If you're prepared to do some research on the internet, it is now fairly straightforward to run your own fund portfolio, avoiding the high fees that are charged by private client fund managers.
You might consider using a fund-of-funds (FOF) as your core portfolio holding, using a professional fund manager to run the underlying funds for you. Alternatively, you could pick your own funds to build a portfolio suited to your investment needs.
And if you resent paying a fund manager to run your money, you could, of course, manage your own portfolio. You can use tracker funds or exchange-traded funds (ETFs) to take simple, low-cost exposure to whole markets, rather than having to pick individual shares.
Funds-of-funds
FOFs can act as one-stop-shops for investors, providing ready-made portfolios in a single holding.
If you want to use a FOF as a core holding, make sure you choose a multi-asset fund which holds a variety of funds in different sectors. Diversifying risk across a range of asset classes – including equities, bonds, commodities, property, hedge funds, cash and structured products – should reduce the volatility of your portfolio, as uncorrelated assets should rise and fall at different times.
FOFs have active managers who construct fund portfolios for you, monitoring the performance of underlying managers and rebalancing your asset allocation, if required. One advantage of FOFs is that there is no capital gains tax liability (CGT) when a holding is switched – you only need to pay CGT when you come to sell your entire holding.
Watch out for FOFs that only invest in a single area, as there is little or no diversification benefit from holding virtually identical funds. Using, say, a corporate bond FOF means that you are paying higher than normal charges to hold a range of extremely similar funds.
The main benefit of using a FOF, apart from diversifying across several asset classes, is that you diversify away the risk of a single fund suffering from a bad manager. However, the flipside is that diversifying across several underlying funds in the same sector is likely to result in an average performance (so you would have been better off using cheap tracker funds).
FOFs are a solution to the hassle of manager moves, as the FOF manager can choose whether or not to follow a departing manager. However, FOFs themselves are not immune to manager moves. For instance, highly respected FOF managers Gary Potter and Rob Burdett recently moved to Thames River. Investors who swapped out of their Credit Suisse FOFs in order to stick with the pair would be left with potential CGT liabilities.
The typical annual Total Expense Ratio (TER) for an unfettered FOF is around 2.7 per cent, compared with 1.6 per cent for standard funds. In other words, you pay around one per cent a year to the FOF manager, which is around the same as you would pay to a private client fund manager.
Fettered FOFs only invest in in-house funds, limiting their potential, so their TERs tend to be around 1.6 per cent. Manager of manager funds often have lower charges too but underlying mangers are hired on contracts so you could be stuck with an underperformer for some time before they are replaced.
James Davies, of independent financial adviser (IFA) Chartwell, likes multi-asset FOFs as low-risk core holdings. He recommends CF Midas Balanced Growth (managed by Simon Edwards) and Cazenove Multi-Manager Diversity (run by Mark Harries and Simon Wood).
However, the Financial Services Authority is concerned that some IFAs could be mis-selling FOFs. It has recently investigated whether IFAs have been paying sufficient attention to FOFs' charges and their suitability for clients and will report soon.
Do it yourself
Rather than relying on a wealth manager or a FOF manager to take the decisions for you, you could run your own fund portfolio.
You can save money by buying funds on an execution-only basis through discount-broking IFAs. Nowadays, discount brokers use fund supermarkets but often negotiate additional discounts on initial charges.
Fund supermarkets allow you to hold funds from different managers within a single year's Individual Savings Allowance (Isa), and to switch holdings for just 0.25 per cent. This enables you to pick the best funds in the market and to rebalance your portfolio easily.
You need to be prepared to put some effort in to running a successful portfolio. Fund mangers change jobs every two-and-a-half years on average so you may need to switch to follow a star (or to ditch an underperformer).
Make sure that you build a well-diversified portfolio, with an asset allocation designed to meet your investment needs and reduce your risk. You can plan your portfolio using the tools and research available at www.bestinvest.co.uk and www.trustnet.com.
IFA Bestinvest will provide free advice to clients with portfolios of £50,000 or over. Meanwhile, the likes of Hargreaves Lansdown (www.h-l.co.uk) and Chartwell (www.chartwell.co.uk) will refund some of their annual commission from funds' management charges, if you deal without advice. For more on IFAs, visit www.unbiased.co.uk.
Trackers
You might think you can do as well or better than an active fund manager, in which case you could invest directly, rather than paying a professional manager.
If you believe in stockpicking, you could buy your own shares and bonds – find a broker via www.apcims.co.uk. However, you might not trust your own ability as a stockpicker so you might favour low cost tracker funds, which can give you exposure to a whole market through a single holding.
Trackers have low TERs, typically costing around 0.5 per cent a year. ETFs are listed trackers so you can trade them intraday (without paying any stamp duty) or go short (via spread-betting or contracts-for-difference).
For details of the UK ETF range visit www.londonstockexchange.com. You can buy ETFs commission-free in your Isa (with just a £25 annual management charge) at www.selftrade.co.uk.
