The case for investing in a fund of funds

By Opinion Time of article published May 18, 2021

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By Andrew Ludwig

The pandemic and resultant market roller coaster was a red flag for risk-averse investors who do not cope well with extreme market volatility, a hallmark of most of 2020. We recently interviewed the fund managers at New Road Capital and Flagship Asset Management to discuss the fund of funds investment approach, a strategy that has been shunned for its fees, but should not be forgotten for its intended purpose of diversification.

A fund of funds, also referred to as a multi-manager investment, is a pooled investment fund that invests in other funds, typically other unit trust funds. The portfolio essentially contains different underlying portfolios of other funds, affording greater diversity and reduced risk.

Paul Fouché and Garth Nash, partners at New Road Capital, launched their fund of funds range in April 2020, in the thick of the local lockdown. Fouché and Nash were both financial advisers before they started their asset management company and are uniquely aware of the importance of behavioural investing both from an investor and adviser perspective. “We tie our return outcomes to what we believe is realistically achievable over the medium to long term for a specific risk profile and aim to achieve those returns with the least risk or volatility possible. We believe this strategy increases the likelihood that investors will remain invested through volatile market conditions, which is when they usually make bad decisions and switch out of their long-term asset allocations,” says Fouché.

New Road Capital’s funds of funds are designed as holistic wealth management solutions rather than specific investment products. “Most single strategy funds are designed with a specific investment philosophy in mind as components for use in a broader portfolio. These tend to focus too much on investment theory rather than investment practice and investor behavior, which can result in large tracking errors and taking on unnecessary risk in order to provide a small amount of alpha over time. A well-structured fund of funds combines these different strategies and products in a holistic way to provide an efficient overall portfolio,” says Fouché. He believes this approach also helps investors to stick to their longer-term investment plan and maximises the chances of reaching investment outcomes as there is less guesswork in trying to choose which single strategy funds to combine together.

Funds of funds have traditionally been expensive. However, with the advent of exchange traded funds (ETFs) and other passive strategies, Fouché says it is possible to reduce costs significantly. “We use a combination of passive and active strategies to achieve our targeted outcomes and generally only use active strategies where the risk reward profile is favorable. This enables us to offer fund-of-funds solutions with substantially lower fees than the majority of our peers,” says Fouché.

Their solutions are in line with most single strategy funds, but investors benefit from an added layer of governance and portfolio and risk management at no extra cost. New Road Capital currently has R1.4 billion in assets under management and partners with financial advisers who recognise the importance of the investment function and the long-term benefits of sharing this responsibility with investment specialists.

Worldwide perspective

Global equities provided more than a few headaches for asset managers over the last 12 months with the S&P and other global equity indexes recording close to all-time highs. For Flagship Asset Management, which runs a Worldwide Flexible Fund of Funds, the fact that the S&P World Index and other global equity indices are recording close to all-time highs provided a further tailwind to performance. Kyle Wales is a portfolio manager at Flagship, a global-only asset manager. “Given the record levels of equity prices, our portfolio, which has a flexible mandate, currently has an equity weighting of 80%. We generally reduce this weighting when markets look expensive and increase it when they looks cheap,” says Wales.

The fund is a curated portfolio of best-in-class global equity funds that does not contain Flagship’s own, recently launched, Icon equity Fund, despite the fact that this fund has performed well. “We wanted to offer our Flagship clients an option to diversify between managers. The benefit is that when we select funds there is no conflict of interest and we can be totally objective,” says Wales.

Wales believes that when looking to invest in a fund of funds investors should look at several criteria. While performance is important regardless of where you invest, he emphasises the need to ensure that there is a broad selection in terms of styles within the fund itself. “We invest in a number of funds within the portfolio, including growth, funds with a more quality bias and value funds resulting in a smoother overall performance through the cycle.” The fund’s one-year performance of 19.4% was well head of its benchmark of 8.4%, while its since-inception return on an annualised basis is 14.0% against the benchmark of 10.3%, demonstrating a consistent track record of delivering alpha.

Andrew Ludwig is director of Black Onyx, an asset management distribution specialist. For more details go to Fund Hub, where you can access the full video interview, factsheets and contact details.

Disclaimer: This article does not constitute financial advice. While the author and his firm Black Onyx are regulated by the FSCA, readers should consult their own financial adviser.


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