Are you a fan of meal deals, breakfast cereal variety packs, and barely twitching a muscle when it comes to investing?
Then a fund-of-funds is probably for you.
A good multi-asset fund-of-funds is a passive investor’s Swiss army knife. Open it up and you’ll find several index trackers inside, offering you an instant, globally diversified portfolio, with equities covering the world’s major stock markets allied to a slug of bonds, and sometimes property, gold, cash and more to boot.
The joy of fund-of-funds is they are as simple as a Wurzel and relieve investors of chores like:
It’s hard to make investing any more convenient than a fund-of-funds. However there is one complexity left – navigating the proliferation of competing all-in-one products.
Happily Monevator is here to streamline even that choice. You’ll be back to eating grapes in no time!
You can see our round-up of the main contenders in the table below. We’ll spend the rest of this post talking about how to choose between them.
What we’re looking for in a fund-of-funds
We’re passive investing fans here at Monevator. We believe that most people are more likely to succeed if they follow a passive investing strategy.
The key principles of passive investing are:
- Choose a globally diversified portfolio
- Pick an asset allocation in line with your risk tolerance
- Use low cost investments
- Avoid trades that attempt to predict what’s ‘hot’ – a practice known as market timing
For our money, only the first two products in the table above – from Vanguard and Fidelity – meet all those conditions.
The rest fall foul of the ‘no market timing’ rule.
Every fund-of-funds family in the table features globally diversified portfolios built from low-cost investments – usually index trackers, though not always. Each family line-up also enables you to select your level of risk. Choose the funds that are loaded with equities to take more risk in pursuit of higher rewards. Opt for a fund-of-funds with more bonds if you prefer a smoother ride.
So far, so similar – but only Vanguard’s LifeStrategy range and Fidelity’s Multi Asset Allocator family (including its Allocator World fund) offer stable asset allocations that you can be sure they’ll stick to.
The rest give their managers licence to chop and change. For example, the HSBC Global Strategy Balanced fund can allocate any amount from 40% to 70% in equities, depending on the manager’s market view.
There’s ample evidence to show such active management does not pay off for most people. Yet the literature for some of these fund-of-funds runneth over with BS bingo-talk about dynamic asset allocation, proprietary research, and discretionary management (“House!”).
We can judge the effectiveness of these efforts by comparing the funds’ results on Trustnet.
Source: Trustnet charting tool, 21 June, 2019
The most relevant time frame is the longest comparable one we can get, so let’s focus on the five-year column. Here we see that the HSBC Global Strategy Balanced fund edges the Vanguard LifeStrategy 60% Equity, with the HSBC product’s 8.8% annualised return besting Vanguard’s 8.6% – a pretty negligible difference.
As for the rest, did they add value with all their expert analysis and volatility management and huffing and puffing?
No, the other active managers lagged a simple passive strategy, as per usual. (It’s worth noting that the Fidelity Multi Asset Allocator range was actively managed until March 2018.)
It’s true that the active HSBC fund has pipped its passive Vanguard rival over five years. But we need to ask:
- On what basis would you have picked the HSBC fund out of the pack five years ago?
- Will the HSBC fund lead five years from now? Remember that past performance is no guarantee of future results.
- Would you rather invest in a product with clearly defined rules? Or one that can veer wildly from your preferred asset allocation?
You can rely on a passive strategy to deliver the market returns of its investments, minus their costs.
Active strategies are a riskier bet. Some may top the table, but some will trail badly because their managers made the wrong calls.
Why are we tabling these active funds at all, if we’re passive like a koala bear after a heavy lunch?
It’s because many Monevator readers have a significant chunk of their wealth invested in Vanguard LifeStrategy and they want to diversify into other multi-asset fund-of-funds.
But this space is full of pitfalls when you dig into it. There’s a ton of funds trading on the credibility of passive investing while also dazzling prospects with their active management bling. Some of the firms even have the cheek to put the word ‘passive’ in their fund names, though to us they appear to be blatantly active.
Such passive pretenders justify themselves by investing in index funds and Exchanged Traded Funds (ETFs). But there’s nothing passive about index trackers if you’re using them to market time. Passive investment is a strategy not a product type.
