Play your (Investment) funds right

Wednesday, 11th November 2009 14:00 - by Resident IFA

Picking a managed investment fund is a little like picking a share, yet on a more ‘global’ basis. By this, I mean that you will choose an individual share on fundamental issues i.e. Market Capitalisation, P/E ratio, Debt, Profit, etc. When choosing a professionally-managed investment fund, you will leave the fund manager to pick the individual shares for you, but you to need to assess how good they are at stock-picking. You may take into account a lot of wide-ranging, 'global' information i.e. Past performance, Independent ratings i.e. Citywire or Morningstar, IMA sector, the Total Expense Ratio (TER) – being the total of annual management and associated charges, Alpha or Beta ratios (risk), Management style, Rank in fund peer group, etc. Quite bewildering, isn’t it?! In my view, there are 3 ways of going about this research/purchase process: 1. Seek the advice of an Independent Financial Adviser (IFA)...who should assess your individual risk profile and construct an appropriate asset allocation within suitable tax wrappers (products). 2. Go direct to a ‘fund supermarket’, utilising their research tools...if you are comfortable doing this. There will be no recourse for bad advice – having sought no advice. 3. Select a ‘Multi-manager’ fund. Now, this is not amazingly dissimilar from option 1, as you will still have to make a judgment between providers and funds, but it is a relatively new option available. A Multi-Manager fund does what it says on the tin. A normal investment fund will have a manager who invests in a number of shares, whereas a Multi-manager fund invests in a number of same such funds...effectively taking the process up another level with even more diversification and ‘spread’ exposure to investment risk. One of the main effects of this can be an increased charge due to the number of underlying transactions/other fund charges (of those invested into). As an example, you might find a good UK Equity fund has a TER of 1.65%, whereas I noted today that one of the better-performing Multi-Manager funds has a 2.35% TER. A simplistic argument is that the MM fund only need out-perform the ‘normal’ investment fund by 0.7% per annum to make it the better buy. I doubt it is that simple. What MM does, however, is provide another option. IFAs have, in the past, been accused of wading into the deep in terms of fund-picking for Clients...a skill that it is unlikely any of them have been tutored in. With MM funds, the onus is on the selected MM company to assess and invest in individual managed funds, the IFA left to understand their Client’s attitude to risk, investment objective(s), and advise on the most efficient and suitable investment product (tax wrapper). Is the concept of Multi-Manager funds new to you as a result of reading this? Are you invested in any? Are you happy with their performance? Do you think they are worth the (usual) extra cost? Have they out-performed your individual, self-managed, share portfolio? Until next time...