Fettered versus unfettered funds

14 May 2019

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.

This article was originally published in November 2014, and updated in May 2019.

Patrick Norwood - Insight Analyst for Funds

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.

Fettered funds

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.

Unfettered funds

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. That said, we’ve seen a trend in multi-manager portfolios with a shift to a greater number holding in-house funds rather than external ones where the in-house option exists, in order to cut costs and be more competitive in relation to peers.

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, tolerance of risk and costs they are prepared to pay.

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