Question
Is there any real difference between a "fund of funds" and a "multi-manager fund"?
Answer
Multi-manager tends to be used when referring to both funds of funds and manager of manager funds, which can cause some confusion.
In a fund of funds the manager invests your money into a spread of other funds, for example you might buy a fund that in turn holds 20 funds. The advantage of this approach is that it's easy to get very wide investment exposure - some funds invest in a range of different assets (e.g. global stockmarkets, bonds, property and commodities) and are marketed as one-stop portfolios.
The disadvantage of funds of funds is primarily cost. You'll pay the fund of funds manager an annual management fee of around 1.5% and the underlying funds will have annual charges too (although they're usually charged at institutional levels, around 0.75%), so total annual charges could easily exceed 2%. And, as usual, the skill of the fund manager is important too. Pick a bad fund of funds manager and you might as well have chosen funds yourself.
Most funds of funds can invest in funds from any investment groups (called 'unfettered'), although some are restricted to the company's own funds (called 'fettered'). Always check this before investing - unfettered is potentially better, albeit more expensive.
In a manager of manager fund an overall manager will delegate parts of the fund to specific investment managers rather than buy other funds. For example, they might choose one manager to handle the UK stockmarket and another the US etc. The chosen managers, who may well work for other investment companies, will normally purchase shares (or bonds etc as appropriate) rather than funds and run that part of the overall fund as if it was their own.
This approach should be cheaper than funds of funds and usually costs the same as conventional funds, because you're paying just one annual management fee (the manager of managers pays the underlying managers out of this).
Manager of manager funds can work well provided the overall manager delegates to top notch managers. But in practice this isn't always the case and switching underlying managers is a far slower process (for example, they might have an annual contract) compared to funds of funds (where the manager can sell a fund almost instantly).
I'm not sure one approach is better than the other, they both have their pros and cons. But funds of funds tend to be better suited to investing in a wide range of assets within a single fund.
Is there any real difference between a "fund of funds" and a "multi-manager fund"?
Answer
Multi-manager tends to be used when referring to both funds of funds and manager of manager funds, which can cause some confusion.
In a fund of funds the manager invests your money into a spread of other funds, for example you might buy a fund that in turn holds 20 funds. The advantage of this approach is that it's easy to get very wide investment exposure - some funds invest in a range of different assets (e.g. global stockmarkets, bonds, property and commodities) and are marketed as one-stop portfolios.
The disadvantage of funds of funds is primarily cost. You'll pay the fund of funds manager an annual management fee of around 1.5% and the underlying funds will have annual charges too (although they're usually charged at institutional levels, around 0.75%), so total annual charges could easily exceed 2%. And, as usual, the skill of the fund manager is important too. Pick a bad fund of funds manager and you might as well have chosen funds yourself.
Most funds of funds can invest in funds from any investment groups (called 'unfettered'), although some are restricted to the company's own funds (called 'fettered'). Always check this before investing - unfettered is potentially better, albeit more expensive.
In a manager of manager fund an overall manager will delegate parts of the fund to specific investment managers rather than buy other funds. For example, they might choose one manager to handle the UK stockmarket and another the US etc. The chosen managers, who may well work for other investment companies, will normally purchase shares (or bonds etc as appropriate) rather than funds and run that part of the overall fund as if it was their own.
This approach should be cheaper than funds of funds and usually costs the same as conventional funds, because you're paying just one annual management fee (the manager of managers pays the underlying managers out of this).
Manager of manager funds can work well provided the overall manager delegates to top notch managers. But in practice this isn't always the case and switching underlying managers is a far slower process (for example, they might have an annual contract) compared to funds of funds (where the manager can sell a fund almost instantly).
I'm not sure one approach is better than the other, they both have their pros and cons. But funds of funds tend to be better suited to investing in a wide range of assets within a single fund.
Read this Q and A at http://www.candidmoney.com/questions/question406.aspx
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