Mark Dampier: 'Multi-manager funds, who needs 'em? Quite a lot of us'

It is quite possible to do a better job picking your own funds, however, to dismiss multi-managers misses a trick

I was at a conference recently and overheard a conversation about investing in funds. It went something like this: "I've just decided to invest, but I won't bother with a multi-manager as I prefer to pick my own funds.". The reply was: "You're likely to do better picking your own funds; you don't really need a multi-manager."

It bothered me enough that I feel the need to set the record straight. Of course it is quite possible to do a better job picking your own funds, and for those willing to put in the legwork there is absolutely nothing wrong with this strategy. There are certainly perks – it is more flexible, for example, as the rules restricting multi-managers on where they invest and the amount they can allocate to certain areas do not apply. However, to dismiss multi-managers misses a trick.

Let's go back to first principles – what is a multi-manager fund? At first glance, it is simply a collection of funds making up a portfolio. In reality it is much more than that. Each fund is carefully chosen with the whole portfolio in mind, with each fulfilling a slightly different role and dovetailing with the other positions. The portfolio is diversified across suitable investments and is managed in line with an overall objective.

In my view, it all boils down to one simple question: do you feel capable of outperforming an experienced investor who spends his days thinking, reading, selecting and talking about funds, while surrounded by other fund managers?

If yes then good luck to you. I don't think the rest of us can afford to dismiss the diversification and wealth of experience that comes so neatly packaged within a multi-manager fund.

I suspect most investors don't really monitor their own performance. In particular, few want to admit to their mistakes. I can't prove it one way or the other, but I'd wager that most investors underperform a good multi-manager over the long term.

Granted, investors generally pay a slightly higher price than they would if they bought the underlying funds within a portfolio separately. But be honest, will you be as diligent in your management? I would suggest there is place in almost any portfolio for a multi-manager fund or two.

For smaller pots of cash, a multi-manager fund could be the only investment. The hassle of day-to-day management is left to an expert, and while it may appear the proverbial eggs are all placed in one basket, take the name away and what remains is a perfectly diversified, balanced portfolio consisting of a number of standalone funds.

And these funds, in their own right, are balanced and diversified across a huge number of stocks.

However, multi-manager funds can also play a key role in larger portfolios. There is so much fund choice that, in many cases, I fear investors hold far too many and end up over-diversified.

That said, a multi-manager fund also has attractive tax advantages: any sales that managers make are not subject to capital gains tax, which allows them to move to better opportunities as and when they arrive, without the worry of a large tax bill. For example, if the manager of a key fund in your portfolio moves on to another venture, it is likely you will want to follow. However, if you face a large tax bill in doing so, it is tempting to put it off. A multi-manager is not limited in this way and, as such, does not allow the tax tail to wag the investment dog.

An active investor could use a multi-manager fund to provide the core of a portfolio, with individual satellite funds added to provide additional exposure to a particular area or to gain access to a specific theme. In this way, there are fewer funds to monitor and you are more likely to have higher conviction in the funds you do hold – leaving more time to play golf or whatever other hobby takes your fancy.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit hl.co.uk