Are multi-manager funds really a good idea?

Posted by TEBI on November 6, 2023

Are multi-manager funds really a good idea?



Multi-manager funds are particularly popular, and are even often billed as a “no-brainer investment” in the financial media. But what is the real story? Financial analyst ABRAHAM OKUSANYA explains why investors may be better off steering clear.



Robin Powell: One of the most popular types of funds you can invest in is called a multi-manager fund. These are often billed as no-brainer investments because they give you exposure to a wide range of asset classes in a single fund.

Abraham Okusanya: Multi-asset funds are essentially a way for investors to get exposure to multiple asset classes via a single fund structure. And so the idea is that they present a family of funds – a family of multi-asset funds – and you can choose one of these funds, depending on your risk appetite as an investor.

RP: But is it a good idea to invest in a multi-manager fund? Abraham Okusanya’s company produces an annual report which compares their performance with a simple low-cost portfolio containing two index trackers — an equity fund and a bond fund.

AO: What we found was that, again, over any one-year period, you will do better than 60% of the multi-asset funds out there. When we extend that time horizon to five years, you go to 80%. You will do better than 80% of professionally trained fund managers who are trying to mix equities, bonds, and all those things in your portfolio. And over a ten-year period, for the funds that survive, you would do better than 90% of them.

RP: So, why do multi-manager funds perform so badly? There are, says Abraham, two main reasons.. and the first is that they tend to be quite expensive.

AO: You have to pay for the underlining manager for each of the asset classes, and then of course, you have to pay for the multi-asset fund manager who is trying to manage the whole thing. So cost is one reason why they don’t outperform. The other reason is: if you think that it’s hard to pick any single fund that would outperform for a single asset class – let’s say, US equities, for instance – imagine trying to do that for five or six or ten different asset classes.

RP: Like so many investment products, multi-manager funds sound very attractive. But, year after year, the evidence shows that they’re best avoided.


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