Of late the industry has focussed on cost. But, asks David Hambidge, investment director multi-manager funds, Premier Miton, is that always the right focus when looking to achieve returns for investors?
While I think most people would agree that returns net of fees ultimately determine the success (or otherwise) of an investment, the evidence suggests that there has been much more emphasis on cost and perhaps not enough on value. This is certainly true over the last year or so where we have seen some of the cheapest funds on the market (which have attracted £billions over the last few years) suffer some of the largest drawdowns.
We know the level of fees paid for an investment will, all things being equal, have an impact on the overall return and this can be significant in the long term. However, in the world of fund management, things are rarely equal and to us there are far more significant factors that are likely to determine whether an investment is not only successful but also turns out to be good value for money.
Within our multi-asset (multi-manager) range of funds, cost has always been an important part of our investment process although there are other aspects that will have a far greater impact on returns and a successful outcome versus benchmarks and peers.
Asset allocation
Top of the list is asset allocation and while this will vary considerably depending on the stated objective of the fund, getting this part of the process right (or at least more right than wrong) will have a significant impact on returns both in absolute terms and relative to peers. In our funds our preference is to focus on areas that we believe are cheap and are often out of favour with most other investors. This slightly contrarian approach doesn’t always work but has generally stood the test of time in the near 25 years that we have been managing multi-asset solutions.
Investment selection
Next up is investment selection and getting this right is probably as important as asset allocation. For us, it is no good if we get the top-down bit broadly right only to populate our portfolios with lousy holdings. Good asset allocation and poor fund selection will almost certainly lead to a poor outcome for investors and this is the reason we spend so much time on this part of the process. Someone once told me that there are more funds in the world than individual company shares. Whether that is true or not I don’t know, but it is true to say that the range of collective investments available to us is enormous.
Before selecting a manager, we first need to decide whether to go active or passive, open-ended or closed-ended. While our portfolios are generally populated with actively managed funds, we will certainly use passive funds in any area where we believe that active managers will struggle to add value. This can include areas such as government debt or large cap equities, but we may also use passives to capture a particular theme.
Open-ended or closed-ended
I’m often asked how we decide to invest in either an open-ended or closed-ended fund and the answer really depends on the type of asset we are investing in. Certainly, most of our portfolios are made up of open-ended funds that are valued and trade on a daily basis. The advantage of this is that we can move our portfolios around very quickly if we need to. However, there are several asset types that are more suited to a closed-ended or to put it another way, a fixed capital structure. A good example of this is commercial property, but there are many others including infrastructure, private equity and some less liquid areas of the bond market to name a few.
And then we come to cost. Multi-manager funds generally have two layers of fees. Some refer to this as double charging but this fails to take into account that we are able to use our scale to negotiate discounts on many of the funds that we invest in. Clearly this is not the case with closed-ended funds but in our experience the extra fee is justified given the type of assets we are able to access by investing in these structures.
In conclusion
While a multi-manager fund will never be able to compete with other funds on costs, being able to populate a single fund with world class investment talent certainly has merit. Ultimately, a successful outcome will be determined by returns net of fees and on this we are more than happy to stand up and be counted over the short, medium or longer term.
This information is intended for journalists and media professionals only. It should not be relied upon by retail clients or investment professionals. The views provided are those of the author at the time of writing and do not constitute advice. These views are subject to change and do not necessarily reflect the views of Premier Miton Investors. The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
