Lie back and let the experts grab ISA glory for you
With 'multi-managers', investors don't worry about fund selection. But is the cost worth it?
Sunday 26 March 2006
There are 2,000 funds to choose from and just 10 days left till the close of this year's individual savings account (ISA) season. The glaring disparity between those figures leaves investors with a dilemma: where do they put this year's £7,000 allowance when time is so short to make up their minds?
For most people who are considering taking a punt on the stock markets before 5 April through an equity ISA, picking the right fund might seem like throwing darts blindfold.
Many agonise over which sector to invest in and what kind of fund will best suit their needs - whether for a regular annual income, say, or for long-term savings to go towards school fees.
And even if you manage to pick a winner, you'll still have to watch the fund like a hawk. That stellar performance, for example, might be followed by a sharp and prolonged slump. Or the star manager whose track record persuaded you to buy into a particular fund might jump ship to join a rival firm, leaving your cash to an untested beginner.
And then there's the fluctuating fortunes of different stock markets and their effect on where your money should best be invested. What merit bonds versus shares, or the waxing FTSE over a waning Nikkei?
All those decisions, all that monitoring - it's enough to make the investor pack away his darts.
As a result of this angst, however, there has been a sales surge in a type of fund that aims to lift the burden from the shoulders of investors: the "multi-manager".
"Instead of you picking the funds, let a professional do it instead," says Tim Cockerill at independent financial adviser (IFA) Rowan. "They'll try to amass a portfolio that spreads your cash across lots of different, separate funds."
This both dilutes the risk to your cash and gives you exposure to what the manager thinks will make the most money.
Multi-managers - or, as they're also known, "funds of funds" - are shaping up to be one of this year's most popular equity ISAs. The Investment Management Association reports that sales trebled to £1.1bn in the three months to the end of December 2005 compared with the year before.
Their popularity has also been boosted by support from an unlikely source. Many IFAs who have in the past ignored these funds, because they make their own selection skills redundant, now prefer to spend more time dealing with other parts of their customers' financial planning. As a result, they have changed their tune.
"For those with smaller sums of money, [multi-managers] offer access to a diversified portfolio that would otherwise be hard to access," says Anna Bowes at IFA Chase de Vere.
However, there is a price to pay: higher charges.
"There are two mouths to feed," warns Michael Owen of IFA Plan Invest. Buying into a fund that itself buys into other funds equals a double dose of annual fees, he adds - and that eats into your returns.
So instead of paying an annual management charge of between 1 and 1.25 per cent, multi-managers can leave you forking out as much as 2.5 per cent.
Managers defend these fees, arguing that they use their "bulk buying" power to negotiate steep discounts - giving you cheaper access to a wide range of top funds.
Over the past three years, this has helped investors by reducing the annual fees from 4 per cent, says Marcus Brookes of fund manager Gartmore. "There have been economies of scale as funds of funds have grown in popularity and assets under management have become larger, which has helped to drive charges down," he explains.
Some IFAs can also be sceptical about warnings of high charges. "Fees can be a bit of red herring," says Mr Cockerill at Rowan. "If a multi-manager can deliver 15 per cent returns, then a higher 2.5 per cent fee is not a bad deal compared to 10 per cent growth with a 1 per cent fee.
"The charges for a multi-manager are something that you cannot avoid," he adds. "Of course it's important to check the fees, but don't set too much store by them."
The performance of the funds stands up to scrutiny (see the table on the back page). If, three years ago, you had put £1,000 into the M&G Managed Growth multi-manager fund, you would have £2,315.89 today - a growth rate of more than 130 per cent and well above that of its competitors in the same industry sector (96.7 per cent).
And, over the past 12 months, the Jupiter Merlin Income Portfolio multi-manager fund has grown by 19.3 per cent - again, more than the 14.4 per cent sector average.
As with all popular funds, however, the market has now reached a point where anyone considering a multi-manager can choose from a wide range, adds Mr Rowan. "You still have to do some sort of research - a choice, say, between F&C's Cautious multi-manager fund and Fidelity's Special Situations [which invests in racier shares]."
Watch out for the difference between "fettered" and "unfettered" funds. The former, such as M&G's Managed Growth, invest only in funds from elsewhere in the M&G range. The latter, and those proving most popular, buy into funds across the whole of the market.
Be aware that many companies have jumped on the multi-manager bandwagon, warns Mr Owen at Plan Invest. "My advice would be to stick with the tried-and-tested managers who have been doing this for many years. Among the most experienced are those at Jupiter, Credit Suisse, Gartmore and F&C."
Ms Bowes at Chase de Vere recommends Credit Suisse's funds of funds, as well as those offered by fund manager Miton.
Within an ISA, lump-sum investments for multi-managers start at around £500 and regular savings at £50.
Don't forget that, as long as you're confident in your choice of fund, a discount broker can usually help you buy in more cheaply.
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