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Fund-of-funds: the rivals

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.

A fund-of-funds stack

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.

Fund-of-funds table

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:

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?
  • 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.

Passive aggressive

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.

Watch out

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,

The Accumulator

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{ 70 comments… add one }
  • 51 David P June 25, 2019, 11:54 pm

    Hi Pipp, if you look up any Lifestrategy fund on Morningstar the domicile is listed as UK on the “management” tab.

  • 52 Tim June 26, 2019, 12:09 am

    I’m a bit surprised to see SLI’s MyFolio only mentioned in the “too expensive/active/inaccessible” list at the end. Certainly the active “MyFolio Managed” and “MyFolio Multi-Manager” range (and their Income variants) are unlikely to be of interest to Monevator types on cost grounds, but the “MyFolio Market” ones (5 risk levels, accumulation units only, OCFs 0.3-0.37%) seem to be exactly the “off-the-shelf cheap portfolio of cheap passives” kind of thing we like, and appear to be not unlike L&G multi-index at first glance. Available on ATS. Top 10 holdings of the mid-risk “III” shows it to be a collection of Vanguard, L&G & iShares passives, with just one sub-5% SLI property fund qualifying as active. Think it might have been more expensive in the past (e.g 0.71% OCF mentioned in a 2016 article on it). Last time I looked at the performance (last few years risk-return curves over the risk levels) it was behind Lifestrategy or L&G multi-index, but ahead of Blackrock Consensus; I suspect the discrepancy is largely explained by degree of home bias carried. Don’t actually hold any (already have Lifestrategy & some L&G multi-index) but thought it looked interesting as another option for this kind of thing… did I miss something awful about it?

  • 53 Fundlearner June 27, 2019, 6:44 am

    Firstly, thanks for another informative post. I’d missed this one the first time around. Maybe update slightly more frequently? Annually?

    My other question… what about 40/60 instead of 60/40? Those folk with shorter timeframes may want to consider something slightly lower risk and whilst LS40 is fairly obvious, searching for fidelity for example failed this novice!

  • 54 Hague June 27, 2019, 12:15 pm

    I hold five different iShares ETFs to maintain a 80/20 portfolio and to set up my geographical balance with a bit of home bias.
    The average OCF is about 0.12% which beats all the ‘funds of funds’ available.
    Maintaining the asset allocation is currently achieved through periodic new contributions. I use De Giro which gives me very cheap trading costs as well so periodic re-balancing would be fairly easy.
    It’s slightly less convenient than a single fund but seems optimal for me at the moment.
    I should probably look to diversify away from iShares which I will try to do at some point.

  • 55 Maximus June 27, 2019, 11:49 pm
  • 56 Simon June 29, 2019, 8:36 am

    Was that FE link supposed to bring up the chart for them all ? It doesnt for me. The link shows
    https://www2.trustnet.com/Tools/Charting.aspx?typeCode=NUKX,NB:AFIA,NB:AFIB,NB:AFIC

  • 57 The Investor June 29, 2019, 8:43 am

    @Simon — Hmm, I see the same thing. When I edited @TA’s piece I presumed it was just a link to root Trustnet actually, and didn’t really interrogate it. Let’s see what he says.

  • 58 Forextc June 29, 2019, 11:02 am

    I’m not sure I understand many of the arguments here or the obsession people have with Life Strategy. If I held a generic world tracker and then diverted an additional amount of my portfolio to a dedicated UK tracker than that would introduce a weighted ‘bias’ to my portfolio. Seems other funds get slated for deviating from the global weightings but Vanguard can do this and it’s accepted. If home market or currency risk is the argument, then why would you invest outside your own markets at all? Ultimately any of this is assumption on future in unknowns, but at least keep the arguments consistent.

  • 59 The Investor June 29, 2019, 12:01 pm

    If home market or currency risk is the argument, then why would you invest outside your own markets at all?

    *KLAXON* All or Nothing Alert Triggered *KLAXON*

    I agree that the home market bias and currency risk aspects of LifeStrategy versus other funds or strategies are worth discussing and debating.

    However just because you want a bit less currency risk — or even if you want a bit more — that doesn’t get us to “why would you invest outside your own market at all?” as you ask.

    Investing across lots of markets has advantages. Investing across multiple currencies *may* reduce volatility, although it’s probably in the long-run uncompensated risk. Buying loaves of bread in your local currency when you retire and thus your local currency being very important BUT also wanting the best (personally risk adjusted) chance of being able to buy the most loaves of bread you can with your savings when you get there is rationale. 🙂

    Nothing personal, but whenever I hear a dramatic “all or nothing” statement (which like anyone I occasionally slip into myself) I think it needs restating that most things in investing are not all or nothing decisions. 🙂

  • 60 FrugalSurfer June 29, 2019, 1:32 pm

    Hi TA,

    First of all thanks to Monevator for shifting me from saving to investing a few years back. I am now almost entirely in VLS 60. I had struggled, doing my own research, to find attractive looking alternatives, so this article is very useful.

