Multi-Manager Misery

Published in Investing on 27 March 2012

The problem with the multi-manager system is that you pay multi-charges.

Oops, they did it again. Yes, I'm talking about wealth advisers and fund managers. They've got all worked up about a new client offering and, once again, it has worked better for them than their clients. The product? It's called multi-manager. 

Rather than a single asset manager controlling all the investor's money, the multi-manager divvies it up between specialist "best of breed" funds from different asset management houses.

In theory, it looks attractive. Most fund managers have one or two thoroughbred funds, and a lot of also-rans. The multi-manager plucks out the winners, and ditches the dross.

The funds are carefully screened and the investor's money is spread between different assets, strategies and styles, giving them instant diversification.

Multi-manager also went under an alias: 'fund of funds'. And now the verdict is in.

It's a flop. Worse, it's an expensive flop.

Short on consistency

Independent financial stats company Defaqto has rated 184 multi-manager funds and found that only a few have performed consistently. Marking them on a scale from one to five, it found that, since June 2008, only 25 have successfully maintained ratings of either three, four or five.

Just 25 out of 184. That's a pretty poor showing.

Or as Defaqto puts it: "This suggests that consistency in fund management is extremely difficult to achieve."

You're telling me.

Low on confidence

Defaqto also noted that multi-manager funds were increasing their cash positions, and suggested this indicated "a sense of uncertainty and lack of confidence in the market".

Who wouldn't be lacking in confidence, given such a low success rate?


As any Fool knows, beating the market isn't easy. Doing it consistently is even harder. Fund managers are only human, after all. Unfortunately, they're very expensive humans.

The problem with multi-manager is that you pay multi-charges. One set of fees for the overall fund manager, and another for the underlying funds.

You typically get discounts on the underlying initial fund charges, but you can still end up paying a total expense ratio of as much as 3% a year.

That would be a big chunk of your returns even if multi-manager funds "performed consistently". But, as we now know, they don't. You pay the fees, you just don't get the performance.


To be fair, advisers aren't recommending multi-manager to their clients just for the money. Many have made the decision that it would be better for a specialist fund manager to make asset-allocation decisions, rather than do it themselves.

That's probably a wise and modest piece of delegation, though it is slightly scary that IFAs don't trust themselves to allocate their client's assets.

May be that "lack of confidence" is spreading.

Multi-managers don't always get it right, either. Some have been accused of sticking rigidly to a standard, fixed, strategic asset-allocation model, that doesn't work in these strange times.

Fair fees

Around one in four advisors currently outsources to a multi-manager, and this is set to rise in 2012, as they review their business models in the run-up to the retail distribution review (RDR), the new FSA consumer protection regime.

But RDR does cast a cloud on the multi-manager horizon. Peter Smith, the FSA's head of investment policy, says the watchdog will be examining the high level of fees charged by UK fund managers. It will be interesting to see whether the regulator will consider charging double for inconsistent returns counts as treating customers fairly.

The True and Fair Campaign is demanding greater transparency over investment fund fees and holdings. It claims there are more than £18 billion of hidden charges in the fund management industry.

Is multi-manager just another way of burying them?

Wise Fools

I was always suspicious about multi-manager, so I'm glad to see my sceptical Foolish instincts confirmed by Defaqto. Plenty of advisers have also been wary, preferring to do the asset allocation themselves, cheaply, using low-cost trackers.

I'm sure most of you have shunned multi-manager as well. If so, pat yourselves on the back.

It's in the wealth management's interests to get you to pay twice for the same service. It certainly isn't in yours.

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