Just how important is it to choose the right fund manager? Despite the screeds of copy and internet space devoted to rating the people who manage our money, it seems investors would be far better off focusing on which country to invest in, rather than who to invest with.
For example, the best-performing sector last year was Europe, excluding the UK, while the worst was Japan. If you had bought into the best-performing Japanese fund – SG’s Japan Core Alpha, which fell 4.4% during the year – you would be substantially worse off than if you’d bought the poorest European performer (Henderson’s European Fund, which grew 11.8%). In fact, research by Ibbotson Associates covering 17 years of US markets indicates that 90% of investment return is down to being in the right place at the right time.
So what to do? Heather Connon in The Observer suggests you might want to buy into a fund of funds as a “cheap way of adding asset allocation to your portfolio”. These funds invest in a broad portfolio of countries, asset classes and fund managers – the benefit is that with the fund manager
switching between assets for you, you save on hassle and dealing charges. It sounds like a good idea until you realise that they are anything but “cheap”. Charges for funds of funds are on average 0.7% to 1% higher than for an individual fund, as the top manager adds their own charges to those beneath.
And fund of funds managers are no better at being in the right place at the right time than anyone else. Independent financial adviser Brian Dennehy of Dennehy Weller & Co says: “If your adviser puts you into a fund of funds, he’s just choosing an expensive fund that aspires to mediocrity, and charging you more for the privilege.” His words are backed up by the statistics. Data from Trustnet.co.uk show that the average global fund of funds returned 55.1% in the last three years. Sounds good – but the FTSE All-Share index has returned more than 50% over the same period, so a simple tracker fund would have deliver the same performance with far lower charges. Sure, that’s not comparing like with like – but what’s the point of paying for expensive global asset allocation if it can barely beat the UK market?
It’s far cheaper to allocate your own assets by investing in exchange traded funds (ETFs). Shares in ETFs trade on the stockmarket and track the performance of a specific index or sector. Annual fees are in the range of 0.25% to 0.5%. As for what to buy, Japanese funds underperformed
last year, but the country’s economic recovery continues and stocks seem likely to benefit – the iShares MSCI Japan ETF is a good way in.