Multi-asset funds that invest directly in securities achieved better average performance than funds of funds over a 10-year period, according to recent research conducted by Scope Analysis.
Scope, which specialises in the analysis and rating of asset management companies, mutual funds and alternative investment funds, evaluated the performance of more than 800 multi-asset funds – balanced, dynamic, flexible and conservative – with a track record of at least 10 years, all of which invest globally and are licensed for sale in Germany and other countries.
The study found that in all the above four peer groups, the biggest difference in performance between direct funds and funds of funds was recorded in the ‘global balanced’ category where the nearly 100 direct funds achieved an average annual return of 5.5 per cent. The 71 funds of funds in this peer group recorded an average return of only 4.6 per cent.
The report found that there was little to distinguish the performance of direct funds and funds of funds in the ‘global dynamic’ category where both averaged a return of 6.6 per cent over the past 10 years. This was also the best performance of the multi-asset funds surveyed.
However, the research found that for funds of funds managers, even if they under-perform traditional direct funds on average, those funds of funds that perform well do tend to perform better than direct funds.
Martin Fechtner, head of fund analysis at Scope, points out that funds with a top rating usually outperformed rivals in the same category significantly and in three of the four comparison groups considered, the top rating ratio of funds of funds was higher than that of direct funds adding that the Scope fund rating always reflects performance and risk aspects.
“One major advantage that might explain the outperformance of the best performing funds of funds is that they can pick the best performing funds in separate asset classes. A very good fund picker can create a superior portfolio,” he explains.
In terms of volatility, the differences between funds of funds and direct funds were found to be comparatively low. In the balanced and dynamic compared with flexible and conservative categories, they turned out to have nearly similar or reduced volatility. Only in the ‘global conservative’ category – which comprises multi-assets funds or funds of funds with low risk profiles – did funds of funds show noticeably lower volatility at an average of 3.5 per cent compared with 4.4 per cent for direct funds.
The survey found that only in the ‘global conservative’ category were funds of funds significantly less volatile (maximum loss: funds of funds with -4.6 per cent on average, direct funds with -6 per cent).
It is to be expected that funds of funds perform less well because of the extra costs involved, explains Fechtner. “But what is more surprising is that despite broader diversification, they offer hardly any significant advantages from being less volatile. One explanation might be that, as a rule, direct funds already have broadly diversified portfolios so further diversification through the funds of funds approach adds little extra benefit.”