The ‘active passive’ posture is like an oil company claiming to be low carbon because they don’t do coal, or because they’ve planted a wind turbine on top of company headquarters.
Most of the active products seem to be designed to reduce friction for financial advisors. The advisors get a low-maintenance package that neatly complies with the risk regulations and doesn’t suck them into awkward client conversations about how believing in market-beating managers is like believing in Santa Claus.
I’m a long rant away from the table now, but I need to explain a few things about what I’ve picked out in case you’re tempted by the active options.
Low cost is good. The less of your return that’s removed from your pocket the better.
The fewer degrees of freedom the manager has, the happier I am. We’ll keep an eye on the fund asset allocations in the years ahead, because it may be that the managers are pretty hands-off in some cases. Low OCFs, transaction costs, and portfolio turnover rates all point to a manager that isn’t sweating particularly hard on your behalf. (That’s good from passive perspective.)
What about the fund features picked out in the ‘Watch out’ and ‘We like’ columns of the table?
- Home bias in equities means the fund invests more in UK shares than a strictly globally-diversified market cap strategy dictates. That’s fine for some – it may not be optimal, but it makes sense if you want to reduce your exposure to currency risk.
- Bonds – Unhedged global bonds, corporate bonds, emerging market bonds/debt, and junk/high-yield bonds all add extra diversification and risk to your portfolio. A 60:40 equities:bonds portfolio contains more risk than at first blush if it invests in a high proportion of bonds that are unhedged or rated below AA. The point of bonds for our purposes is to be a refuge in a crisis, not an extra source of risk. The bonds that best serve this goal are UK Government bonds or highly-rated foreign government bonds that are hedged back to the pound.
- Some of the fund-of-funds families use alternative strategies as part of their long-term asset allocation, especially in the riskier versions of their funds. That means your fund may be taking long/short positions and/or investing in commodities, Exchange Traded Notes (ETNs), private equity, and other complex instruments. You may think that’s worth the risk and expense. I don’t.
- Extra diversification – Some products include property (generally REITs), gold, risk factors (such as small cap or value funds), and sector funds (for example tilting towards tech firms). There’s good evidence in favour of holding a slice of property and risk factors in your portfolio. Gold is a mixed bag. You’re not compensated for taking risk on sector funds. You’ll notice little difference if a fund holds a token 2% to 3% in an asset class but it’s handy for the fund’s marketing team, which can claim to be more diversified than thou.
Ultimately, it’s your equities / bond split that will matter most for your result. Choose the extra bells and whistles if you believe the evidence but don’t be fooled into thinking that more always means better.
An alternative way to a simple diversified portfolio
We buy package deals for convenience not perfection, so it’s no surprise when the options don’t fit like a made-to-measure suit.
A good alternative to a fund-of-funds is to pair a simple global equity tracker with a UK gilt tracker, rebalance annually, and be satisfied with a job well done.
Sure, that’s two funds not one, but you’ll be as diversified as needs be and you won’t have to keep your eye on a frisky fund manager.
Final thoughts for DIY fund-of-fund selectors
A few final pointers about this round-up.
OCFs are based on the best available fund share class that’s accessible via consumer platforms.
The ‘Watch out’ and ‘We like’ columns are based on the asset allocation of the fund-of-funds closest to a 60:40 equity:bond mix. The results table compares these same funds. Holdings and results will vary for other funds in the family.
We deem BlackRock’s MyMap range too new to be included in the table, but we have some initial thoughts.
The Dimensional World Allocation range is only available through financial advisors so doesn’t make our list.
Finally, the following multi-asset funds were rejected for being too expensive / active / inaccessible:
- Aviva Investors Multi-Asset Funds
- BMO Universal MAP Growth Fund
- Fidelity Multi Asset Open Funds
- HSBC Portfolios World Selection
- Invesco Global Balanced Index Fund
- Invesco Summit Growth Funds
- L&G Mixed Investment Funds
- L&G Multi Asset Core Funds
- L&G Multi Manager Trusts
- MI Charles Stanley Multi Asset Funds
- Standard Life MyFolio
Take it steady,