Fettered versus unfettered funds
12 November 2014
Multi-manager funds, where the manager selects the funds they believe to be the best in each asset class for their portfolio (rather than investing in shares, bonds or other investments directly), can be either fettered or unfettered, Patrick Norwood explains in this article.
In the case of fettered, the multi-manager can only select funds from within their organisation.
The advantages of this approach are:
- Costs will usually be lower
- The multi-manager will have constant and more detailed access to the underlying managers - often they will be sitting just a few desks away from each other
Also, fewer managers to concentrate on allows for greater focus.
With the unfettered approach, the manager can select funds they believe to be the best from any organisation. The big advantage here is that the opportunity set is much larger, not only in terms of funds but also investment styles and strategies, with the result that the manager should be able to achieve greater diversification and therefore lower volatility for the same level of return (or greater return for the same level of volatility).
Which approach to choose
We at Defaqto, together with the fund management industry generally, do not believe that one approach is better than the other. In fact, we’ve seen many recently launched ranges offering a combination of the two - fettered funds for some asset classes - where the organisation believes they have strong expertise in-house - and unfettered for others.
As explained here, each approach has different advantages (with the disadvantages being the opposite of the advantages of the other approach) and the final choice will usually depend on the investor’s preferences and tolerance of risk.