It amazes me how easily we are duped into paying more than something is worth simply because of the way it’s packaged.
In this week’s Planet Money podcast from America’s National Public Radio, they discussed how retailers charge a premium for wedding dresses – and why people are willing to pay these inflated prices because anything cheaper would be “too cheap” for the occasion.
One retailer admitted, without flinching, that if that white wedding gown going many thousands of dollars did not have the word “wedding” in its name, its price would would be cheaper by not just hundreds, but perhaps thousands, of dollars.
This brings me very clumsily to multi-manager funds. The other week while moonlighting for FT Money I wrote about multi-manager funds and the fact that, on average, they tended to produce middling performance at a higher average cost than single-manager funds.
Now, it certainly is possible to invest in a very good multi-manager fund that outperforms the market and offers decent value for money. But so often this is not the case.
Like that expensive wedding dress, many investors pile into multi-manager funds because they think they’re getting something extra-special because of the marketing surrounding it. The promise of a diversified portfolio managed by the best minds in the industry is difficult to pass up.
Unfortunately many of these funds have total expense ratios of more than 2%, sometimes as high as 3%, acting as pure negative alpha from the word go.
These fees, as many experts say, create pure negative alpha, a hurdle for the manager to overcome before any returns are made. In North America this has been researched ad nauseam and the culture there is view fees as one of the biggest factors in bad fund performance. Yet this concept is only just starting to gain traction here in the UK.
Since the average multi-manager fund can’t even beat its peers, wealth managers and financial advisers are starting to shun them in favour of lower cost alternatives. And for good reason. If they can’t see any performance advantage in one of these funds in an era when lower growth is more susceptible to fee drag than ever before, why should they be considered acceptable for their clients?
While I’m hardly a passive investment advocate – my portfolio consists of investment trusts, a scattering of open ended funds and direct shares – I can see the argument for ETFs and tracker funds.
Unfortunately, it seems we’re still in a world where we’re easily suckered into paying a premium for smoke and mirrors. While some advisers have caught on to the ruse, the IMA’s sales figures for multi-manager funds shows that their popularity still hasn’t abated.
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