What's in a fund family?

Patrick Norwood – Insight Analyst (Funds)

Funds traditionally existed as individual, standalone funds. Over the past decade or so, however, as multi-manager and multi-asset investing have become popular, fund management firms have launched and marketed ‘families’ of funds.

Increasing/decreasing risk and return

At Defaqto we define a fund family as a group of funds managed by the same person or team and following the same investment process throughout the family.

What differs across the family are the risk and return objectives for each fund within the family.

This will be achieved primarily through the strategic and tactical asset allocations of the fund – the funds taking more risk in order to try and achieve higher returns will allocate a greater amount to assets such as equities, particularly those of non-UK companies. Funds taking less risk and therefore happy to accept lower returns will invest higher proportions in asset classes such as government bonds and cash.

The other way expected risk and return can be varied across the family is through the selection of the underlying funds (assuming the funds in the family do invest in third-party funds, which the majority do) – ‘punchy’ funds that hold less in securities and pay little or no regard to the benchmark can be chosen for the riskier portfolios in the family and vice versa.

Convenience and consistency

The advantage of fund families is that advisers and clients have investment options in terms of risk from the cautious/defensive end through to adventurous/growth, run by the same team and following the same investment process.

Advisers can recommend different funds from the family to each client depending on their attitude to risk and capacity to accept any capital loss. Meanwhile, as existing clients are already familiar with the firm, people and process, it's much easier for them to move up or down the risk spectrum as their needs change, simply by moving to the next more or less risky fund in the family, rather than having to spend time finding a new fund from a different provider.

Within our universe of risk targeted fund families, the majority of families contain four or five funds (the average is, in fact, somewhere between these two numbers) although a few contain more than five or fewer than four.

We see four as the minimum number of funds that a family should contain so that advisers can align closely enough a fund’s objectives to the needs of a particular client or, put another way, provide enough options in terms of risk and return.