    The Fidelity MAA looks attractive, and I note your point about ‘stable asset allocation’. However the fund sheet states ‘mixed investments 40 – 85% shares’. So doesn’t this mean that the current 60% equity allocation is subject to potential considerable change over time, or am I missing something?

    Any comments gratefully received.

    Cheers
    FS

  • 61 The Accumulator June 29, 2019, 10:01 pm

    @ Frugal – I think you’re referring to the Investment Association Sector referenced on the web page for the Fidelity MAA Growth fund? They used to actively manage these funds but stopped in March 2018. I suspect they haven’t bothered to change the IA Sector.

    Download the fact sheet pdf and it says:
    Asset allocation exposure of the fund will be typically allocated as follows: 60%
    higher risk assets (e.g. shares) and 40% lower risk assets (e.g. bonds and cash).

    From the annual report:
    The fund is managed to provide diversified and efficient exposure to global
    markets, and is rebalanced periodically to keep asset allocation in line with
    the fund’s long-term strategic asset allocation. Its asset allocation is not
    adjusted in response to the market outlook.

    @ Simon – it’s a link to the charting tool but the tool doesn’t retain the data. You have to start from scratch every time sadly.

    @ Fundleaner – Fidelity Multi Asset Allocator Strategic = 40/60

    @ Tim – I couldn’t find the Standard Life MyFolio Market funds on the platforms I checked, namely: AJ Bell, Hargreaves Lansdown and Interactive Investor. Seems like they still involve some degree of active management. Using index trackers doesn’t make a product passive – that’s a sleight of hand that a lot of products on this list use. Market timing is still an active strategy even if you’re using passives.

    @ Jonny – I’m agnostic about investing in global government bonds vs gilts. This is the global index tracker equivalent of gilts: iShares Global Government Bond ETF (IGLH). The Vanguard fund mentioned above includes corporate bonds.

  • 62 Adrian June 30, 2019, 6:49 pm

    Some details of the 0.17% OCF Blackrock MyMap funds as reported here: https://www.sharesmagazine.co.uk/funds/fund/QD4K/holdings

    so BlackRock MyMap 3 (64% bonds, 34% equity, 2% alternatives) has the following holdings:

    ISH UK GILTS 0-5 ETF GBP DIST 18.08%
    ISHARES US EQUITY INDEX (UK) X 17.74%
    ISH GBP ULTSHRT BND ETF GBP DI 15.06%
    ISHARES $ TREAS BND 1-3 ETF US 12.12%
    ISHARES UK GILTS ALL STOCKS IN 11.10%
    ISHARES CONTINENTAL EUROPEAN E 6.88%
    ISHARES 100 UK EQUITY INDEX (U 4.91%
    ISH $ TRES BND 7-10 ETF $ DIST 4.08%
    ISHARES EMERGING MARKETS EQUIT 3.04%
    ISHARES INDEX LINKED GILT INDE 2.06%

    the considerable use of short-dated UK and US treasuries makes it quite different to almost anything else in this field.

  • 63 Adrian June 30, 2019, 6:52 pm

    And no corporate bonds!

  • 64 Tim July 2, 2019, 10:28 am

    @TA: Re the SLI MyFolio Market funds… odd, I can see them on HL (besides ATS): e.g https://www.hl.co.uk/funds/fund-discounts,-prices–and–factsheets/search-results/s/standard-life-inv-myfolio-market-ii-class-p-accumulation , https://www.hl.co.uk/funds/fund-discounts,-prices–and–factsheets/search-results/s/standard-life-inv-myfolio-market-iii-class-p-accumulation , https://www.hl.co.uk/funds/fund-discounts,-prices–and–factsheets/search-results/s/standard-life-inv-myfolio-market-v-class-p-accumulation (although strangely not the “IV” risk level so far as I could see). I haven’t looked into much detail about how their asset allocation is determined or how frequently it’s tweaked, but they seems to be run on much the same basis as L&G’s multi-index funds (in the same “volatility managed” IA grouping too), and surely the same “market timing” arguments must apply to L&G multi-index too: L&G hide them away in their a “for professionals/intermediaries only” area, but if you care to look for them you can find some nice quarterly updates from Justin Onuekwusi (L&G’s multi-index manager) describing how he’s positioning things based on a view on valuations, where we are in the economic cycle etc. It does indeed look pretty “active” compared with Lifestrategy’s allocations which hardly ever change (although even there I note there was a story a week or so ago about Vanguard wanting to dial back on Lifestrategy home bias… but waiting until after Brexit… market timing again!?! https://www.telegraph.co.uk/investing/funds/vanguard-lifestrategy-brexit-has-stopped-us-cutting-back-british/ ). Seems to me that the fundamental problem is that while indexing within an asset class is easy enough these days, as soon as you start allocating across multiple asset classes you have to make what’s fundamentally an “active” decision, even if it’s only picking which Lifestrategy % you buy. Maybe the only “pure” thing to do is something like holding the world’s investable assets in proportion: the “global market portfolio” https://www.bogleheads.org/forum/viewtopic.php?t=251190 .

