Fitzrovia research addresses key issues relating to multi-manager schemes and helps to clarify the sector for private investors
It says a lot for our financial services industry that most people still do not understand the difference between a fund of funds and a manager of managers - if the professionals in the financial services industry are not clear, then what chance does the private investor have?
Research carried out by Fitzrovia has compared some of the main issues relating to these multi-manager schemes and may shed some light on some of their key aspects. This will assist investors in making better evaluations on which scheme may be best for them.
The key issues which I think are relevant are as follows:
Diversification: For most schemes there is still a concentration on equities and fixed interest, with little focus on other relevant asset classes. These could include commercial property, index-linked issues, commodities and private equity. In times of uncertainty in markets (which is just about any time) good diversification is essential not only to spread risk but also to increase the probability and predictability of returns - the narrower the range, the greater the risk. Merely spreading investments across more equities is not diversifying the asset risk but just concentrating it.
Cost: the Total Expense Ratio (TER) is a crucial issue in the multi-manager world, as there is every opportunity for investment managers to not disclose the full TER and, in effect, the client is being misled as to the true costs of their investments. The issue with the TER is the two tier structure of charging which does not have to be disclosed. That does not mean that the cheapest is the best but clarity and good value must be crucial.
Volatility: This is an often ignored area, but managing volatility is vital for investors, especially after the frightening experiences during the crash of 2000. Most investors I find are rarely asked how much volatility they are willing to suffer in their investments and, if asked, are often looking to reduce it, not increase it. If our industry wants to win back the trust of the investor again, then this is an important issue.
Performance: This is crucial but I have found that the most important issue for clients has been that of consistency - are you going to be able to try and provide a similar result year after year over a medium-term basis? Merely having one 'star' year often implies a level of volatility in performance which can only scare clients. Again, at a time when we are trying to win back confidence we must try to show a level of consistency - "You did what you said you would do".
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