Funds of fund strategies investing only in index or smart-beta instruments have performed better than those investing only, or mainly, in active funds over the past five years, research from Morningstar shows.
In absolute terms, across six different investment categories, where there were passive-only fund of funds, Morningstar's data showed the passive-only option outperformed their counterparts investing in a blend of styles or active only each time.
In Morningstar's GBP Moderate Allocation category, for instance, fund of funds investing only in index or smart beta funds returned just over 4% in annualised terms over five years.
For those investing in a blended strategy or in active only, that return was under 3%.
While one reason for this is a general underperformance from active strategies, cost savings also play a big part in the findings, the data provider said.
In all categories, funds investing passively were significantly cheaper than those investing actively, or in a blended manner.
Taking the GBP Moderate Allocation category as an example again, the average KIID charge on those investing passively was around 0.5%, compared to 1.2% for active strategies.
The figure for direct investment funds in the same category was just over 1%.
Indeed, the average fund of fund charge across all categories were no more expensive than their directly invested peers. In fact, in some categories, like GBP Flexible Allocation, the fund of funds were cheaper.
Associate analyst for manager research at Morningstar Bhavik Parekh said: "One of the biggest critiques against investing in funds of funds is their double layer of fees and whether this extra cost is worth it.
"Some empirical studies do point in that direction; however, our analysis shows that picture is more nuanced. The data shows that on average, funds-of-funds cost more or less the same as their direct investment counterparts."
While in absolute terms the average fund of fund, and particularly those focusing on active underlying holdings, underperform non-fund of fund category peers, they come out better on a risk-adjusted basis.
In the GBP Moderate Allocation category, the Sharpe ratio of the average fund of fund was higher - around 0.35 versus around 0.3 - than those directly invested.
In the GBP Moderately Cautious Allocation category, not only did the average fund of fund show a higher Sharpe ratio than its directly invested counterpart, at around 0.44 versus around 0.36, but the average fund of fund investing in active strategies also had a higher Sharpe ratio, at around 0.37.
Morningstar's report suggested this showed fund of fund managers are "perhaps more successful in controlling risks on the downside and in delivering attractive risk-adjusted returns, but with less focus on relative outcomes".
Morningstar's analysis showed fund of funds strategies have been popular in recent years, with the sector seeing net inflows of £44bn in the past five years.
The majority of these flows have been into fettered funds - which invest exclusively in underlying funds run by the overall fund provider - most notably in Vanguard's LifeStrategy range. This range has accounted for a third of the net flows.
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