  • 65 The Accumulator July 2, 2019, 1:40 pm

    Thanks Tim, I missed them on HL. Re: management style, from the factsheet:

    “The fund is actively managed by the investment team. Their main focus is to select funds within each asset class and ensure that the strategic asset allocation (long-term proportions in each asset class) meets the fund’s objectives. In addition, they will take tactical asset allocations (changing short term proportions in each asset class) to improve returns. It may consist of up to 40% actively managed funds.”

    The MyFolio Market II Fund lists 26 holdings (including 3 broad UK equity trackers!) including corporate bonds, emerging market debt and junk bonds. I’ll put it in the table next time but it doesn’t look like we’re missing a trick here.

    Choosing an asset allocation and sticking with it is not “active”. It’s a fundamental investing decision that begins with your split between equities and bonds. We need to choose equities/bond split in line with risk tolerance not, say, the global allocation of capital between the two. So while I have no edge that leads me to think I ought to have more holdings in Amazon than a total world tracker, it’s legitimate for me to tilt towards UK equities if I want to reduce my exposure to currency risk e.g. I’m about to start drawing down on my SIPP and my bills will be paid in £s.

    Choosing an asset allocation in line with your long-term objectives and individual circumstances is just good sense. Short-term tactical asset allocation in the hope of beating the market is a recipe for failure.

  • 66 Jon July 2, 2019, 5:28 pm

    Newbie question:
    Is there a good app/program/website to monitor your chosen fund(s) prices, and perhaps receive alerts when they drop below a certain level, etc?
    I know you can find graphs of prices on multiple websites, but wondered if there was a really goof (and reliable) tracking app that everyone is using?

  • 67 Tim July 2, 2019, 6:10 pm

    @TA I note that neither L&G’s multi-index nor SLI MyFolio Market “choose an asset allocation and stick with it”. What they both seem to do is target some particular level of volatility (different for each fund in the range) and then adjust asset allocation to try and stay true to that. However that “In addition, they will take tactical asset allocations (changing short term proportions in each asset class) to improve returns” in the MyFolio factsheet does seem pretty damning… I can’t see anything equivalent to that in the L&G multi-index factsheets… on the face of it, they seem to be claiming to be entirely about managing volatility. On the other hand, there’s an interesting 2017 article on L&G multi-index here: https://www.professionaladviser.com/professional-adviser/feature/3023041/actively-passive (note the “actively passive” strapline!) which mentions the manager “is ensuring the portfolios only have exposure to those areas he considered to have strong return and growth prospects” and there’s even a quote “We aim for true diversification and are trying to be properly active”… so it’s not clear that L&G multi-index is any less guilty of “activeness” than MyFolio Managed! There’s perhaps an interesting debate to be had on whether tactical asset allocation to manage volatility is somehow less evil/more feasible than doing it to boost returns.

  • 68 The Accumulator July 5, 2019, 6:27 pm

    “There’s perhaps an interesting debate to be had on whether tactical asset allocation to manage volatility is somehow less evil/more feasible than doing it to boost returns.”

    Agreed. Though what odds would you give me on it being the Emperor’s new clothes?

  • 69 Mr Optimistic August 14, 2019, 5:33 pm

    I’ve been pondering this a bit. Not sure I am so concerned about the potential for asset allocation to be tweaked as you are. After all, the Vanguard Lifestrategy allocations are not set in stone. I believe they have reduced the home bias once already and have expressed a wish to do so again but are inhibited by brexit ( don’t think they elaborated). So it could change. In any case, why would a fire and forget allocation be so desirable if it is some sense still based on human judgement at one place in time?
    All this assumes that any adjustments are relatively small.
    I agree about the commercial bonds though, wish the HSBC range weren’t so gung ho, after all the yields on offer across the range are hardly a big draw. Ditto hedging, think that is in Vanguard’s favour, at least from my perspective.
    Thanks for the article.

  • 70 Mr Optimistic September 19, 2019, 3:04 pm

    HSBC state that they hedge all fixed income holdings back to GBP.

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