survey has raised doubts that multi-manager funds are offering quite the degree of diversification, cost and performance benefits they say they are. Cherry Reynard investigates
This month, FundsNetwork said it would be targeting legacy with-profits business for its new unit-linked offering to be launched later this year.
The group said that the asset allocation in with-profits funds had changed so dramatically that in many cases, it was worth the cost of switching. Clearly this is not new and many advisers have been weighing up the cost of switching client assets with the potential loss of staying in an underperforming investment for some time.
Many fund management groups are now making the case that a short-term loss is better than remaining in an opaque, badly-run, expensive with-profits fund. But can they be sure that the alternative is offering them the diversification, risk, performance and low cost that they seek?
Given a choice, most advisers would probably shift much of their with-profits business. Solvency requirements have led to a substantial shift in the asset allocation of with-profits products. The average fixed interest exposure of with-profits is now over 50%, well above the level five years ago. It tends to be the case that the weaker the life office supplying the fund, the higher the allocation to fixed interest.
Equally, few would argue that this is not the best time to have a high weighting in fixed interest. Veteran fixed interest fund managers Paul Causer and Paul Read of Invesco Perpetual recently said that their view on the bonds markets is cautious, because the absolute level of bond yields is low.
But this is less the point than the fact that a one-stop shop long-term savings product such as a with-profits fund should provide consistent, predictable returns through a fully diversified portfolio. If it has a high allocation to bonds and large swings between asset classes, it is not doing that.
There can be few who are unaware that with-profits - on the whole - are not doing their job, but that alone does not make it worth the switch. Consider that an existing with-profits investor has £10,000 in the fund. A typical market value adjuster may account for 10% of that if they exit the fund. There is the cost of investing in another fund, which could be up to 5%, but is likely to be 2%-3% through a fund supermarket or discount broker. The new investment has a large drop to make up, which could take several years.
But that would be worth it for a well-diversified, cost effective, well-run portfolio for the long-term. Any investment for longer than five years should reward the move. But how can investors be sure that is what they're getting? A recent survey by Seven Investment Management (or 7IM) in conjunction with Lipper and Fitzrovia shows that investors may not be getting quite the product that they think, even once they have exited their with-profits investment.
The survey looks at diversification, cost, volatility and performance over one year for multi-manager funds, long touted as a potential successor to with-profits. The diversification statistics vary substantially even when funds have similar stated benchmarks. For example, in the 'Moderately Cautious' category (where the benchmark operates along a 25% equity-75% bonds split), the Scottish Widows Cautious Portfolio has 15% in equity and 85% in fixed interest. But the equivalent CF 7IM Moderately Cautious portfolio has 28% in equity and 59% in fixed interest. And while the 7IM fund has 52% held outside the UK, the Scottish Widows portfolio has 80% in non-UK assets.
The argument for and against active asset allocation is one that splits the multi-manager industry. Those against active asset allocation argue that it increases risk and does not add value over time. Controversially, this survey seems to prove the opposite - that active asset allocators generally have greater diversity and lower risk. In the Adventurous category, for example, John Chatfeild-Roberts's Jupiter Merlin Growth Portfolio (which uses active asset allocation to generate returns) has a volatility score of 0.45, the 5th lowest out of 19 funds measured. Mark Harris of New Star also uses active asset allocation and his Managed Portfolio has the lowest volatility of all the funds in the Moderately Adventurous sector.
In this survey, manager of manager groups are in the top half of the table for volatility. Funds from both SEI and Abbey have among the highest volatility for their funds in the Adventurous sector. It is perhaps unfair to compare these funds over one year as manager of manager groups prefer to look at performance and risk over a full market cycle. But it certainly raises the question as to whether manager of manager groups can claim - as many have - that their product is inherently lower risk than that of the fund of funds providers, particularly those that take active asset allocation decisions.
The report was also revealing on costs. Some multi-manager groups are certainly getting their act together in terms of pricing. Companies like Axa, Abbey, Fidelity and Skandia have TERs of 2% or below on all their funds. This is competitive with single-strategy funds and debunks the myth that multi-manager has to be a high cost solution.
But at the other end of the spectrum, there are two funds from Insight (UK Dynamic Managed and Global Dynamic Managed) that have TERs well in excess of 3%. Investors do apparently pay more for the active asset allocation approach of Jupiter and New Star - both have TERs at around 2.5%, but as these funds both lurk at or near the top of their sectors, investors may well feel that the price is worth it.
The with-profits investor is likely to be feeling a little fragile, especially if he has just parted with an apparently large sum of money in the expectation that his new investment will serve him much better. From a client relationship point of view, another poorly-performing, ill-diversified, high-cost fund could be a disaster. The multi-manager market is extremely competitive and advisers need to make sure providers can back up their claims of low-risk, low-cost, well-diversified products. Seldom has caveat emptor been more important.
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