Assessing value
28 July 2015
Mike Turner – Assistant Research Manager for Funds and DFM
As an adviser you have a suite of tools to allow you to assess the value being added by a fund manager. And when assessing value, cost and performance are both key metrics.
Below we show the differences between two key groups of funds within the multi-asset universe, displaying total returns, risk adjusted returns (Sharpe ratio) and ongoing charge figures (OCF). The figures in the table have been calculated using clean share classes. Return figures are net of charges.
| Three-year annualised return | Three-year Sharpe ratio | OCF | |
|---|---|---|---|
| Multi-asset multi-manager funds (average) | 6.18% | 1.54 | 1.09% |
| Multi-asset single-manager funds (average) | 7.60% | 1.64 | 0.96% |
| Multi-asset multi-manager funds (range) | 1.31% to 13.16% |
0.84 to 2.17 |
0.24% to 1.75% |
| Multi-asset single-manager funds (range) | -1.81% to 17.7% |
1.41 to 2.77 |
0.63% to 1.53% |
It’s generally assumed that fund of funds have higher OCFs than single manager funds. The average for multi-asset multi-manager funds is 1.09%, whereas the average for multi-asset single-manager funds is lower, although only slightly, at 0.96%.
OCF range for multi-asset multi-manager funds
When looking at the OCF range for multi-asset multi-manager funds, the highest OCF, which is 1.75%, is higher than the highest multi-asset single-manager OCF, which is 1.53%.
On the contrary, when comparing the lowest OCFs, the lowest for multi-manager funds is 0.24%, which is lower than that of the single manager funds, which is 0.63%. This is due to the increase in fund of funds that are using passive funds/ETFs to reduce costs.
Performance levels
We can see from the above table that the upper performance level for multi-asset single-manager funds is higher when compared to multi-asset multi-manager funds. We can also see that the lowest performance is higher for multi-asset multi-manager funds, in other words, there's less dispersion in multi-manager than single-manager performance. When looking at the average, there’s a 1.42% difference in favour of single-manager funds.
Sharpe ratio
When comparing on a risk adjusted basis, using the Sharpe ratio, the average Sharpe ratio is slightly higher for multi-asset single-manager funds. The same is true at the upper and lower ends of the ranges.
Transaction costs
These costs can also be considered when assessing value. As the fund purchases and sells underlying holdings, transaction costs will be incurred. Portfolio turnover rates (PTR) can be used as a proxy for transaction costs.
The higher the PTR the more the fund is buying and selling underlying holdings – and can therefore be incurring more transaction costs.
There are a number of ways to assess value
What’s important is to identify the key metrics that determine value and to understand how such metrics sit in relation to funds with similar investment mandates.
On the face of the above figures, it would appear that single-manager funds offer better value than multi-manager ones. However, these numbers cover just a three-year period. Ideally, longer periods should be used but this was not possible here due to a much smaller number of funds with longer histories.