Past performance is not a guide to the future. The value of investments can fall as well as rise. The views expressed in this article are those of the author and do not necessarily represent the views of Standard Life. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this content.
The increasing attraction of the multi-manager approach
In today’s ever more complex financial markets it is an almost impossible task for one individual to keep abreast of all the investment funds available let alone maintain a proactive asset allocation policy. Investors and financial advisers alike are therefore increasingly turning towards the multi-manager or fund of funds approach to investing.
This approach uses a team of specialists to select the best funds from all those available, including those not normally accessible to private investors, to meet a specific mandate, such as cautious managed or active. Advisers are increasingly attracted to this service as it reduces paperwork and frees up their time to concentrate on tailoring their client’s portfolio. It is also of direct benefit to the end investor, who through a fund of funds is able to access the best managers in particular areas through one fund.
Most importantly, fund of funds managers are able to devote much of their time to monitoring funds and have greater access to information about the underlying portfolios and the investment styles of the underlying fund managers. This means they can carefully measure risks and ensure there is no unintended overlap. It also means they can quickly tailor funds in anticipation of a particular financial or economic climate to try and capture the best returns.
A fund of funds therefore benefits from both specialisation and diversification: in selecting the best managers within an asset class or region it benefits from expertise in specific areas; in respect of diversification, a fund of funds is, by definition, spread across potentially hundreds of underlying securities, which should help to reduce risk for investors.
Since funds of funds can ordinarily negotiate reduced fees when investing in funds, they offer a cost-effective means of active asset allocation and wide diversification – an objective that would be prohibitively expensive and time-consuming for advisers and their clients to achieve by other means.
Links to other newsletter stories
Help with IHT planning: Part 1
Help with IHT planning: Part 2
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• Past performance summaries
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