Watch Those Fees With Multi-Manager Funds - Perhaps We're Better Off Investing Risk-Free at 4%
September 2006
It almost seems surreal, create an industry that’s designed to be complex with 2,000 plus choices and then offer to simplify the whole business, for extra fees of course.
This is what’s happening right now in the Fund Management business. Many investors are rightly confused with the amount of funds on offer etc and so never to miss a marketing opportunity - the Multi Manager Fund was born
What Is A Multi Manager Fund
A Multi-Manager fund aims with the help of its manager to cherry pick and invest in the best funds on the market. Investing in one of these funds solves the problem of how with 2,000+ funds to pick the right funds without doing an incredible amount of research and fact finding.
There are two types of Multi-manager Funds
- Fund of Funds - This fund has one manager who looks to invest in a portfolio of funds offered by other fund managers, always trying to add/delete funds that he expects to over or underperform the market
- Manager of Managers - This is where a manager will allocate money directly to fund managers (not therefore investing in funds themselves) to invest into the market
How Have These Funds Performed
Over the last 3 years the average return from the following funds have been -
- Conventional funds : 38.3% total return
- Fund of Funds : 46.6%
- Manager of Manager : 33%
Source - Bestinvest
So the Fund of Fund concept has actually outperformed conventional investment funds which is certainly to be commended. But the Manager of Manager concept has greatly underperformed with some putting this down to ‘conservative management’.
Charges Will Always Be The Investors Nemesis
One of the reason why the Fund management firms are pushing these Multi-Manager funds so much is that they’re incredibly lucrative when it comes to charging fees.
A conventional fund will normally charge a Total Expense Ration (TER) of 1.5% to 1.7%. Note that the TER is the figure you want to be looking at because it takes into account not just the annual management fees but also other costs such as custodian and legal fees.
The real problem with Multi-Manager funds is that their TERs average between 2% and 3%. Now this might not seem a lot but charges are often, if not, THE KEY in determining long term growth for your money.
But we haven’t finished on charges yet because there’s the notorious front-end load, or initial charge to consider. This is where up to 7%, but normally 5% is swiped from your money BEFORE your capital is even put to work. So invest £1,000 in a fund (Multi or other) and on day 1 your investment becomes just £950.
Combine this initial charge with the 2-3% annual management charge and it’s often the case that the fund management firm gets the better deal over the longer run than the poor investor. Of course, most investors don’t do the simple sums needed to realise this but those that do tend to steer well clear of high charging funds and certainly those that levy initial charges.
So Use Fund Supermarkets
One way to slash or cut out completely the initial charge of up to 6% when investing in any fund is to use a Fund Supermarket which offer many different funds, just without the front end load. No such luck on the annual management charges though.
Summary
Yes, so far research has shown that Multi-Manager funds do generally out perform the more plain vanilla funds but this comes at a cost of higher charges and other assorted fees that are never disclosed such as dealing costs.
Let’s just do some very simple calculations to see the real effect that charges play on capital invested -
- £7,000 invested at 7% (assumed average stockmarket return) for 10 years returns around £13,500 without any charges
- £7,000 invested at 7% for 10 years returns just under £12,000 when levied with a 1.5% annual charge - A difference of £1,500 or 11%
Now this is the interesting statistic -
- £7,000 BUT with a 5% initial charge deducted invested at 7% AND with an annual management of 1.5% becomes around £10,700 after 10 years
- Conversely, £7,000 invested at 4% risk-free (in a deposit account) becomes around £10,400 after 10 years!
And don’t discount the power of risk free here because the return of £10,400 is almost 100% guaranteed whereas there’s no way in assuming ahead of time that the stockmarket will return an average of 7%, it could be far more but then it could also be negative
And if that statistic doesn’t get you sitting bolt upright in your chair when it comes to investing and the relationship that charges/fees have on your money then surely you are doing your personal money a disservice?
See Also
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