As it transpires many funds of funds look and act surprisingly similar, JPM Adviser Solutions' Jamie Farquhar shares his tips on what to assess when selecting one...
In recent years, the UK authorised funds universe has undergone significant growth and now numbers well into the thousands. At the same time, in an effort to make fund selection simpler through the provision of ready-made portfolios, a healthy fund of funds sector has also sprung up.
But with the number of fund of funds having grown by 43% in the last five years to stand at around 200 today (according to Lipper), the choice is now scarcely less bewildering. Hard-pressed advisers may feel what they need is a ‘fund of fund of funds’.
The number of fund of funds on offer implies that there is a huge amount of choice, but when profiling the funds on basic attributes, many appear to offer a similar deal.
Is it time for a fund of funds of funds?
Many of the funds are risk graded by external risk consultancy firms, with the aim of producing a set of portfolios that can be easily matched up with client risk appetites.
But, as risk ratings are based on asset allocation and not just volatility, the funds tend to invest in the same asset classes – often with remarkably similar percentage exposures to each. Pricing is also similar, with an average ongoing charge of 1.93% in the market and little spread either side of that figure.
Not surprisingly, performance differentiation between funds with equivalent risk ratings also becomes much narrower.
Among the fund of funds risk rated 5 by a well-known risk-rating agency over the last three years, there has been less than a 6% spread in performance against the average, compared to 31.2% in the wider IMA Mixed Investment 20-60% Shares sector (according to Financial Express).
This sector includes both fund of funds that do not use a risk-rated approach and multi-asset funds that do not have a fund of funds structure.
However, although at face value many providers and fund of funds may look pretty similar, if you dig deeper you should find an Aladdin’s cave of investment options.
Beyond the generic fund profile, there are many differentiating factors that could help you separate the best fund of funds from the merely average, and the core attributes for performance delivery are focused on the investment processes and research capabilities of the fund provider.
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