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Multi-asset funds out-perform fund of funds

Berlin based ratings company “Scope” found that Multi-asset funds that invest directly in securities outperformed fund-of-funds over a 10-year period.

Multi-asset funds out-perform fund of funds

Scope analysed the performances of over 800 multi-asset funds across 4 peer groups; balanced, dynamic, flexible and conservative, that had a minimum 10-year track record.

Across all four of the peer groups the study by Scope found that on average direct funds achieved better performance than fund-of-funds.

In the “global balanced” category nearly 100 direct funds achieved an average annual return of 5.5%

In contrast the 71 fund-of-funds in the same peer group, recorded an average return of only 4.6%. Over a 10-year period there was a 0.9% per annum performance differential.



Volatility

In the balanced and dynamic compared with flexible and conservative categories, the volatility had very little difference.

In the global conservative category, comprising of multi-asset funds or funds-of-funds with low risk profiles, fund-of-funds did show noticeably lower volatility at an average of 3.5% compared with 4.4% for direct funds.



Possible causes

Scope analysts theorised that fund of funds do not perform as well due to the extra costs involved. Additionally, despite fund-of-funds having broader diversification, they offer hardly any significant advantages from being less volatile.

A potential explanation; direct funds already have broadly-diversified portfolios so further diversification through the fund-of-funds approach adds little extra benefit.

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