When three heads are better than one

When three heads are better than one

One fund manager good, two better, three (or more) best - that's the mantra from a growing group of financial firms hoping to convince investors that the conventional idea of buying the skills of one manager has had its day.

Their reasoning is simple. Figures from investment group New Star show "the inability of fund managers to post consistent outperformance, making it difficult for investors to select funds".

New Star fund manager Mark Harris says: "We looked at 347 trusts investing in the UK. Only one in six managers had scored above the median in each of the three past years, while just one in 17 had managed that over five consecutive years. The situation is even worse when it comes to overseas investment - just one in 10 managers passed the three-year test of success investing in the US, while not a single one of the 62 Japanese funds beat the averages over each of the past five years."

The difficulty for investors - even those blessed with 20/20 foresight - is each switch to a new fund can incur up-front costs and potential capital gains tax bills.

One solution is to go "multi-manager" - hiring more than one at the same time. That, advocates say, accesses a greater variety of skills but also means you can effectively hire and fire managers without tax or switching expenses.

But there are two distinct forms of multi-manager - manager of manager (MoM) and fund of funds (FoF). So which works better?

Darius McDermott at IFA firm.....continued below

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Chelsea Financial Services says: "MoM is cheaper, especially on very large funds, but they are far less nimble - these managers can effectively take months to change, while a FoF can alter direction overnight. And it can access the entire market."

Andrew Wilson at wealth management firm Towry Law believes MoM offers greater transparency and lower fees. "But these advantages are mainly in theory; in practice, it does not work well."

FoF fans point to Abbey, which sacked its own unit trust managers after a long spell of poor returns to go MoM. But this failed as well - now Abbey owner Santander has taken the fund management back in-house.

Witan, the £1.5bn investment trust, went MoM in 2004 after a long period in the doldrums, bringing in "managers with attributes to support the delivery of long-term outperformance". It has just changed some managers. Trustnet figures show Witan is 23rd out of the 30 funds in its sector over the three years with 61% growth - against an average 74%.

Witan's James Budden admits that "some of our managers have not out-performed. They are all on one month's notice, but you have to give them a couple of years [to bed themselves in]. There will be more changes, we are now in stage two of our plans." He adds: "We only tend to hire managers with long periods of outperformance behind them."

And that is the problem, according to Wilson. "To get an MoM appointment, you need an absolute track record of outperformance. But by the time they are outperformers, the chances are they are poised to underperform. In an FoF, we can look at a fund with perhaps six to eight months' good performance, keep it for a few months but ditch it quickly if it fails."

Amanda Davidson, at IFA Baigrie Davies, says MoM is more like "managing by committee. It's very cautious because they don't go outside often tight constraints. You don't really know what you are buying, unlike FoF, where you can kick the tyres."