COMMENT
Multi-Manager Funds Aren't Your Best Bet

By Ed Bowsher (TMFArkle)
January 17, 2006

UK investors now have a choice of more than 1900 unit trusts and OEICs to invest in, so trying to pick just one fund can be a daunting prospect. At first glance, a multi-manager fund appears to be a solution. Surely it makes sense to invest across a range of managers, funds and themes?

Well, I'm not convinced.

First, some definitions. There are two main types of multi-manager fund: a fund of funds and manager of managers.

If you buy a fund of funds, the manager of your fund is investing in a range of other funds. Your manager should be monitoring the fund management universe full time, and pick the best funds as a result.

A manager of managers fund does not invest in other funds. Instead it attempts to identify the best fund managers out there, and then asks those managers to invest a separate pot for the manager of managers fund. This means the fund can give precise instructions to the managers about what kind of investment strategy should be pursued.

Confusingly, the term "multi-manager" fund is sometimes used to refer to manager of managers funds only. Traditionally, manager of managers funds have not been available to private investors, but that is now changing.

So why don't I like multi-manager funds?

My main gripe is cost. Conventional unit trusts normally deduct an initial charge of 3% or more with an annual charge of 1 to 1.5%. A multi-manager fund will then levy further charges on top of that.

Defenders of multi-manager funds often say that the extra charges are not that great because the underlying funds are usually prepared to provide a large discount to multi-manager clients. There's some truth in that, but multi-manager funds still tend to have higher Total Expense Ratios (TER) than conventional unit trusts.

What's more, it's not just multi-manager funds that can obtain discounts from conventional unit trusts. Private investors can benefit from lower charges if they buy their unit trusts via a fund supermarket.

Another problem is that multi-manager funds don't appear to beat conventional unit trusts over the long-term. According to Trustnet, the average unit trust has risen 20.4% over the last five years, beating the average multi-manager fund by 0.4%.

And then there's the good old Foolish favourite, tracker funds. They're cheap and simple, and what could be more diversified than buying every share in an index? You can also gain exposure to lots of overseas markets via exchange traded funds, which are very similar to trackers.

So don't be bamboozled by the fund management industry. You can invest in global stock markets without employing two layers of highly paid fund managers. Just pick a tracker, or maybe an investment trust if you're feeling more adventurous.

More on trackers and exchange traded funds | More on investment trusts