Faith Glasgow suggests funds and trusts for beginner investors or those looking for a ‘core’ to their portfolio.
Investors come in numerous shapes and sizes, and many would rather not shoulder the responsibility of creating and managing their own diversified, balanced portfolio. They may feel they don’t know enough, or have more interesting or pressing things to do, or that fund selection is a job where professional input really pays off.
Others may want a solid, well-managed ‘core’ to their portfolio, and will then channel their energies into smaller holdings in racier or more specialist ‘satellite’ holdings.
What are the options if you want hands-off investment? For DIY investors there are ready-made solutions in the shape of multi-manager and multi-asset funds and trusts, and the model portfolios (including those on interactive investor).
The challenge is to understand the differences between the various alternatives, and to identify the highest quality and most appropriate funds for your own circumstances, so let’s work through the options.
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Instead of investing directly in individual shares, as most equity funds do, the managers of multi-manager funds identify other managers and allocate different parts of the portfolio to them. In many cases they include exposure to other asset classes, including bonds and property.
Multi-managers build their portfolios in several ways. Some managers within large investment houses create ‘packages’ of mainly in-house funds; others select funds run by external managers in a ‘best of class’ approach; and others again provide the chosen fund managers with their own bespoke mandate – Alliance Trust (LSE:ATST), for example, tasks each fund manager to invest in their 20 best stocks.
Each option has its own advantages. As Ben Yearsley, a director at Shore Financial Planning, observes, the use of external funds “makes it easier to change underlying funds if performance slips or a manager moves”, while specific mandates “help reduce costs and give the multi-manager more control over how the money is managed”. The in-house route, meanwhile, keeps costs low but limits choice.
Multi-asset funds package up a mix of different asset classes, mainly using the expertise of different fund managers.
Some invest directly shares and bonds. Here the focus is often primarily on capital preservation. Highly regarded examples of the latter include Troy Trojan fund, Ruffer Investment Company (LSE:RICA) and Capital Gearing (LSE:CGT) trust.
In many cases multi-asset funds are designed as core holdings providing a specific target balance of risk and return: many leading managers, including BMO, Premier, Jupiter and Janus Henderson, run ranges of funds including cautious, balanced and adventurous options.
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For example, Janus Henderson’s main multi-asset range comprises seven funds with differing levels of equity risk, which invest in a mix of in-house and external actively managed funds and passives. The manager also runs a core monthly income range that keeps costs down by using mainly passives and internal funds.
One key attraction of this type of multi-asset fund in particular is professional asset allocation and risk management. James de Bunsen, portfolio manager in the multi-asset team at Janus Henderson, explains how big a deal this can be for investors.
“Good asset allocation requires detailed understanding of macro-economics and market dynamics,” he says. “It also requires an in-depth understanding of the drivers and sensitivities of all the different asset classes, and especially of which ones will add to your risk, diversify it or hedge it.”
Pros and cons
So what benefits does the multi-manager structure offer? Most obviously, you’re buying a whole spread of managers, geographies, styles and asset classes in a single managed package. Moreover, there's an expert at the helm, undertaking the important jobs of asset allocation and manager selection and monitoring new opportunities as they arise.
Against these benefits, there are two potential negatives to balance. One is the double layer of costs: multi-manager funds involve the sub-managers’ charges as well, and so have a reputation for being relatively expensive, typically 1.2% or higher.
However, Rob Burdett, co-head of multi-manager at BMO Asset Management, argues that while there are additional charges, they are not necessarily double those of conventional funds. “They are lower than many think these days as, for example, multi-managers can access institutional share classes with lower fees for scale,” he says.
Giant global investment trusts such as Witan (LSE:WTAN) and Alliance Trust (LSE:ATST) are good multi-manager examples in this respect. Both use specialist external managers to provide expertise and diversity, but their size means the managers are able to negotiate competitive rates on the outsourced mandates. So despite the double layer of charges, the ongoing charges figure (OCF) for Alliance Trust is just 0.65%, while for Witan it is 0.83%, according to Morningstar.
The bottom line in terms of cost is whether a private investor could do it more cheaply if they just bought the funds individually, says de Bunsen. “Given the points about economies of scale and access, this is not really a simple equation,” he maintains. “A retail investor, if they could actually replicate a multi-asset fund, would likely end up paying more in fees for those underlying investments and for trading them.”
The other characteristic to be aware of is that multi-manager funds are unlikely to outperform conventional equity funds. The combination of hundreds of underlying holdings plus deliberately low correlation between the various funds held limits their capacity to shoot the lights out. On the other hand, it should make for greater long-term consistency.
“The proof of the pudding is usually in more challenging backdrops. Markets go up over time – multi-asset funds will hopefully capture a decent proportion of those pure market gains, but also manage the downside risk for investors,” says de Bunsen.
Choosing a fund
The multi-manager funds and trusts that hold only or mainly equity investments do not have a designated sector and are classified according to their geographical focus - so, for instance, Witan and Alliance Trust are in the investment trust global sector. This can mean it is hard to identify multi-managers from conventional funds.
Yearsley picks out a couple of broad-based choices, both unusual in that they invest in a diverse range of investment trusts rather than funds; they could therefore work well for beginner investors who find trusts more complicated to understand but like the potential for superior performance.
One is Unicorn Mastertrust, run by Peter Walls, which is itself structured as a fund. The other is Miton Global Opportunities (LSE:MIGO) investment trust, which is also available as an open-ended fund (Premier Miton Worldwide Opportunities).
Open-ended multi-asset funds are corralled in the Investment Association’s mixed investment and flexible investment sectors, according to their potential equity exposure. In addition, says de Bunsen, investors can establish precisely where each fund sits on the risk/return spectrum: “Multi-asset funds in the UK publish a risk/reward indicator known as an SRRI, which ranges from one to seven, on their key information documents.”
interactive investor’s Model Portfolios
Many investors do not have the time or the confidence to make their own investment choices.
Generally speaking, they can be used either as reference tools for selecting individual funds from specific asset classes and areas, or the constituents can be purchased individually as the building blocks of a relatively adventurous and diversified portfolio.
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interactive investor runs five model portfolios: ii Active Growth, ii Active Income, ii Ethical Growth, ii Low-Cost Growth and ii Low-Cost Income. The latter two models use passive index funds and exchange-traded funds (ETFs).
Investors could follow their chosen option closely, or use it as a starting point for their own version, perhaps adding in other holdings or substituting some choices.
interactive investor has also done the heavy lifting for investors looking for a single multi-asset solution, in the shape of its so-called Quick-Start funds funds. It has selected BMO’s Sustainable Universal multi-asset funds (Growth, Balanced and Cautious) as its active choices and three Vanguard LifeStrategy funds as its passive picks (80% Equity, 60% Equity and 20% Equity)
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As Dzmitry Lipski, head of funds research at interactive investor, explains: “The three BMO funds stood out from the competition due to their sustainable investment philosophy, how the funds invest and manage risk, and BMO’s focus on low costs.”
Moira O’Neill, head of personal finance at interactive investor, adds that they are “a good starter option and should appeal to a broad range of needs”.
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