The Evidence-Based Investor

Multi-manager funds — Who needs ’em?

Posted by Robin Powell on January 25, 2016

“99% of what you read about investing in magazines and newspapers,” the investment author William Bernstein once wrote, “is worse than useless”.

Although I see where he’s coming from, I think that’s harsh. There are some outstanding investment journalists out there; Jason Zweig on the Wall Street Journal and John Authers on the FT are two who spring to mind. Perhaps 80% is a more accurate figure than 99.

The problem is that investing magazines and newspaper money sections are written not only by bona fide journalists, but also by people who work in the investment industry and are therefore almost invariably conflicted. What they write isn’t journalism in the normal sense; it’s thinly veiled PR and marketing.

An example is a recent piece in The Independent about multi-manager funds by Mark Dampier. There is nothing in the article to suggest that Mark is anything other than a professional journalist, but he’s not. He works for the investment broker and fund platform Hargreaves Lansdown. For readers outside the UK who may not have heard of it, HL is a hugely successful, FTSE 100 company, which at the last count had £55.2 billion of assets under management and which last year made a profit of £200 million.

Mark’s a good guy. He writes well and he’s very knowledgeable about the investing industry. But he’s not an objective investment journalist.

Largely speaking, the success of Hargreaves Lansdown is built on selling high-fee, actively managed funds, and these are precisely the funds that Mark Dampier tends to write about in what is, in fact, a regular column he produces for The Independent. Hargreaves Lansdown is also a big fan of multi-manger funds and — guess what? — Mark is too, as the article I’m referring to makes perfectly clear.

It’s disappointing then that The Independent (a newspaper I like and respect) didn’t alert readers to the fact that the author of this article is not “independent” at all. It also failed to provide any context or to seek the opinion of anyone who takes an alternative view.

As regular readers of this blog will know, the evidence clearly shows that only a tiny fraction of active funds outperform consistently and that they’re all but impossible to spot in advance (by Hargreaves Lansdown or anyone else). But quite apart from that, there are two glaring reasons why investors should avoid multi-manager funds like the plague.

First, far from offering that diversification and reduced risk that those who sell them to suggest, they actually add to concentration risk. Active fund managers tend to place bets on a relatively small number of stocks, and because, very often, managers take similar positions to each other, a large holding in a fund or funds can leave you heavily exposed to certain sectors and to specific stocks.

But the main reason for avoiding multi-manager funds is that they’re also extremely expensive. In effect they layer fees on top of fees. It’s not unusual for these funds to have a Total Expense Ratio of 2.5% or even 3% — and that’s before transaction costs, which typically add another 0.5% a year.

There’s an excellent interactive tool on Vanguard’s UK website which shows the huge impact of costs on long-term returns. Every investor and adviser should take a look at it. Using a slider, you can see how even a few extra basis points in costs can put a significant dent in the returns you’ll eventually keep for yourself over different time periods. The slider only goes up to 3%. Including transaction costs, some multi-manager funds are literally off the scale!

Invest in a multi-manager fund, and you’re exposing yourself to much greater risk than you need to. More importantly, you’re paying far more than necessary. Remember, every pound you pay to invest is a pound less in your pot when you come to retire. It’s hard enough to fund your own retirement without funding other people’s as well.

So, don’t be tempted by multi-manager funds. And next time you read an article about investing, look at who the author is and ask yourself whether they really have your best interests, and yours alone, at heart.

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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector. Regis Media.

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