The four largest peer groups for multi-asset funds comprise more than 1,600 funds with €500bn in assets under management.
About one third of the products considered are funds-of-funds that do not invest directly in equities, bonds and other asset classes, but invest exclusively in other mixed funds.
The results are sobering for funds-of-funds managers. The investment premise of funds-of-funds is that their higher costs are offset by the greater diversity they offer investors through providing less volatile, if not superior, returns than investing directly in multi-asset funds.
Fund-of-funds managers also differentiate themselves through the access they tend to have to investment vehicles and fund tranches that are usually closed to private investors – such as hedge funds – or in which they can only invest at higher fees.
The investment premise of funds-of-funds is that their higher costs are offset by the greater diversity they offer investors through providing less volatile, if not superior, returns.
More reassuring for funds-of-funds managers is that even if they under-perform traditional direct funds on average, funds-of-funds that perform well do tend to perform better than direct funds.
Performance: direct funds clearly ahead
Scope evaluated the performance of more than 800 multi-asset funds – balanced, dynamic, flexible and conservative – with a track record of at least 10 years.
The study found that in all four peer groups, direct funds achieve on average a better performance than funds-of-funds. The biggest difference in performance between direct funds and funds-of-funds was recorded in the “global balanced” category where the nearly 100 direct funds achieved an average annual return of 5.5%. The 71 funds-of-funds in this peer group recorded an average return of only 4.6%. A performance difference of as much as 0.9% per annum over a period of 10 years.
In contrast, there is little to distinguish the performance of direct funds and funds-of-funds in the “global dynamic” category where both averaged a return of 6.6% over the past 10 years. This was also the best performance of the multi-asset funds surveyed.
Volatility: few significant differences in funds
The differences in volatility between funds-of-funds and direct funds were comparatively low. In the balanced and dynamic compared with flexible and conservative categories, they turned out to have nearly similar or reduced volatility.
Only in the ‘global conservative’ category – which comprises multi-assets funds or funds-of-funds with low-risk profiles – did funds-of-funds show noticeably lower volatility at an average of 3.5% compared with 4.4% for direct funds.
It is to be expected that fund-of-funds perform less well because of the extra costs involved. More surprising is that despite broader diversification, they offer hardly any significant advantages from being less volatile.
One explanation might be that, as a rule, direct funds already have broadly-diversified portfolios so further diversification through the funds-of-funds approach adds little extra benefit. The survey found that only in the “global conservative” category were funds-of-funds significantly less volatile (maximum loss: funds-of-funds with -4.6% on average, direct funds with -6.0%).