The Telegraph
Since 1st March, 1999
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Spicing up returns

Too many cooks may spoil a broth, but several fund/ portfolio managers can actually spice up your investments and returns.

It's elementary, really. First, when funds are spread across different asset classes, the risk is less. Second, if the fund or portfolio managers who are the best in the respective asset categories are put together to manage the investments, the overall returns on the investment over a period of time are likely to be superior to the portfolio mandated to a single fund manager.

That's why the concept of multi-manager mutual funds and multi-manager portfolio management services are gaining ground in mature markets: it took off in Europe in the late 1980s and quickly caught investors' fancy in Japan, Australia, New Zealand and South Africa.

Back home, ING Investment Management (India) Private Ltd, the asset management company of ING Vysya Mutual Fund, has set up Optimix as a stand-alone multi-manager division.

Optimix is already offering multi-manager mutual funds and portfolio management services in Australia with A$6.4 billion worth of assets under its management.

Here, it has unveiled the Optimix Income Growth Multi-manager Fund of Funds Scheme.

The caveat

The Optimix Income Growth isn't a multi-manager fund in the true sense of the term; it's just a fund of funds (FoF).

With increasing popularity of multi-manager funds, mutual fund houses are interchangeably using the terms 'fund of funds', 'manager of managers' and 'multi-manager' fund even in developed markets.

But an FoF and a 'multi-manager' fund are different in respect of investment processes, though conceptually the two sound similar. The cost or expense ratio of the two funds is also different.

Diversity watch

The basic difference between the two fund types is that while an FoF invests in stocks or bonds indirectly through other mutual funds, a multi-manger fund invests in equities or debt assets directly on the advice of fund managers.

In other words, this means that a fund manager of an FoF has little control on the investments once made. An FoF is a passively managed fund.

But FoF investors incur a two-fold cost ' first, the fees for the FoF that are debited directly from the investment of an investor, and second, the fees and charges the FoF pays to other mutual funds for investments in their units.

Even when an FoF is actively managed ' when a fund manager churns the portfolio of the underlying mutual funds ' the cost increase is relatively high than the potential rise in returns.

The big edge

In a multi-manager fund, individual fund managers are appointed to look after different asset classes of the investment portfolio.

Hence, the fund manager, instead of managing the money, handles the asset allocation by employing the skills of the sub-managers appointed for the fund telling them which benchmark and investment styles should be followed.

The only fee a multi-manager fund pays is that to the sub-managers.

Tax effect

The tax implications of an FoF and a multi-manager fund also vary significantly. Since an FoF invests in the units of other mutual funds, investors in an FoF do not get the long-term capital gains tax benefit as in the case of any diversified equity scheme of a mutual fund. This tax benefit is, however, available on a multi-manager fund.

Though Optimix puts the multi-manager tag to its Income Growth Fund, it is basically an actively-managed monthly income FoF, which entails a 0.75 per cent higher cost compared with other MIPs in the market.

Entry barrier

As of now, market regulator Securities and Exchange Board of India doesn't allow the managers of any mutual fund to take investment advisory assignments from another house. Multi-manager funds are not yet permitted in this country.

Mutual fund investors in this country will have to wait till Sebi allows fund houses to offer true multi-manager funds.

Once allowed, all the foreign asset management companies, which are currently operating in India or are waiting on the sidelines to get an entry, will bring in their multi-manager funds here, too.

Multi-manager funds are fast growing elsewhere. According to a study by US- based research firm Cerulli Associates, the number of fund houses offering multi-manager funds has grown to 700 worldwide and the corresponding asset base has increased to over $800 billion in 10 years.

However, these are now available only in mature markets.

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