By Gregoire Theron, Chief Investment Officer at GraySwan
Investors have the option to either construct their own portfolio of selected single unit trusts or use a fund of funds solution – otherwise known as a fund of funds unit trust.
Investors who are looking for well-diversified combination of single unit trust funds which provides consistent superior performing and at lower fees than the industry should consider fund of funds unit trusts. There are a select few premium fund of funds unit trusts which provides such as a one stop shop solution.
Single manager unit trusts, which are managed funds that pool money from investors to achieve economies of scale, have grown increasingly popular as they provide easy access to a broad range of assets, such as local and offshore stocks, bonds and cash.
One of the key selling points of fund of funds unit trusts is that they provide more diversification than single-manager products. Because each of the underlying fund managers has a different investment style and approach, this helps to diversify the fund of funds unit trust portfolio. In contrast, a single-manager unit trust is limited to one fund manager’s investment strategy and views, which means less diversification and greater risk.
Fund of funds unit trusts also offer greater flexibility and adaptability in that the fund of funds manager adjusts the investment strategies and asset allocations dynamically in response to changes in the market. The fund of funds manager also rebalances or replaces fund managers or moves out of certain styles which may not be in favour during certain market environments. On the other hand, investors in a single-manager unit trust is tied to one strategy that may no longer works in a changing market environment.
Fund of funds provide full transparency, as they provide monthly reports on the performance and asset allocation and fees of the overall strategy.
Further, they offer access to a wider range of investment teams relative to single-manager unit trusts, and can invest in unit trusts overseen by fund managers that specialise in particular segments of the market. This can give rise to otherwise overlooked investment opportunities if an investor tries to select their own funds and aim to combine such into a diversified portfolio.
There is a perception that fund of funds unit trusts tend to be more expensive than single-manager funds because they add an extra layer of management fees over and above the fees of each underlying fund. The extra fee that the fund of funds manager charges equates to approximately 0.36% per annum. To justify such extra fee the fund of funds manager must use skill and experience to carefully select and combine various single unit trust funds in a way that ensures superior risk-adjusted returns than the average of all the single manager unit trusts.
GraySwan’s range of fund of funds total cost including the fee paid to GraySwan as the fund of funds manager is lower than average fee paid to the universe of single fund manager unit trusts. So, what this means is that investors can access the best of breed single fund manager unit trusts and such at a lower fee via the GraySwan fund of funds than if the investor invested directly into the same funds and in the same combinations.
GraySwan accesses lower cost institutional fee classes for its private client investors and furthermore includes a material allocation to very low-cost passive funds to compliment its selected higher fee actively managed funds.
Most importantly, this reduced fee approach does not come at the expense of performance or risk mitigation. Since inception, GraySwan’s fund of funds have consistently achieved an average outperformance of more than 1% per annum after fees relative to their Association for Savings and Investment South Africa (ASISA) unit trust peer group benchmarks. Over the past 3 years the fund of funds have produced top quartile performance at lower risk and lower fees than our fund of fund and single fund manager unit trusts.
Our two portfolio managers have been working together for more than 20 years and our proven investment approach is visible in the superior performance versus the unit trust peer groups. Aside from fund manager selection, we actively manage the asset allocation of the fund of funds and dynamically hedge currency exposure when we believe this is prudent. Our previous offshore experience where we managed a hedge fund gives us the edge as we understand how to manage risk.
In short, it certainly is possible for a fund of funds to deliver outperformance of the universe of single fund manager unit trusts without incurring additional fees.
This is an important observation considering the numerous advantages that fund of funds offer – including greater diversification, flexibility, transparency, and access to best of breed fund managers.
For investors who are looking for a lower fee but superior performing portfolio which is well-diversified across best of breed fund managers, actively managed, risk managed and transparent, fund of funds unit trusts such as which GraySwan offers are undoubtedly a great option.
GraySwan is an award-winning independent investment advisory and wealth management firm, serves investment advice through a global megatrend lens to institutional and corporate investors, financial planning and wealth management solutions to personal and family office investors. The wealth of their investment experience and the depth, strength and stability of their advisory and investment team amounts over 100 years. With offices in Stellenbosch, Somerset West and Johannesburg, the firm is one of the most experienced in terms of assets with over R16 billion under advice.