Why Do No Multi-Manager Funds Have a Gold Rating?

Senior Fund Analyst for Morningstar Randal Goldsmith explains why cost is an important consideration for investors - and how high fees stop fund-of-funds gaining a gold rating

Randal Goldsmith 16 August, 2016 | 4:40PM
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Randal Goldsmith: Okay. So, you've asked why we don't have any Gold-rated multi-manager funds. Well, the first thing to say is that we have the same fund rating process for multi-manager funds as for any other actively-managed fund. However, there are some reasons why multi-manager funds don't tend to score so highly.

First of all, we try and identify the best funds from the entire multi-asset categories regardless of whether they are invested directly or whether they are invested in other funds. Secondly, we work from a structured process covering five main characteristics.

One of those is price. We're obviously looking at performance and process and people and the parent group. But in relation to price, we find that multi-manager funds have higher ongoing charges and therefore don't score so highly. The reason for that is that they have an extra layer of charges from the underlying external funds that they invest in.

Now that wouldn't be so much of an issue if they were able to cover those costs from added value on their fund selection. In practice though, we find that they generally don't, and it's really quite rare that we find a multi-manager fund that consistently generate enough added value to outweigh those costs and working from a repeatable process for us to develop high conviction.

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Randal Goldsmith  is a Manager Research Analyst with Morningstar.

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