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Funds of funds: completely misunderstood

8th July 2022

This week James de Bunsen (a multi-asset fund manager at Janus Henderson) and I appeared in an article by Gavin Lumsden of Citywire drawing attention to the new guidelines requiring funds of funds to disclose the “costs” of investing in investment companies (or trusts) in our own Ongoing Charge Figures (OCFs). The comments section of this article (see here) showed, once again, some of the antipathy towards funds of funds. Here I attempt to address many of the misconceptions about funds of funds.

The starting point should be to consider why do we even bother investing in funds rather than directly into securities? Especially when it opens us up to so much vitriol and accusations of ripping clients off. We don’t do it for our health. We don’t do it to line the pockets of the people who work for (or are shareholders in) the fund management companies we invest with. These people aren’t necessarily our friends. HFM do not invest in funds run by our own firm and thus earn double fees (mainly because there aren’t any!).

We do it because we think the post-charges performance justifies it. We are judged on our performance – why would we incur charges that harm our performance with no other benefit to ourselves?

Why do we believe that investing in funds rather than directly into the underlying securities leads to better performance?

  • Access to best-in-class talent / we can’t do it all

We think there are people that can do a better job than us. We invest in a multitude of asset classes across all geographies. We are a very well-resourced team (4 fund managers running just 3 funds – there aren’t many better resourced fund management teams) but our expertise and resource doesn’t run to selecting South-East Asian equities or US residential mortgage-backed securities, or raising finance and then purchasing stakes in private companies, or building a network in the shipping industry and then being able to determine whether handy-size bulkers are better value than oil tankers. Instead we search out the fund manager talent we think are best placed to invest in these areas.

  • Access to more asset classes

2022 has shown how “multi-asset” funds invested only in bonds and equities are not diversified at all. We think “multi-asset” means investing in far more than just bonds and equities. Other assets include property, ships, private equity, asset-backed securities, royalties, energy storage, solar panels – all of which can be invested in via one of this industry’s most successful innovations: the investment company. These assets behave meaningfully differently to equities and bonds. Unfortunately, as closed-ended funds, these investments carry (what we think) is an arbitrary “cost” that now has to be disclosed in our OCFs. I won’t go into the details of why we don’t think these are actually cash costs to our investors here, but I will do so again soon (watch this space).

If we wanted to be a lower-cost multi-asset fund we could try to invest directly in all the securities we currently do via funds. More likely we’d have to significantly restrict our investment universe to cope with all the necessary research. In addition, we could shun all assets except those we could invest in directly – i.e. just invest in equities and bonds. But in doing these things, we would be hamstringing our ability to perform well – even if it would make our funds a lot more marketable and our lives a lot easier!

Our track record, and those of many of our peers, demonstrates the benefits of this approach. Accessing all these asset classes and investing with the best fund manager talent available has given all three of our funds industry-leading track records.

Finally, what of our own fees? Our platform share class carries an annual management charge of 0.75% – that is what we earn (not the OCF as some seem to think). There are some directly invested multi-asset funds that are a bit cheaper, and passively-invested multi-asset funds that cost less than a third of 0.75%. But who is more expensive?

As I have repeatedly said, fund managers should be judged on post-fee (risk-adjusted) performance. But parking that ‘output’ argument, let’s look at the inputs: capacity and the resource involved in running a fund. The capacity of a passively-invested multi-asset fund runs into the £10s of billions and requires very little resource. The capacity of our funds is just £1bn and requires a huge amount of work and diligence. Which is better value from a resource standpoint? Which business has a higher profit margin? The fund that can generate £10s of millions of revenue from relatively little work? Or the fund that is capacity constrained with revenue capped out at a fraction of the larger funds’ potential for many times the work involved? Which fund is earning the shareholders of the management company more money?

I am certainly not denigrating the many excellent passive and larger active bond/equity-mix funds available to investors – but merely trying to dispel myths about funds of funds charges. We also have a huge amount of sympathy for advisers who are forced to disclose costs in a frankly nonsensical way.

It is time to educate investors about the difference between cost and value and help them understand how fund managers are remunerated. The OCF tells you almost nothing about either of these things. Fund managers are not all out to rip off the customer. We care deeply about our performance – in our case not least because our parents and children invest alongside us.

Ben Conway – Head of Fund Management

Ben Conway

For professional advisers only. This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC390.

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