These Funds of Funds Are Worth a Look

Standout offerings provide diversification, good management and quality underlying holdings

Adam Zoll 6 August, 2014 | 4:43PM
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It takes a certain degree of faith to invest in a fund of funds. Unlike owning a conventional OEIC--in which a fund manager hand-picks securities or tracks those included in an index--owning a fund of funds calls for trusting in a manager who will oversee a portfolio made up of funds run by other managers (or index funds). For some investors, betting on one person to properly manage a group of funds run by other managers may introduce too much potential for error. After all, even if many of the fund of funds' underlying holdings are index funds, or active funds that do well, an over-allocation to laggards could lead to overall underperformance.

But for investors looking for an easy-to-own, well-diversified core holding, a fund of funds can be an attractive option. The growing popularity of target-date funds--many of which use a fund-of-funds structure with a changing allocation designed for retirement savers--suggests that investors are becoming more comfortable with such all-in-one investment vehicles (even if some have simply been auto-enrolled into such funds through their employer's retirement plan). 

But not all funds of funds serve the same purpose. Some are allocation funds, investing primarily in stock funds and bond funds, while others use the fund-of-funds structure to provide diversification with an asset class--such as multi-sector bond funds.

So what makes for a good fund of funds? One of the most important elements is a strong parent company offering strong funds. After all, funds of funds typically stay in-house with their portfolio holdings, and they can't perform well if their ingredients are subpar. Look for funds of funds whose underlying holdings include funds run by good managers. Another key feature is reasonable fees. Some fund companies layer on extra fees on top of what is charged by the underlying funds. A small added fee may be acceptable to help cover the fund of funds' own operating costs, but excessive added fees are unacceptable. Finally, a consistent, well-defined strategy is a must. A fund of funds may use a tactical allocation that shifts between or within asset classes based on market conditions, or it may maintain a fixed allocation regardless of conditions. Whatever the fund's approach, make sure it is clearly spelled out and executed consistently.

To search for quality funds of funds vetted by Morningstar's team of fund analysts, we turned to our online Fund Screener. We left out target-date funds and screened for funds of funds that could make good core holdings in any account type, not just for retirement. Only funds with a Morningstar Analyst Rating of Bronze or better were considered, and we screened out institutional funds and those currently closed to new investors. See the full list here. It includes the funds that follow.

Fund: Fidelity Multi Asset Strategic

Morningstar Analyst Rating: Bronze

Star Rating: 2 Stars

Morningstar Category: GBP Moderate Allocation

IMA Sector: Unclassified Sector

Analyst Opinion: Manager Trevor Greetham brings a wealth of experience and as this fund invests primarily in other Fidelity funds, he also benefits directly from the work of Fidelity’s vast team of analysts and fund managers.

Greetham’s Investment Clock model is at the heart of the process. The model is defined by the four stages of the economic cycle: reflation, recovery, overheat and stagflation. In theory, this then determines which asset classes he biases the portfolio toward.

Performance since inception has been strong, with the fund outperforming the Morningstar category peer group average by 1.3 percentage points annualised. However, the fund struggled in 2011 and 2012 as the asset allocation model was caught out by the sharply oscillating markets.

Fund: Henderson Multi-Manager Income & Growth

Morningstar Analyst Rating: Bronze

Star Rating: 3 Stars

Morningstar Category: GBP Moderate Allocation

IMA Sector: Mixed Investment 20-60% Shares

Analyst Opinion: This is an attractive offering for investors wishing to invest in a UK-centric fund with an income bias. It benefits from the experience of lead manager and seasoned investor Bill McQuaker, who has over 25 years’ experience and is supported by a team of five fund managers each with an average of 15 years’ industry experience.

This fund aims to deliver a yield in excess of the FTSE All-Share index with prospects for long-term capital growth, from asset allocation and fund selection. 

The fund’s TER is higher than the Morningstar GBP Moderate Allocation median. However, the Morningstar category includes direct funds, which tend to be cheaper than their funds-of-funds counterparts.

Fund: Jupiter Merlin Growth Portfolio

Morningstar Analyst Rating: Gold

Star Rating: 4 Stars

Morningstar Category: Global Large-cap Blend Equity

IMA Sector: Flexible Investment

Analyst Opinion: Jupiter was the only fund provider in our search results that has Gold-rated funds that met our criteria. A major strength of this particular fund is the quality and experience of its management team. John Chatfeild-Roberts, Peter Lawery and Algy Smith-Maxwell have worked together for more than 10 years. In our view, the managers’ combined skills and experience in asset allocation and fund selection make for a market-leading fund-of-funds team.

The managers’ ability to make timely changes to their asset allocation positions has supported the delivery of strong relative returns in both rising and falling markets as well as consistent returns over the long term. 

Fund: Schroder Multi-Manager Diversity

Morningstar Analyst Rating: Bronze

Star Rating: 3 Stars

Morningstar Category: GBP Moderate Allocation

IMA Sector: Mixed Investment 20-60% Shares

Analyst Opinion: This is a solid fund choice in the multi-manager space, underpinned by its management team and investment approach. Co-managers Marcus Brookes and Robin McDonald are well supported in managing this fund by the strength of the wider team of fund managers at Cazenove/Schroders.

The fund aims to deliver a return in excess of CPI over the long term and has a fixed structural asset allocation of a third in fixed income and cash, a third in equities, and a third in alternatives/hedge. The managers have used the flexibility afforded to them well since taking over the mandate in 2008 and the fund is ahead of its category average over that period.

Fund: Threadneedle Global Equity & Bond

Morningstar Analyst Rating: Bronze

Star Rating: 4 Stars

Morningstar Category: GBP Aggressive Allocation

IMA Sector: Mixed Investment 4-85% Shares

Analyst Opinion: This fund of funds features an experienced team at the helm in the form of Mark Burgess, Threadneedle’s CIO, and Alex Lyle, who has co-managed the fund since April 2008. 

This fund's success is dependent on the asset allocation decisions taken and the quality of the underlying funds, with the latter limited to Threadneedle offerings. While the fettered nature of the fund limits the choice available to Burgess and Lyle, we believe Threadneedle has a sufficient pool of talented managers to allow this fund to be competitive. Using internal managers provides Threadneedle with the ability to reduce the costs of the fund compared with other fund-of-funds offerings, which has been achieved such that the TER of the fund is below the retail category median. 

Morningstar.co.uk Managing Editor Holly Cook contributed to this article.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Janus Henderson Mlt-Mgr Inc & Gr A Inc151.80 GBP-0.07Rating
Jupiter Merlin Growth Portfolio L Acc616.52 GBP-0.20Rating
Schroder MM Diversity A Acc1.41 GBP0.14Rating

About Author

Adam Zoll  is an assistant site editor with Morningstar.com, the sister site of Morningstar.co.uk.

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