Choose your multimanager fund carefully

Investors opting for multi-manager funds need to take extra care when researching and selecting from the range on offer, according to Fidelity International.

As the popularity of multi-manager funds continues to rise, three distinct styles of investing have emerged, as it has become apparent that no one single approach can meet the needs of every investor.

Understanding that no particular investment approach is better or worse, advisers may want to extend their analysis of multi-manager funds to look at which investment approach is the most appropriate match for their clients’ specific investment goals. Fidelity outlines below what it believes are the three predominant approaches to multi-manager investing:

Risk Mitigators: Typically the larger, more institutional houses who make a virtue of their scale and potential cost advantage. While these funds aim to minimise risk through very broad diversification, often including as many as 60 funds within the portfolio, there is often a corresponding reduction in alpha generation, as many of these funds tend to track the benchmark;

Alpha Generators: Concentrate on producing strong returns by a bottom-up approach to fund-picking and portfolio construction. On average, these multi-manager funds have costs in the middle of the range, and usually focus on consistent risk-adjusted returns. Fund selection is more critical, and active asset allocation contributes less to the overall performance or volatility. Fidelity believes this ‘fundamental’ approach meets the principles and expectations of multi-manager investing most frequently.

Aggressive Asset Allocators: Lie at the other end of the spectrum – with total fees on average almost one percent higher than the risk mitigators, but offering some of the best-performing funds over short-terms within the ‘actively managed’ category. However, some may argue that much of their performance can be attributed to successful sector bets, rather than the fundamental fund selection imperative to the principles of multi-manager investing. These multi-managers typically show higher levels of volatility, and performance can swing from good to bad very quickly;

“All too often investors make the mistake of thinking all multi-manager funds are the same, and run in an identical way, says Simon Ellis, Managing Director of Fidelity’s MultiManagerBusiness. “Our experience is that this couldn’t be further from the truth. Despite the relative youth of the multi-manager market and the rapid growth of funds being launched, we believe that its evolution has been similarly rapid. It’s important that investors and advisers do their homework before opting for a particular fund as, while they may share some common characteristics, their underlying approaches can be hugely different.”

Ellis adds:“Across the board, it appears that the two approaches attracting the most inflows are those at polar opposite ends of the spectrum, which suggests that investment decisions are being made based on either the lowest fees or the strongest recent performance. We believe that, as the multi-manager arena continues to grow and evolve, advisers and investors will start to select more scientifically from the range of approaches and managers available to match the style to specific customer needs. It certainly is not the case that one size fits all.”