Are Multi-Manager Fund Fees Too Expensive?

Morningstar Senior Fund Analyst, Randal Goldsmith explains why fund of funds have higher fees, and whether they are worth it

Emma Wall 4 December, 2017 | 1:05PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar's Senior Fund Analyst, Randal Goldsmith, to talk about fund of funds.

Hi, Randal.

Randal Goldsmith: Hi.

Wall: So, we're talking about fees and we're talking about multi-manager or fund of funds. Why do these types of funds tend to have a higher fee than just individual funds?

Goldsmith: Well, I mean, it's important to distinguish right away that you've got two types of multi-manager funds; those which can invest right across the marketplace and those which are restricted to investing with in-house managers. Here when we are talking about extra fees, we are talking about those which are unrestricted. The reason they've got extra fees is because they invest with managers externally and that investment in external managers comes with an extra layer of fees.

Wall: So, you are basically paying for the fees of the underlying funds and then a fee on top of that to the manager to pick those funds and to asset allocate?

Goldsmith: Indeed. That's exactly right.

Wall: And are these higher fees justified?

Goldsmith: We've done a study comparing the fees of unrestricted multi-manager funds that can invest anywhere in the marketplace and we've compared it with other types of multi-asset investing. That is, we've compared it with those multi-manager funds that are fettered, tied to in-house products; we've compared it with multi-asset funds that invest directly in securities and we've compared it with funds of passives.

And what we found is that the charges are significantly higher than for fettered fund of funds and for directly invested. You're basically talking about 60 basis points higher on average. And compared with funds of passives, they are much higher, well over 100 basis points more.

Wall: And that 60 or 100 basis points, of course, in a rising market you might not notice as much. But as markets start to look toppy, in an environment that arguably we are in now, that compounded fee structure will eat into returns quite significantly, won't it?

Goldsmith: Yes. Yes, it will, certainly. But really, I mean, we are talking about in any market environment, because we are looking at relative returns here. And what we found is that for that extra 60 basis points in relation to fettered and directly invested, basically the unrestricted multi-manager funds, they struggle to exceed that.

Wall: Are there any funds, which in your eyes, in Morningstar's analyst eyes, actually do well and deserve that extra layer of fees?

Goldsmith: Yes. But we are talking here about averages. And there are always exceptions to the rule. We've got some funds that we do give positive ratings to where the funds are generating enough added value to outweigh those extra fees.

So, just to give you one example, we rate the multi-asset funds of Premier. With their fund of funds approach, they take a very broad approach investing in both open-ended and closed-ended and really look a little bit wider and invest into some funds which are less well-known, maybe have a little bit more risk with them, but the chance of generating extra returns, and it seems to work.

Wall: Randal, thank you very much.

Goldsmith: You're welcome.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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
Premier Miton Multi-Asset Dist C acc397.30 GBP-0.28Rating
Premier Miton Multi-Asset Mly Inc C acc213.70 GBP-0.28Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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